<PAGE> 1
Filed Pursuant To Rule 424(b)(1)
Registration No. 333-21459
23,000,000 SHARES
HARTFORD LIFE, INC.
CLASS A COMMON STOCK
(PAR VALUE $.01 PER SHARE)
[HARTFORD LOGO]
HARTFORD LIFE
------------------------
Of the 23,000,000 shares of Class A Common Stock, par value $.01 per share
(the "Class A Common Stock"), being offered, 18,400,000 shares are being offered
hereby in the United States and 4,600,000 shares are being offered in a
concurrent international offering outside the United States. The initial public
offering price and the aggregate underwriting discount per share are identical
for both Equity Offerings. See "Underwriting".
Hartford Life, Inc. (the "Company") is an indirect wholly owned subsidiary
of The Hartford Financial Services Group, Inc. (formerly known as ITT Hartford
Group, Inc.)("The Hartford") and, upon completion of the Equity Offerings, The
Hartford will beneficially own 100% of the outstanding shares of Class B Common
Stock, which will represent approximately 83.2% of the economic interest (i.e.,
the right to participate in distributions in respect of the common equity) in
the Company (approximately 81.4% if the Underwriters' over-allotment options are
exercised in full).
Holders of Class A Common Stock generally have rights identical to holders
of Class B Common Stock, except that holders of Class A Common Stock are
entitled to one vote per share while holders of Class B Common Stock are
entitled to five votes per share on all matters submitted to a vote of the
Company's stockholders. Following completion of the Equity Offerings, The
Hartford will beneficially own shares of Class B Common Stock representing
approximately 96.1% of the combined voting power of all the Company's classes of
voting stock (approximately 95.6% if the Underwriters' over-allotment options
are exercised in full) and will thereby be able, among other things, to direct
the election of all the Company's directors and exercise a controlling influence
over the business and affairs of the Company. See "Risk Factors -- Control by
and Relationship with The Hartford" and "Description of Capital Stock".
The Hartford has advised the Company that its current intention is to
continue to hold all the shares of Class B Common Stock it beneficially owns.
However, The Hartford has no contractual obligation to retain its shares of
Class B Common Stock, except for a limited period described in "Underwriting".
Prior to the Equity Offerings, there has been no public market for the Class
A Common Stock. For factors considered in determining the initial public
offering price, see "Underwriting".
Up to 700,000 shares of Class A Common Stock are being reserved for sale to
certain employees of the Company, The Hartford and their respective affiliates,
and the respective directors thereof, at the initial public offering price.
SEE "RISK FACTORS" BEGINNING ON PAGE 14 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE CLASS A COMMON STOCK.
The Class A Common Stock has been approved for listing, subject to notice of
issuance, on the New York Stock Exchange under the symbol "HLI".
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE DISCOUNT(1) COMPANY(2)
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Per Share................................ $28.25 $1.62 $26.63
Total(3)................................. $649,750,000 $37,260,000 $612,490,000
</TABLE>
- ---------------
(1) The Company and The Hartford have agreed to indemnify the Underwriters
against certain liabilities, including liabilities under the Securities Act
of 1933. See "Underwriting".
(2) Before deducting estimated expenses of $5,000,000 payable by the Company.
(3) The Company has granted the U.S. Underwriters an option for 30 days to
purchase up to an additional 2,400,000 shares of Class A Common Stock at the
initial public offering price per share, less the underwriting discount,
solely to cover over-allotments. Additionally, the Company has granted the
International Underwriters a similar option with respect to an additional
600,000 shares of Class A Common Stock as part of the concurrent
International Offering. If such options are exercised in full, the total
initial public offering price, underwriting discount and proceeds to Company
will be $734,500,000, $42,120,000 and $692,380,000, respectively. See
"Underwriting".
------------------------
The shares of Class A Common Stock offered hereby are offered severally by
the U.S. Underwriters, as specified herein, subject to receipt and acceptance by
them and subject to their right to reject any order in whole or in part. It is
expected that certificates for the shares of Class A Common Stock will be ready
for delivery in New York, New York on or about May 28, 1997, against payment
therefor in immediately available funds.
GOLDMAN, SACHS & CO.
DEAN WITTER REYNOLDS INC.
MERRILL LYNCH & CO.
MORGAN STANLEY & CO.
INCORPORATED
SMITH BARNEY INC.
------------------------
The date of this Prospectus is May 21, 1997.
<PAGE> 2
AVAILABLE INFORMATION
Hartford Life, Inc. has filed with the Securities and Exchange Commission
(the "Commission") a Registration Statement (which term shall include any
amendments thereto) on Form S-1 (the "Registration Statement") under the
Securities Act of 1933 (the "Securities Act"), with respect to the shares of
Class A Common Stock, par value $.01 per share (the "Class A Common Stock"),
being offered hereby. This Prospectus, which constitutes a part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto, to which
reference is hereby made. For further information with respect to the Company
and the Class A Common Stock being offered hereby, reference is made to the
Registration Statement, including the exhibits and schedules thereto. Statements
made in this Prospectus as to the contents of any contract, agreement or other
document referred to are not necessarily complete. With respect to each such
contract, agreement or other document filed as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the matter involved, and each such statement shall be deemed qualified in its
entirety by such reference. The Registration Statement and the exhibits and
schedules thereto, filed with the Commission by the Company, may be inspected
and copied at the public reference facilities maintained by the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
regional offices of the Commission located at Seven World Trade Center, Suite
1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 or on the internet at http://www.sec.gov.
Copies of such materials also may be obtained upon written request from the
Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates.
Upon the completion of the offering made hereby in the United States (the
"U.S. Offering") by the underwriters therefor (the "U.S. Underwriters") and the
concurrent international offering (the "International Offering" and, together
with the U.S. Offering, the "Equity Offerings") by the underwriters therefor
(the "International Underwriters" and, together with the U.S. Underwriters, the
"Underwriters"), the Company will be subject to the informational requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, will file reports and other information with the
Commission.
The Class A Common Stock has been approved for listing, subject to notice
of issuance, on the New York Stock Exchange (the "NYSE"). Upon such listing,
copies of the Registration Statement, including all exhibits thereto, and
periodic reports, proxy statements and other information will be available for
inspection at the offices of the New York Stock Exchange, Inc. located at 20
Broad Street, New York, New York 10005.
------------------------
CERTAIN PERSONS PARTICIPATING IN THE EQUITY OFFERINGS MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CLASS
A COMMON STOCK, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING
TRANSACTIONS IN SUCH SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN
CONNECTION WITH THE EQUITY OFFERINGS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING".
------------------------
THE COMPANY IS A HOLDING COMPANY WHICH OWNS DIRECTLY OR INDIRECTLY ALL THE
OUTSTANDING SHARES OF CAPITAL STOCK OF CERTAIN INSURANCE COMPANY SUBSIDIARIES
DOMICILED IN CONNECTICUT AND NEW JERSEY. INSURANCE LAWS OF SUCH STATES
APPLICABLE TO THE COMPANY GENERALLY PROVIDE THAT NO PERSON MAY ACQUIRE CONTROL
OF THE COMPANY, AND THUS INDIRECT CONTROL OF THESE INSURANCE COMPANY
SUBSIDIARIES, WITHOUT THE PRIOR APPROVAL OF THE APPROPRIATE INSURANCE
REGULATORS. IN GENERAL, ANY PERSON WHO ACQUIRES BENEFICIAL OWNERSHIP OF 10% OR
MORE OF THE VOTING SECURITIES OF THE COMPANY WOULD BE PRESUMED TO HAVE ACQUIRED
SUCH CONTROL, ALTHOUGH THE APPROPRIATE INSURANCE REGULATORS, UPON APPLICATION,
MAY DETERMINE OTHERWISE.
------------------------
FOR NORTH CAROLINA RESIDENTS: THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE COMMISSIONER OF INSURANCE FOR THE STATE OF NORTH CAROLINA,
NOR HAS THE COMMISSIONER OF INSURANCE RULED UPON THE ACCURACY OR ADEQUACY OF
THIS DOCUMENT.
2
<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and consolidated financial statements appearing elsewhere
in this Prospectus. Unless the context otherwise requires, the "Company" means
Hartford Life, Inc. and its consolidated subsidiaries. See "Glossary of Selected
Insurance and Other Terms" for the definitions of certain insurance-related
terms which are printed in boldface type the first time they appear in this
Prospectus.
Unless otherwise indicated, financial information, operating statistics and
ratios applicable to the Company set forth in this Prospectus are based on
United States generally accepted accounting principles ("GAAP") rather than
STATUTORY ACCOUNTING PRACTICES. In addition, unless otherwise indicated, all
information in this Prospectus assumes no exercise of the Underwriters'
over-allotment options.
GENERAL
The Company is a leading insurance and financial services company with
operations that provide (i) annuity products such as individual VARIABLE
ANNUITIES and FIXED MVA ANNUITIES, deferred compensation and retirement plan
services and mutual funds for savings and retirement needs to over 1 million
customers, (ii) life insurance for income protection and estate planning to
approximately 500,000 customers and (iii) employee benefits products such as
group life and group disability insurance for the benefit of over 15 million
individuals. According to the latest publicly available data identified below,
with respect to the United States, the Company is the largest writer of both
total individual annuities and individual variable annuities based on sales for
the year ended December 31, 1996, the eighth largest consolidated life insurance
company based on STATUTORY ASSETS as of December 31, 1995, and the largest
writer of group short-term disability benefit plans and the second largest
writer of group long-term disability insurance based on full-year 1995 new
PREMIUMS and PREMIUM EQUIVALENTS.
The Company's assets have grown at a compound annual growth rate of 36%,
from $23 billion in 1992 to $80 billion in 1996. The Company has achieved rapid
growth of assets by pursuing a strategy of selling diverse and innovative
products through multiple 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 (the "Stag Logo"), one
of the most recognized symbols in the financial services industry. During this
period, the Company has attained strong market positions for its principal
product offerings -- annuities, individual life insurance and employee benefits.
In particular, the Company holds the leading market position in the individual
variable annuity industry based on sales for the year ended December 31, 1996.
The Company's sales of individual variable annuities grew from $1.8 billion in
1992 to $9.3 billion in 1996, and, for the year ended December 31, 1996, the
Company had a 13% market share (according to information compiled by Variable
Annuities Research and Data Service ("VARDS")). During this period of growth,
the Company's separate account assets, which are generated principally by the
sale of annuities, grew from 36% of total assets at December 31, 1992 to 62% of
total assets at December 31, 1996. The Company believes that such asset growth
stems from various factors including the variety and quality of its product
offerings, the performance of its products, the effectiveness of its multiple
channel distribution network, the quality of its customer service and the
overall growth of the variable annuity industry and the stock and bond markets.
However, there is no assurance that the Company's historical growth rate will
continue. See "Risk Factors -- Risks Associated with Certain Economic and Market
Factors".
Management believes the Company's substantial growth in assets, together
with management's effort to control expenses, has made the Company one of the
most efficient competitors in the insurance industry. In 1995, the Company had
the ninth lowest ratio of GENERAL INSURANCE EXPENSES to statutory assets, an
industry measure of operating efficiency, of the fifty largest U.S. life
insurers, based on statutory assets. The Company's ratio improved to .64% in
1996, from .72% in 1995 and 1.38% in 1992, as compared with the average ratio of
1.50% for the fifty largest U.S. life insurers for the year ended December 31,
1995, based on information compiled by A.M. Best Company, Inc. ("A.M. Best").
3
<PAGE> 4
ANALYSIS OF NET INCOME
As shown in the following table, the Company's operating results by segment
reflect: (i) strong results from its Annuity, Individual Life Insurance and
Employee Benefits segments, offset by (ii) results in its Guaranteed Investment
Contracts segment, from which management expects no material income or loss in
the future as described herein, and (iii) results in the Company's corporate
operation (the "Corporate Operation"). In response to the results in the
Guaranteed Investment Contracts segment in 1994, the Company undertook a
thorough review of the guaranteed investment contract market and determined to
substantially withdraw from the GENERAL ACCOUNT guaranteed rate contract ("GRC")
business in 1995. In 1996, the Company initiated certain asset sales and hedging
transactions to insulate itself from any ongoing income or loss associated with
the investment portfolio of Closed Book GRC (as defined below). Because the
Company does not expect any material income or loss from the Guaranteed
Investment Contracts segment in the years subsequent to 1996, management
believes that future earnings will be dependent on income from the Annuity,
Individual Life Insurance and Employee Benefits segments, net of the Corporate
Operation.
In the first quarter of 1997, net income increased by $24 million, or 62%,
to $63 million from $39 million in the first quarter of 1996 due to growth in
the Annuity, Individual Life Insurance and Employee Benefits segments of 30%,
22% and 13%, respectively, and the elimination of losses in the Guaranteed
Investment Contracts segment. These results were partially offset by higher
unallocated expense in the Corporate Operation primarily due to an increase in
interest expense related to the Pre-Offering Indebtedness. See "-- Company
Financing Plan".
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS
ENDED MARCH
FOR THE YEAR ENDED DECEMBER 31, 31,
--------------------------------- -------------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ----- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Annuity.................................... $ 35 $ 54 $ 84 $113 $ 145 $ 33 $ 43
Individual Life Insurance.................. 17 21 27 37 44 9 11
Employee Benefits.......................... 36 48 53 67 78 16 18
Guaranteed Investment Contracts(1)......... 21 30 1 (67) (225) (15) --
Corporate Operation(2)..................... (16) (28) (14) 3 (18) (4) (10)
Unallocated net realized capital gains
(losses)(3).............................. 8 5 -- (3) -- -- 1
Cumulative effect of changes in accounting
principles(4)............................ (47) -- -- -- -- -- --
---- ---- ---- ---- ---- --- ----
Net income............................... $ 54 $130 $151 $150 $ 24 $ 39 $ 63
==== ==== ==== ==== ==== === ====
</TABLE>
- ---------------
(1) The Company substantially withdrew from the general account GRC business in
1995. Management expects no material income or loss from the Guaranteed
Investment Contracts segment in the future as described herein.
(2) The Company maintains a Corporate Operation through which it reports items
that are not directly allocable to any of its business segments. Included in
the Corporate Operation are: (i) unallocated income and expense, (ii) the
Company's group medical business, which it exited in 1993, and (iii) certain
other items not directly allocable to any segment such as items related to
the ITT Spin-Off (as defined herein). For a discussion of the Corporate
Operation, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Results of Operations for the Years Ended
December 31, 1994, 1995 and 1996 -- Corporate Operation".
The following table details the components of the Corporate Operation:
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ----- ---- ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Unallocated income and expense.......... $(11) $ (3) $ (7) $(14) $ (18) $ (4) $ (10)
Group medical business.................. (5) (25) (7) (1) 1 -- --
ITT Spin-Off related items and other.... -- -- -- 18 (1) -- --
---- ---- ---- ---- ---- --- ----
Total Corporate Operation....... $(16) $(28) $(14) $ 3 $ (18) $ (4) $ (10)
==== ==== ==== ==== ==== === ====
</TABLE>
(3) Represents net realized capital gains (losses) that are not allocable to any
of the Company's business segments.
(4) Reflects the cumulative effect of adoption of Statement of Financial
Accounting Standards ("SFAS") No. 106, Employers' Accounting for
Postretirement Benefits Other Than Pensions, and SFAS No. 112, Employers'
Accounting for Postemployment Benefits.
4
<PAGE> 5
SEGMENT ANALYSIS
Annuity net income has grown at a compound annual rate of 43%, from $35
million in 1992 to $145 million in 1996. This segment offers individual variable
annuities and fixed MVA annuities, deferred compensation and retirement plan
services, mutual funds, investment management services and other financial
products. As indicated above, the Company is the largest writer of individual
annuities (according to information compiled by Life Insurance Marketing and
Research Association ("LIMRA")) and the largest writer of individual variable
annuities (according to information compiled by VARDS). In 1996, the Company
sold $9.8 billion of individual annuities, of which $9.3 billion were individual
variable annuities; of the Company's total individual annuities, $6.6 billion
were sold through broker-dealers and $3.2 billion were sold through banks. The
Company's variable annuity product offerings include the Putnam Capital Manager
Variable Annuity and The Director, two of the four highest selling variable
annuity contracts in the United States for the year ended December 31, 1996.
These variable annuity products allow customers to save for retirement on a
tax-deferred basis through a variety of mutual funds provided by the Company.
The Company's fixed MVA annuity also provides customers a tax-deferred savings
vehicle with fixed rates for guaranteed periods. As of December 31, 1996, such
fixed rates ranged from 3.4% to 9.3% and averaged 6.53%, while the periods over
which such rates are to be paid ranged from one to ten years and averaged
approximately seven years. The Company has distribution arrangements to sell its
individual annuity products with approximately 1,350 national and regional
broker-dealers and approximately 450 banks. Management believes that it has
established a strong distribution franchise through its long-standing
relationships with the members of its bank and broker-dealer network and is
committed both to expanding sales through these established channels of
distribution and promoting new distributors for all its products and services.
Individual Life Insurance net income has grown at a compound annual rate of
27%, from $17 million in 1992 to $44 million in 1996. This segment, which
focuses on the high-end estate and business planning markets, sells a variety of
individual life insurance products, including VARIABLE LIFE and UNIVERSAL LIFE
INSURANCE policies. The Company believes that it is one of the leading
competitors in the high-end estate and business planning markets as indicated by
its relatively high average face value per POLICY. The Company has distribution
arrangements to sell its individual life insurance products in the United States
with approximately 137,000 licensed life insurance agents.
Employee Benefits net income has grown at a compound annual rate of 21%,
from $36 million in 1992 to $78 million in 1996. This segment sells group
insurance products, including group life and group disability insurance and
corporate-owned life insurance ("COLI"), and engages in certain international
operations. As indicated above, the Company is the largest writer of group
short-term disability benefit plans and the second largest writer of group
long-term disability insurance, as well as the fourth largest writer of group
life insurance, based on full-year 1995 new premiums and premium equivalents
(according to information reported to the Employee Benefits Plan Review
("EBPR")). Management believes that, as a result of the Company's name
recognition, the value-added nature of its managed disability products and its
effective claims administration, it is one of the leading sellers in the "large
case" group market (companies with over 1,000 employees) and that further growth
opportunities exist in the "small" and "medium case" group markets. The Company
uses an experienced group of employees to distribute its Employee Benefits
products through a variety of distribution outlets, including insurance agents,
brokers, associations and THIRD-PARTY ADMINISTRATORS.
Guaranteed Investment Contracts net income has declined from net income of
$21 million in 1992 to a net loss of $225 million in 1996. The results of this
segment have been primarily affected by prepayments substantially in excess of
assumed and historical levels of mortgage-backed securities ("MBSS") and
collateralized mortgage obligations ("CMOS") supporting a block of traditional
general account GRC written by the Company prior to 1995 ("Closed Book GRC").
The Company substantially withdrew from the general account GRC business in 1995
and now writes a limited amount of such business primarily as an accommodation
to customers. For example, in the first quarter of 1997 the Company wrote $13
million of general account GRC (most of which was renewals to existing
customers), representing an expected annual net income of less than $30,000. In
1996, the Company initiated certain asset sales and hedging transactions to
insulate itself from any ongoing income or loss associated with the Closed Book
GRC investment portfolio. The Company expects no material income or loss from
the Guaranteed Investment Contracts segment in the future. For a discussion of
Closed Book GRC and the risk of future losses, see "Risk Factors --
5
<PAGE> 6
Interest Rate Risk" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations for the Years Ended
December 31, 1994, 1995 and 1996 -- Comparison of Guaranteed Investment
Contracts Segment Results -- Closed Book GRC".
The Company maintains a Corporate Operation through which it reports items
that are not directly allocable to any of its business segments. The Corporate
Operation includes (i) unallocated income and expense, (ii) the Company's group
medical business, which it exited in 1993, and (iii) certain other items not
directly allocable to any business segment such as items related to the ITT
Spin-Off (as defined below).
The Company's principal insurance subsidiaries currently are rated "A+
(superior)" by A.M. Best and have claims-paying ability ratings of "AA" from
Standard and Poor's ("S&P") and "AA+" from Duff & Phelps Credit Rating Co.
("Duff & Phelps"), and one such insurance subsidiary, Hartford Life Insurance
Company ("Hartford Life"), has an insurance financial strength rating of "Aa3"
from Moody's Investors Service, Inc. ("Moody's").
The Company is a direct subsidiary of Hartford Accident and Indemnity
Company ("Hartford Accident and Indemnity") and an indirect subsidiary of The
Hartford Financial Services Group, Inc. (formerly known as ITT Hartford Group,
Inc.) ("The Hartford"). The Hartford is among the largest domestic and
international providers of commercial property-casualty insurance,
property-casualty REINSURANCE and personal lines (including homeowners and auto)
coverages. On December 19, 1995, ITT Industries, Inc. (formerly ITT Corporation)
("ITT") distributed all of the outstanding shares of capital stock of The
Hartford to ITT stockholders of record on such date (the transactions relating
to such distribution are referred to herein as the "ITT Spin-Off"). As a result
of the ITT Spin-Off, The Hartford became an independent, publicly traded
company.
The Company's principal offices are located at 200 Hopmeadow Street,
Simsbury, Connecticut 06089. The Company's telephone number is (860) 843-7716.
BUSINESS STRATEGY
Management believes that its corporate strategies will maintain and enhance
its position as a market leader within the financial services industry and will
maximize stockholder value. In addition, the Company's strong positions in each
of its businesses, coupled with the growth potential management believes exists
in its markets, provide opportunities to increase sales of its 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. Management has
established the following strategic priorities for the Company:
LEVERAGE THE COMPANY'S MULTIPLE CHANNEL DISTRIBUTION NETWORK. Management
believes that the Company's multiple channel distribution network provides a
distinct competitive advantage in selling its products and services to a broad
cross-section of customers throughout varying economic and market cycles. The
Company has access to a variety of distribution outlets through which it sells
its products and services, including approximately 1,350 national and regional
broker-dealers, approximately 450 banks (including 21 of the 25 largest banks in
the United States), 137,000 licensed life insurance agents, 2,900 insurance
brokers, 244 third-party administrators and 165 associations. In particular, the
Company believes that the bank and broker-dealer network employed by its Annuity
segment is among the largest in the insurance industry. Management believes that
this extensive distribution system generally provides the Company with greater
opportunities to access its customer base than its competitors and allows the
Company to introduce new products and services quickly through this established
distribution network as well as new channels of distribution. For example, the
Company sells fixed MVA annuities, variable annuities, mutual funds, SINGLE
PREMIUM VARIABLE LIFE INSURANCE and Section 401(k) plan services through its
broker-dealer and bank distribution systems.
OFFER DIVERSE AND INNOVATIVE PRODUCTS. The Company provides its customers
a diverse mix of products and services aimed at serving their needs throughout
the different stages of their lives and during varying economic cycles. The
Company offers a variety of variable and fixed MVA annuity products with funds
managed both internally and by outside money managers such as Wellington
Management Company, LLP ("Wellington"), Putnam Financial Services, Inc.
("Putnam") and Dean Witter InterCapital, Inc. ("Dean Witter"). The Company also
regularly develops and brings to market innovative products and services. For
example, the Company was the first major seller of individual annuities to
successfully develop and market fixed annuities with an MVA feature which
protects the Company from losses due to higher interest rates in the event of
early surrender. The Company also was a leader in introducing the "managed
disability" approach to the group disability
6
<PAGE> 7
insurance market. This approach focuses on early claimant intervention in an
effort to facilitate a claimant's return to work and to contain costs.
CAPITALIZE ON ECONOMIES OF SCALE, CUSTOMER SERVICE AND TECHNOLOGY. As a
result of its growth and attention to maintaining low expenses, the Company
believes it has achieved advantageous economies of scale and operating
efficiencies in its businesses which together enable the Company to
competitively price its products for its distribution network and policyholders.
For example, as noted above, the Company is the eighth largest consolidated life
insurance company based on statutory assets as of December 31, 1995, with a
ratio (as of such date) of general insurance expenses to statutory assets that
is less than half the average ratio for the fifty largest U.S. life insurers. In
addition, the Company has reduced its individual annuity expenses as a
percentage of total individual annuity account value to 28 BASIS POINTS in 1996
from 43 basis points in 1992. In addition, the Company believes that it
maintains high-quality service for its customers and 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. In 1996, the Company received one of the
five Quality Tested Service Seals awarded by DALBAR Inc. ("DALBAR"), a
recognized independent research organization, for its achievement of the highest
tier of customer service in the variable annuity industry.
CONTINUE PRUDENT RISK MANAGEMENT. The Company's product designs, prudent
underwriting standards and risk management techniques protect it against
DISINTERMEDIATION risk and greater than expected MORTALITY and MORBIDITY. As of
December 31, 1996, 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, 1996. The Company also enforces disciplined claims management to
protect the Company against greater than expected mortality and morbidity. The
Company regularly monitors its underwriting, mortality and morbidity assumptions
to determine whether its experience remains consistent with these assumptions
and to ensure that the Company's product pricing remains appropriate.
BUILD ON BRAND NAME AND FINANCIAL STRENGTH. Management believes that the
combined effect of the above-mentioned strengths, The Hartford's 187-year
history and customer recognition of the Stag Logo have produced a distinguished
brand name for the Company. The Company's financial strength, characterized by
sound ratings and a balance sheet of well-protected liabilities and highly rated
assets, also has enhanced the Company's brand name within the financial services
industry. Management believes that brand awareness, an established reputation
and financial strength will continue to be important factors in maintaining
distribution relationships, enhancing investment advisory alliances and
generating new sales with customers.
RELATIONSHIP BETWEEN THE COMPANY AND THE HARTFORD
Following the completion of the Equity Offerings, The Hartford will
continue to be the controlling stockholder of the Company and will beneficially
own 100% of the outstanding Class B Common Stock, par value $.01 per share (the
"Class B Common Stock" and, together with the Class A Common Stock, the "Common
Stock"), which will represent approximately 96.1% of the combined voting power
of all the outstanding Common Stock and approximately 83.2% of the economic
interest in the Company (or approximately 95.6% and 81.4%, respectively, if the
over-allotment options of the Underwriters are exercised in full). The Hartford
has advised the Company that its current intention is to continue to hold all
the shares of Class B Common Stock it beneficially owns. However, The Hartford
has no contractual obligation to retain its shares of Class B Common Stock,
except for a limited period described in "Underwriting".
Promptly following the completion of the Equity Offerings, The Hartford and
the Company expect to elect two additional directors of the Company who will be
persons not currently or formerly associated with The Hartford or the Company.
The Board of Directors of the Company (the "Board of Directors") will then
consist of ten members, including eight who are directors and/or officers of The
Hartford. See "Management -- Directors". The Hartford will have the ability to
change the size and composition of the Company's Board of Directors.
For additional information concerning the Company's relationship with The
Hartford following the Equity Offerings, see "Risk Factors -- Control by and
Relationship with The Hartford" and "Certain Relationships and Transactions".
7
<PAGE> 8
COMPANY FINANCING PLAN
Historically, for financial reporting purposes, The Hartford internally
allocated a portion of its third-party indebtedness (referred to as the
"Allocated Advances") to the Company's life insurance subsidiaries. Cash was
contributed to the life insurance subsidiaries in connection with certain of
such Allocated Advances. In February 1997, the Company (i) declared a dividend
of $1.184 billion payable to Hartford Accident and Indemnity, (ii) obtained a
line of credit from a syndicate of four banks (the "Line of Credit") in the
amount of $1.3 billion, (iii) borrowed $1.084 billion under the Line of Credit
and (iv) paid to Hartford Accident and Indemnity the $1.184 billion dividend,
which consisted of the $1.084 billion in cash borrowed under the Line of Credit
and $100 million in the form of a promissory note executed by the Company for
the benefit of Hartford Accident and Indemnity (the "$100 Million Promissory
Note"). $893 million of such dividend constituted a repayment of the Allocated
Advances. In addition, on April 4, 1997, the Company declared and paid a
dividend of $25 million to Hartford Accident and Indemnity in the form of a
promissory note executed by the Company for the benefit of Hartford Accident and
Indemnity (the "$25 Million Promissory Note" and, together with the $100 Million
Promissory Note, the "Promissory Notes"). The Line of Credit and the Promissory
Notes are hereinafter referred to as the "Pre-Offering Indebtedness".
The Company will use the net proceeds from the Equity Offerings to make a
capital contribution of at least $150 million to its life insurance
subsidiaries, to reduce the Pre-Offering Indebtedness and for other general
corporate purposes.
Promptly following the Equity Offerings, subject to market conditions, the
Company plans to offer approximately $650 million of debt securities (the "Debt
Securities") in one or more offerings (the "Debt Offering") pursuant to a shelf
registration statement. The completion of the Equity Offerings will not be
conditioned on the completion of the Debt Offering. The Company will use the net
proceeds from the Debt Offering to further reduce the Pre-Offering Indebtedness.
For a description of certain transactions effected prior to the Equity Offerings
and the actions to be taken concurrently with or promptly after the Equity
Offerings, see "Company Financing Plan".
THE EQUITY OFFERINGS
<TABLE>
<S> <C> <C>
Class A Common Stock offered(1):
United States Offering..... 18,400,000 shares
International Offering..... 4,600,000 shares
------------
Total................. 23,000,000 shares
Common Stock to be outstanding
after the Equity
Offerings(1)(2):
Class A Common Stock....... 23,000,000 shares
Class B Common Stock....... 114,000,000 shares
------------
Total................. 137,000,000 shares
</TABLE>
- ---------------
(1) Assumes the Underwriters' over-allotment options are not exercised. See
"Underwriting". If the Underwriters exercise such over-allotment options in
full, the number of shares of Class A Common Stock sold in the U.S. Offering
and the International Offering will be 20,800,000 and 5,200,000,
respectively.
(2) Does not include shares reserved for issuance pursuant to the Company's
benefit plans and its restricted stock plan for non-employee directors.
8
<PAGE> 9
Dividend Policy............ The holders of Class A Common Stock and Class B
Common Stock will share ratably on a per share
basis in all dividends and other distributions
declared by the Board of Directors. The Board of
Directors currently intends to declare quarterly
dividends on the Common Stock and expects that the
first quarterly dividend payment will be $.09 per
share, with the initial dividend to be declared and
paid in the third quarter of 1997. For a discussion
of the tax treatment of such dividends, see
"Dividend Policy". For a discussion of the factors
that affect the determination by the Board of
Directors to declare dividends, as well as certain
other matters concerning the Company's dividend
policy, see "Dividend Policy" and "Risk
Factors -- Holding Company Structure; Restrictions
on Dividends".
Voting Rights.............. On all matters submitted to a vote of stockholders,
holders of Class A Common Stock are entitled to one
vote per share and holders of Class B Common Stock
are entitled to five votes per share. The Class A
Common Stock and Class B Common Stock generally
will vote together as a single class on all
matters, except as otherwise required by law. See
"Description of Capital Stock -- Class A Common
Stock and Class B Common Stock -- Voting Rights".
Conversion................. Under certain circumstances, shares of Class B
Common Stock will convert or are convertible into
an equivalent number of shares of Class A Common
Stock. See "Description of Capital Stock -- Class A
Common Stock and Class B Common Stock --
Conversion".
Use of Proceeds............ Based upon an initial public offering price of
$28.25 per share, the net proceeds to the Company
from the Equity Offerings are estimated to be
$607.5 million (or $687.4 million if the
Underwriters' over-allotment options are exercised
in full), after deducting the underwriting
discounts and estimated expenses for the Equity
Offerings payable by the Company. The Company will
use the net proceeds of the Equity Offerings to
make a capital contribution of at least $150
million to its life insurance subsidiaries, to
reduce the Pre-Offering Indebtedness and for other
general corporate purposes. See "Use of Proceeds".
New York Stock Exchange
Listing.................. The Class A Common Stock has been approved for
listing, subject to notice of issuance, on the NYSE
under the symbol "HLI".
RISK FACTORS
Prospective investors should consider carefully, in addition to the other
information contained in this Prospectus, the matters set forth under the
caption "Risk Factors" before purchasing shares of the Class A Common Stock
offered hereby.
9
<PAGE> 10
SUMMARY FINANCIAL DATA
The summary income statement data and balance sheet data set forth below
are derived in the relevant periods from the consolidated financial statements
and the notes thereto of the Company and its subsidiaries. The Company's
consolidated financial statements have been audited by Arthur Andersen LLP,
independent public accountants, as of December 31, 1995 and 1996, and for each
of the three years in the period ended December 31, 1996, and are included
elsewhere in this Prospectus, together with the report of Arthur Andersen LLP
thereon. The Company's consolidated financial statements as of December 31,
1992, 1993 and 1994 and for the years ended December 31, 1992 and 1993 were
derived from audited consolidated financial statements of certain of the
Company's subsidiaries and The Hartford and include all adjustments that
management considers necessary for a fair presentation of the data for such
periods. The summary income statement data and balance sheet data for the three
months ended March 31, 1996 and 1997, presented below, were derived from the
Company's unaudited consolidated financial statements that are included
elsewhere in this Prospectus and include, in the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the financial information for such periods. The results of
operations for the three months ended March 31, 1997 are not necessarily
indicative of the results of operations to be expected for the full fiscal year.
This summary financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations", the
Company's consolidated financial statements, the notes thereto and the other
financial information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF OR FOR
THE THREE MONTHS
AS OF OR FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------------------- ------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
(IN MILLIONS) (IN MILLIONS,
UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenues:
Premiums and other considerations............... $ 1,273 $ 1,755 $ 2,139 $ 2,643 $ 3,069 $ 941 $ 679
Net investment income........................... 1,038 1,160 1,403 1,451 1,534 362 375
Net realized capital gains (losses)............. 10 7 1 (4) (219) -- 1
------- ------- ------- ------- ------- ------- -------
Total revenues................................ 2,321 2,922 3,543 4,090 4,384 1,303 1,055
------- ------- ------- ------- ------- ------- -------
Benefits, claims and expenses:
Benefits, claims and claim adjustment
expenses...................................... 1,663 1,903 2,254 2,395 2,727 651 659
Amortization of deferred policy acquisition
costs......................................... 74 188 149 205 241 66 83
Dividends to policyholders(1)................... 48 228 419 675 635 286 54
Interest expense(2)............................. 26 25 29 35 55 11 16
Other insurance expense......................... 360 377 469 554 695 230 143
------- ------- ------- ------- ------- ------- -------
Total benefits, claims and expenses........... 2,171 2,721 3,320 3,864 4,353 1,244 955
------- ------- ------- ------- ------- ------- -------
Income before income tax expense.................. 150 201 223 226 31 59 100
Income tax expense................................ 49 71 72 76 7 20 37
Income before cumulative effect of changes in
accounting principles........................... 101 130 151 150 24 39 63
Cumulative effect of changes in accounting
principles(3)................................... (47) -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net income.................................... $ 54 $ 130 $ 151 $ 150 $ 24 $ 39 $ 63
======= ======= ======= ======= ======= ======= =======
BALANCE SHEET DATA
General account invested assets................... $13,514 $15,866 $18,078 $20,072 $19,830 $19,593
SEPARATE ACCOUNT assets(4)........................ 8,550 16,314 22,847 36,296 49,770 51,413
All other assets.................................. 1,430 7,454 9,324 9,594 10,333 10,496
======= ======= ======= ======= ======= =======
Total assets.................................... $23,494 $39,634 $50,249 $65,962 $79,933 $81,502
------- ------- ------- ------- ------- -------
Policy liabilities................................ $13,040 $20,863 $25,208 $26,318 $26,239 $25,817
Separate account liabilities(4)................... 8,550 16,314 22,847 36,296 49,770 51,413
Allocated Advances from parent(2)(5).............. 375 425 525 732 893 --
All other liabilities............................. 802 1,107 1,283 1,439 1,757 3,348
------- ------- ------- ------- ------- -------
Total liabilities............................... $22,767 $38,709 $49,863 $64,785 $78,659 $80,578
======= ======= ======= ======= ======= =======
Stockholder's equity(5)(6)........................ $ 727 $ 925 $ 386 $ 1,177 $ 1,274 $ 924
======= ======= ======= ======= ======= =======
Stockholder's equity, excluding net unrealized
capital gains (losses), net of tax(5)........... $ 727 $ 931 $ 1,116 $ 1,221 $ 1,245 $ 1,017
======= ======= ======= ======= ======= =======
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
As of or for the
Three Months
As of or for the Year Ended December 31, Ended March 31,
----------------------------------------------- ------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
(in millions,
(in millions) unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA (AFTER TAX)
Analysis of Net Income:
Annuity........................................ $ 35 $ 54 $ 84 $ 113 $ 145 $ 33 $ 43
Individual Life Insurance...................... 17 21 27 37 44 9 11
Employee Benefits.............................. 36 48 53 67 78 16 18
Guaranteed Investment Contracts................ 21 30 1 (67) (225) (15) --
Corporate Operation(7)......................... (16) (28) (14) 3 (18) (4) (10)
Unallocated net realized capital gains
(losses)(8).................................. 8 5 -- (3) -- -- 1
Cumulative effect of changes in accounting
principles(3)................................ (47) -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net income............................... $ 54 $ 130 $ 151 $ 150 $ 24 $ 39 $ 63
======= ======= ======= ======= ======= ======= =======
SELECTED SEGMENT DATA
Annuity:
Individual annuity sales....................... $ 2,212 $ 4,232 $ 7,005 $ 6,947 $ 9,841 $ 2,240 $ 2,572
Group annuity sales............................ 326 370 366 495 634 90 165
ACCOUNT VALUE
General account.............................. 3,779 4,767 5,499 6,892 7,411 6,950 7,522
GUARANTEED SEPARATE ACCOUNT(9)............... 2,663 3,989 7,026 8,996 9,130 8,790 9,189
Non-guaranteed separate account(10).......... 5,451 11,003 14,282 21,970 34,219 24,996 36,007
------- ------- ------- ------- ------- ------- -------
Total account value...................... $11,893 $19,759 $26,807 $37,858 $50,760 $40,736 $52,718
======= ======= ======= ======= ======= ======= =======
Individual Life Insurance:
Individual life sales.......................... $ 90 $ 96 $ 94 $ 107 $ 130 $ 22 $ 24
Account value
General account.............................. 816 1,127 1,456 1,579 1,998 1,622 2,023
Separate account............................. -- 736 836 979 1,238 1,034 1,307
------- ------- ------- ------- ------- ------- -------
Total account value...................... $ 816 $ 1,863 $ 2,292 $ 2,558 $ 3,236 $ 2,656 $ 3,330
======= ======= ======= ======= ======= ======= =======
Employee Benefits:
Group insurance premiums....................... $ 841 $ 856 $ 974 $ 1,103 $ 1,329 $ 290 $ 362
Group insurance RESERVES....................... 1,056 1,224 1,412 1,633 1,934 1,684 1,991
Total group insurance invested assets.......... 1,046 1,212 1,400 1,617 1,917 1,668 1,973
COLI account value
General account.............................. 864 1,549 2,308 3,566 4,028 3,923 3,853
Separate account............................. -- -- 897 3,484 4,441 3,537 4,352
------- ------- ------- ------- ------- ------- -------
Total COLI account value................. $ 864 $ 1,549 $ 3,205 $ 7,050 $ 8,469 $ 7,460 $ 8,205
======= ======= ======= ======= ======= ======= =======
Guaranteed Investment Contracts:
Guaranteed investment contract sales........... $ 1,608 $ 1,730 $ 1,732 $ 893 $ 169 $ 70 $ 41
Account value
General account.............................. 5,673 6,216 7,257 5,722 4,124 5,318 3,758
Guaranteed separate account.................. 182 193 124 346 408 415 428
------- ------- ------- ------- ------- ------- -------
Total account value...................... $ 5,855 $ 6,409 $ 7,381 $ 6,068 $ 4,532 $ 5,733 $ 4,186
======= ======= ======= ======= ======= ======= =======
STATUTORY DATA(11)
Gains from operations............................ $ 59 $ 61 $ 45 $ 175 $ 148
Gains (losses)................................... 70 10 29 (62) 23
------- ------- ------- ------- -------
Net income....................................... $ 129 $ 71 $ 74 $ 113 $ 171
======= ======= ======= ======= =======
Capital and surplus.............................. $ 824 $ 956 $ 1,088 $ 1,224 $ 1,320
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS
ADJUSTED
FOR EQUITY
HISTORICAL PRO FORMA(12) OFFERINGS
---------- ---------------- ----------
(IN MILLIONS, EXCEPT PER SHARE DATA, UNAUDITED)
<S> <C> <C> <C>
CAPITALIZATION DATA AS OF MARCH 31, 1997
Borrowings under Line of Credit................................... $1,084 $1,084 $ 693
Short-term debt due parent........................................ 100 125 82
Stockholder's equity(5)(6)........................................ 924 899 1,507
PRO FORMA PER SHARE DATA(13)
As of or for the Three Months Ended March 31, 1997:
Net income(14).................................................. $ 0.51 $ 0.51
Book value(15).................................................. 7.89 11.00
As of or for the Year Ended December 31, 1996:
Net income(14).................................................. $ 0.19 $ 0.23
Book value(15).................................................. 8.40 11.43
</TABLE>
11
<PAGE> 12
(1) Growth in dividends to policyholders is a result of the November 1992
acquisition from Mutual Benefit Life Insurance Company ("Mutual Benefit")
of a block of participating leveraged COLI business and the subsequent
growth in the leveraged COLI business from 1993 to 1995. Policyholder
dividends are expected to decline in the future since sales of new
leveraged COLI policies have been terminated as a result of the Health
Insurance Portability and Accountability Act of 1996 (the "HIPA Act of
1996").
(2) For financial reporting purposes, the Company has treated certain amounts
previously allocated by The Hartford to the Company's life insurance
subsidiaries as Allocated Advances from parent. Such Allocated Advances
were not treated as liabilities or indebtedness for tax and statutory
accounting purposes. Cash received in respect of Allocated Advances from
parent was used to support the growth of the life insurance subsidiaries
and was treated as surplus for statutory accounting purposes. Interest
expense prior to December 31, 1996 represents the expense internally
allocated to the Company with respect to the Allocated Advances based on
The Hartford's actual (third party) external borrowing costs. Such interest
expense paid was treated as dividends for tax and statutory accounting
purposes. The increase in Allocated Advances from parent in 1995 was
attributable to the ITT Spin-Off.
(3) Reflects the cumulative effect of adoption of SFAS No. 106, Employers'
Accounting for Postretirement Benefits Other Than Pensions, and SFAS No.
112, Employers' Accounting for Postemployment Benefits.
(4) Includes both non-guaranteed and guaranteed separate accounts.
(5) The Company has received capital contributions and paid or accrued
dividends to its stockholder for the five-year period ended December 31,
1996 and for the three months ended March 31, 1996 and 1997, as set forth
in the table below. The capital contributions described below exclude those
amounts classified as Allocated Advances from parent. Dividends exclude
those amounts classified as interest expense with respect to the Allocated
Advances from parent and paid to The Hartford as described in note (2)
above.
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------------- ----------------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ---- -----
(IN MILLIONS,
(IN MILLIONS) UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Capital contributions............... $ -- $100 $ 50 $180 $ -- $ -- $ --
Dividends........................... -- 24 17 226 -- -- 291
---- ---- ---- ---- ---- ----- -----
Net contributions............... $ -- $ 76 $ 33 $(46) $ -- $ -- $(291)
==== ==== ==== ==== ==== ===== =====
</TABLE>
(6) Stockholder's equity beginning December 31, 1994 reflects the adoption of
SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities. See Note 2 of notes to consolidated financial statements
included elsewhere in this Prospectus.
(7) The Company maintains a Corporate Operation through which it reports items
that are not directly allocable to any of its business segments. Included
in the Corporate Operation are: (i) unallocated income and expense, (ii)
the Company's group medical business, which it exited in 1993, and (iii)
certain other items not directly allocable to any business segment such as
ITT Spin-Off related items. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Results of Operations for
the Years Ended December 31, 1994, 1995 and 1996 -- Corporate Operation".
The following table details the components of the Corporate Operation:
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------------- ---------------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ---- ----
(IN MILLIONS) (IN MILLIONS,
UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Unallocated income and expense....... $(11) $ (3) $ (7) $(14) $(18) $ (4) $(10)
Group medical business............... (5) (25) (7) (1) 1 -- --
ITT Spin-Off related items and
other.............................. -- -- -- 18 (1) -- --
---- ---- ---- ---- ---- ---- ----
Total Corporate Operation........ $(16) $(28) $(14) $ 3 $(18) $ (4) $(10)
==== ==== ==== ==== ==== ==== ====
</TABLE>
(8) Represents net realized capital gains (losses) that are not allocable to
any of the Company's business segments.
(9) Guaranteed separate accounts represent policyholder funds that are
segregated from the general account of the Company and on which the Company
contractually guarantees a minimum return, subject, in most cases, to an
MVA feature if the relevant product is surrendered prior to the end of the
applicable guarantee period.
(10) Non-guaranteed separate accounts represent policyholder funds that are
segregated from the general account of the Company and as to which the
Company does not guarantee a minimum return.
(11) Statutory data has been derived from Annual Statements of Hartford Life and
Accident Insurance Company ("Hartford Life and Accident"), Hartford Life
and ITT Hartford Life and Annuity Insurance Company ("ITT Hartford Life and
Annuity") filed with insurance regulatory authorities, each in accordance
with statutory accounting practices. Gains (losses) are net of IMR and
taxes.
12
<PAGE> 13
(12) The pro forma data as of or for the three months ended March 31, 1997
reflects the Pre-Offering Transactions (as defined in "Capitalization"), as
if such transactions had occurred as of such date. The pro forma data as of
or for the year ended December 31, 1996 reflects the borrowing of $1.084
billion under the Line of Credit, the execution of the $100 Million
Promissory Note, the payment of $1.184 billion as a dividend to Hartford
Accident and Indemnity ($893 million of such dividend constituting a
repayment of the Allocated Advances from parent) and the Pre-Offering
Transactions, as if such transactions had occurred as of such date.
(13) Pro forma per share data is calculated based upon the 114 million shares of
Class B Common Stock owned by The Hartford immediately prior to the Equity
Offerings plus an assumed issuance of 8.67 million shares (for the three
months ended March 31, 1997) and 11.06 million shares (for the year ended
December 31, 1996), as applicable, of Class A Common Stock in the Equity
Offerings (the number of shares which, based on the initial public offering
price set forth on the cover page of this Prospectus and the underwriting
discounts and estimated expenses payable by the Company, would result in
estimated net proceeds equal to the excess of the amount of the February
and April 1997 dividends over, with respect to the March 31, 1997 data, the
earnings for the year ended December 31, 1996 and the three months ended
March 31, 1997 and the Allocated Advances from parent and, with respect to
the December 31, 1996 data, the earnings for the year ended December 31,
1996 and the Allocated Advances from parent, as applicable). Pro forma net
income per share (unaudited) of $.19 for the year ended December 31, 1996
and $.51 for the three months ended March 31, 1997, as included in the
Company's consolidated financial statements and condensed consolidated
financial statements, respectively (each included elsewhere in this
Prospectus), were determined on the basis of an assumed initial public
offering price of $25.50 per share.
(14) As adjusted net income per share is calculated based upon the 114 million
shares of Class B Common Stock owned by The Hartford immediately prior to
the Equity Offerings, an assumed issuance of 8.67 million shares (for the
three months ended March 31, 1997) and 11.06 million shares (for the year
ended December 31, 1996), as applicable, of Class A Common Stock in the
Equity Offerings (as discussed in note (13) above) and an additional
assumed issuance of 4.47 million shares of Class A Common Stock (the number
of shares which, based on the initial public offering price set forth on
the cover page of this Prospectus and the underwriting discounts and
estimated expenses payable by the Company, would result in a reduction of
the Pre-Offering Indebtedness and Allocated Advances from parent by $118
million). As adjusted net income per share is based upon historical amounts
adjusted to reflect a reduction in interest expense, net of tax, from
historical levels that would result from the completion of the Equity
Offerings. The foregoing assumes that the Company does not cancel any
portion of the Promissory Notes. See "Company Financing Plan".
(15) As adjusted book value per share, as of March 31, 1997, represents total
stockholder's equity, as of such date, together with the effect of the
Pre-Offering Transactions and the $607.5 million of estimated net proceeds
from the issuance and sale of 23 million shares of Class A Common Stock. As
adjusted book value per share, as of December 31, 1996, represents total
stockholder's equity, as of such date, together with the effect of the
borrowing of $1.084 billion under the Line of Credit, the execution of the
$100 Million Promissory Note, the payment of $1.184 billion as a dividend
to Hartford Accident and Indemnity ($893 million of such dividend
constituting a repayment of the Allocated Advances from parent), the
Pre-Offering Transactions and the $607.5 million of estimated net proceeds
from the issuance and sale of 23 million shares of Class A Common Stock.
The foregoing assumes that the Company does not cancel any portion of the
Promissory Notes. See "Company Financing Plan".
13
<PAGE> 14
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing shares of the Class A Common Stock offered hereby.
CONTROL BY AND RELATIONSHIP WITH THE HARTFORD
CONTROLLING STOCKHOLDER
The Hartford is currently the beneficial owner of all the capital stock of
the Company. Following the completion of the Equity Offerings, The Hartford will
continue to be the controlling stockholder of the Company and will beneficially
own 100% of the outstanding Class B Common Stock, which will represent
approximately 96.1% of the combined voting power of all the outstanding Common
Stock and approximately 83.2% of the economic interest in the Company (or
approximately 95.6% and 81.4%, respectively, if the Underwriters' over-allotment
options are exercised in full). For as long as The Hartford continues to
beneficially own shares of Common Stock representing more than 50% of the
combined voting power of the outstanding Common Stock, it generally will be able
to approve any matter submitted to a vote of the stockholders, including, among
other things, the election of the entire Board of Directors and the amendment of
the Restated Certificate of Incorporation (the "Certificate of Incorporation")
and By-laws of the Company, without the consent of the other stockholders of the
Company. In addition, through its controlling beneficial ownership (as well as
certain provisions of a master intercompany agreement between the Company, The
Hartford and, with respect to certain sections, Hartford Fire Insurance Company
("Hartford Fire") (the "Master Intercompany Agreement") described under "Certain
Relationships and Transactions -- Intercompany Arrangements -- Master
Intercompany Agreement"), The Hartford will be able to exercise a controlling
influence over the business and affairs of the Company, including determinations
with respect to mergers or other business combinations involving the Company,
the acquisition or disposition of assets by the Company, the Company's access to
the capital markets, the payment of dividends and any change of control of the
Company. In the foregoing situations or otherwise, various conflicts of interest
or areas of competition between the Company and The Hartford could arise.
Furthermore, ownership interests of directors or officers of the Company in
common stock of The Hartford or service as a director or officer of both the
Company and The Hartford could create, or appear to create, potential conflicts
of interest when directors and officers are faced with decisions that could have
different implications for the Company and The Hartford. See "Certain
Relationships and Transactions -- General".
Promptly following the completion of the Equity Offerings, The Hartford and
the Company expect to elect two additional directors of the Company who will be
persons not currently or formerly associated with The Hartford or the Company.
The Board of Directors will then consist of ten members, including eight who are
directors and/or officers of The Hartford. Members of the Board of Directors
will be divided into three classes and serve staggered three-year terms. See
"Management -- Directors". The Hartford will have the ability to change the size
and composition of the Company's Board of Directors.
INTERCOMPANY ARRANGEMENTS
The Company's relationship with The Hartford will be governed by, among
other things, certain agreements to be entered into in connection with the
Equity Offerings and possibly in the future, including the Master Intercompany
Agreement, certain investment management agreements (the "Investment Management
Agreements"), a tax sharing agreement (the "Tax Sharing Agreement") and the
sublease of the Company's headquarters (the "Simsbury Sublease"). See "Certain
Relationships and Transactions -- Intercompany Arrangements". The agreements
entered into in connection with the Equity Offerings generally will maintain the
relationship between the Company and The Hartford in a manner consistent in all
material respects with past practice. Under applicable insurance holding company
laws, agreements between the Company's insurance subsidiaries and The Hartford
or its affiliates must be fair and reasonable and may be subject to the approval
of applicable state insurance commissioners. However, none of these agreements,
nor any agree-
14
<PAGE> 15
ments entered into in the future between the Company and The Hartford or their
respective subsidiaries (for so long as The Hartford maintains its controlling
beneficial ownership in the Company), will result from arm's-length negotiations
and, as a result, the terms of certain of such agreements may be less favorable
to the Company than could be obtained from an independent third party.
MASTER INTERCOMPANY AGREEMENT. The Master Intercompany Agreement will
identify the services that will be provided by The Hartford to the Company and
by the Company to The Hartford following the completion of the Equity Offerings,
specify certain significant corporate activities that the Company only may
undertake upon the prior written consent of The Hartford and provide for the
assumption of liabilities and cross-indemnities allocating liabilities between
the Company and The Hartford. The Company also will agree to use its best
efforts, pursuant to the Master Intercompany Agreement, to effect the
registration under the applicable federal and state securities laws of any of
the shares of Common Stock beneficially owned by The Hartford or any transferee
in respect of at least 5% of the then outstanding Common Stock (together, the
"Rights Holders").
Pursuant to the Master Intercompany Agreement, Hartford Fire, the principal
subsidiary of The Hartford, will grant to the Company a non-exclusive right and
license (the "Hartford License") (and the right to grant sublicenses (the
"Hartford Sublicenses") to certain qualified subsidiaries) to use the "Hartford"
name, various versions of the Stag Logo and certain other trademarks and service
marks in connection with the products and services sold through the Company's
Annuity, Individual Life Insurance and Employee Benefits segments on a worldwide
basis, and any property-casualty products offered outside the United States and
Canada by the Company in the future, subject to customary usage restrictions.
The Hartford License and any Hartford Sublicenses will be perpetual, except
that, in the event that The Hartford reduces its beneficial ownership below 50%
of the combined voting power of the Company's then outstanding securities
eligible to vote in the election of directors of the Company (other than
securities having such power only upon the occurrence of a default or any other
extraordinary contingency) (the "Voting Stock"), Hartford Fire may revoke the
Hartford License and/or any Hartford Sublicenses upon the later of the fifth
anniversary of the date of consummation of the Equity Offerings or one year
after receipt by the Company of written notice of Hartford Fire's intention to
revoke the Hartford License and/or any Hartford Sublicenses. In addition, the
Hartford License and/or any Hartford Sublicenses may be revoked immediately in
certain other limited, customary circumstances. Subject to the terms of the
Master Intercompany Agreement, upon the revocation of any such licenses, the
Company and any of its subsidiaries affected thereby will change their name to
exclude "Hartford" and will discontinue the use of the Stag Logo and the other
licensed trademarks and service marks. The revocation of the Hartford License
and/or any Hartford Sublicenses, in whole or in part, could have a material
adverse effect on the Company's ability to conduct its business. See "Certain
Relationships and Transactions -- Intercompany Arrangements -- Master
Intercompany Agreement -- License and Sublicense".
TAX SHARING AGREEMENT. Pursuant to the Tax Sharing Agreement, the Company,
its subsidiaries and The Hartford will make payments between them such that,
with respect to any period, the amount of taxes to be paid by the Company,
subject to certain adjustments, generally will be determined as though the
Company were to file separate federal, state and local income tax returns
(including, except as provided below, any amounts determined to be due as a
result of a redetermination of the tax liability of The Hartford arising from an
audit or otherwise). With respect to certain tax items, however, such as foreign
tax credits, alternative minimum tax credits, net operating losses and net
capital losses, the Company's right to reimbursement will be determined based on
the usage of such credits or losses by the consolidated group. In addition, The
Hartford will control all the tax decisions of the Company, as is presently the
case, by virtue of its controlling beneficial ownership of the Company and the
terms of the Tax Sharing Agreement. This arrangement may result in conflicts of
interest between the Company and The Hartford. See "Certain Relationships and
Transactions -- Intercompany Arrangements -- Tax Sharing Agreement and Tax
Consolidation".
Provided that The Hartford continues to beneficially own, directly or
indirectly, at least 80% of the combined voting power and 80% of the value of
the outstanding capital stock of the Company,
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the Company will be included for federal income tax purposes in the consolidated
group of which The Hartford is the common parent. Each member of a consolidated
group for federal income tax purposes is jointly and severally liable for the
federal income tax liability of each other member of the consolidated group.
Accordingly, the Company could be liable for the federal income tax liability of
any other member of The Hartford consolidated group in the event any such
liability is incurred, and not discharged, by such other member. Similar
principles apply with respect to members of a combined group for state tax
purposes. In addition, provided that The Hartford continues to beneficially own
at least 80% of the combined voting power or the value of the outstanding
capital stock of the Company, the Company will be included for federal income
tax purposes in the controlled group of which The Hartford is the common parent.
Each member of a controlled group is jointly and severally liable for pension
funding and pension termination liabilities of each other member of the
controlled group, as well as certain benefit plan taxes. Accordingly, the
Company could be liable for pension funding, pension termination liabilities and
certain other pension-related excise taxes, as well as other taxes, of another
member of The Hartford controlled group in the event any such liability is
incurred, and not discharged, by such other member.
INVESTMENT MANAGEMENT AGREEMENTS. Management of the Company's general
accounts and certain of its separate accounts has been, prior to the Equity
Offerings, and will be, following the completion of the Equity Offerings,
conducted by the Company. The Company's investment strategy group is responsible
for determining investment allocations for its general account and guaranteed
separate account investment portfolios. The Investment Management Agreements
will provide that the investment staff of The Hartford will implement (e.g.,
selection, purchase and sale of securities) the investment strategies determined
by the investment strategy group of the Company and act as advisor to certain of
the Company's non-guaranteed separate accounts and mutual funds. The Investment
Management Agreements also will provide that the Company will pay a fee designed
to reflect the actual costs of providing such services. In addition, the
Investment Management Agreements generally will provide that, prior to April 1,
2000, The Hartford may not terminate such Agreements, and the Company may only
terminate such Agreements, upon six months' written notice, based on The
Hartford's failure to satisfy performance benchmarks agreed to by the parties.
Further, the Investment Management Agreements generally will provide that from
and after April 1, 2000, the Investment Management Agreements will continue
unless 180 days' prior written notice of termination is provided on or after
October 1, 1999 by one party to the other. The Investment Management Agreements
for the Company's mutual funds will be terminable by the mutual funds' boards of
directors at any time. See "Certain Relationships and
Transactions -- Intercompany Arrangements -- Investment Management Agreements".
HARTFORD FIRE GUARANTEE. Pursuant to a guarantee agreement between
Hartford Fire, Hartford Life and Accident Insurance Company ("Hartford Life and
Accident") and Hartford Life (the "Guarantee Agreement"), Hartford Fire has
provided to Hartford Life and Accident and Hartford Life an unconditional
guarantee since 1990, on behalf of and for the benefit of such subsidiaries and
the owners of the life, disability and other insurance and annuity contracts
issued by either such subsidiary, in respect of contractual claims made under
such contracts by the beneficiaries thereof. Upon the completion of the Equity
Offerings, Hartford Fire will terminate such guarantee; however, the guarantee
will remain in full force and effect with respect to any outstanding contracts
at the time of such termination. Although management does not believe the
termination of the Guarantee Agreement will have an adverse impact on sales, it
is possible that future sales of some of the Company's products could be
adversely affected as a result of the absence of the marketing benefit
associated with such guarantee.
IMPORTANCE OF COMPANY RATINGS
Ratings are an important factor in establishing the competitive position of
insurance companies. Insurers compete with other insurance companies, financial
intermediaries and other financial institutions on the basis of a number of
factors, including the ratings assigned by nationally recognized statistical
rating organizations. In September 1996, S&P announced that it reduced the
claims-paying ability ratings of The Hartford group of companies from "AA+" to
"AA" and, in
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January 1997, Moody's announced that it downgraded various ratings of The
Hartford and its subsidiaries, including the insurance financial strength
ratings of The Hartford's insurance subsidiaries, from Aa2 to Aa3. Taken
together, S&P and Moody's expressed concern with, among other things, the
overall strength of The Hartford's consolidated capital, the recent charges it
had taken relating to the environmental and asbestos reserves of The Hartford's
property-casualty insurance operations (which are not part of the Company's
operations) and Closed Book GRC and the competitive nature of the business in
which The Hartford and its subsidiaries operate. Further ratings downgrades (or
the potential for such downgrades) of the Company could, among other things,
materially increase surrender levels, adversely affect relationships with
broker-dealers, banks, agents, wholesalers and other distributors of the
Company's products and services, negatively impact PERSISTENCY, adversely affect
the Company's ability to compete and thereby materially and adversely affect the
Company's business, financial condition and results of operations.
Moreover, for so long as The Hartford maintains a controlling interest in
the Company, a deterioration in the financial condition or significant insured
losses from a catastrophic event or other unforeseen occurrence that materially
affects the financial results of The Hartford and results in a downgrade of The
Hartford's ratings could adversely impact the ratings of the Company.
Claims-paying ability or insurance financial strength ratings reflect a
rating agency's opinion of the Company's principal life insurance subsidiaries'
financial strength, operating performance and ability to meet their respective
obligations to policyholders and are not evaluations directed toward the
protection of investors.
For more information on the ratings of the Company, see
"Business -- Ratings".
RISKS ASSOCIATED WITH CERTAIN ECONOMIC AND MARKET FACTORS
The Company's results of operations are affected by certain economic and
market factors, including the level of volatility in the markets in which the
Company invests and the overall investment returns provided thereby. In
particular, significant growth in the retirement-oriented investment market and
uncommonly strong stock and bond market appreciation have been material factors
in the growth of the Company's assets and its ability to generate new sales in
recent years. There can be no assurance, however, that these economic and market
trends will continue. While management believes that the Company operates in
growing markets and that its business strategy will foster continued asset
growth, adverse economic conditions and other factors, including a protracted
and/or precipitous decline in the stock market and other economic factors that
affect the popularity of the Company's products and services, may negatively
impact the Company's business, financial condition and results of operations.
Accordingly, no assurance can be given that the Company's historic growth of net
income, revenues and assets will continue.
INTEREST RATE RISK
Changes in interest rates can have significant effects on the Company's
profitability. Under certain circumstances of interest rate volatility, the
Company is exposed to disintermediation risk and reduction in net interest
spread or profit margins. The Company's investment portfolio primarily consists
of investment-grade, fixed maturity securities, including MBSs and CMOs. The
fair value of these and the Company's other invested assets fluctuates depending
on market and other general economic conditions as well as the interest rate
environment. During periods of declining interest rates, MBSs and CMOs prepay
faster as the underlying mortgages are prepaid and refinanced at lower interest
rates. In addition, during such periods, the Company generally will not be able
to reinvest the proceeds of any such prepayments at comparable yields.
Conversely, during periods of rising interest rates, the rate of prepayments
generally slows.
Management believes that its asset/liability management strategies minimize
the effects of such interest rate volatility, including product design (e.g.,
the use of surrender charges or MVA features in certain products), the use of
certain hedging techniques, the purchase of securities structured to protect
against prepayments and consistent monitoring of the pricing of the Company's
products. See "Business -- Investment Operations -- Asset/Liability Management
Strate-
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gies". No assurance can be given, however, that management will successfully
implement such strategies. Any such failure could have a material adverse impact
on the Company's business, financial condition and results of operations.
During the early 1990s, the Closed Book GRC investment portfolio, which was
principally composed of MBSs and CMOs, was materially and adversely affected by
lower investment rates and earnings due to prepayments substantially in excess
of assumed and historical levels, as well as the interest rate rise in 1994,
which caused a mismatch in the DURATION of such assets and the associated
liabilities. As a result, the Company's net income fell to $150 million in 1995
and $24 million in 1996. Management expects that the net income or loss from
Closed Book GRC in the years subsequent to 1996 will be immaterial based on the
Company's current projections for the performance of the assets and liabilities
associated with Closed Book GRC, the Company's expectations regarding future
sales of assets from the Closed Book GRC investment portfolio from time to time
in order to make the necessary payments on maturing Closed Book GRC liabilities
and the stabilizing effect of certain hedge transactions. To date, such asset
sales have been consistent with the Company's expectations. However, no
assurance can be given that, under certain unanticipated economic circumstances
which result in the Company's assumptions proving incorrect, further losses in
respect of Closed Book GRC will not occur in the future. For more information on
Closed Book GRC, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations for the Years Ended
December 31, 1994, 1995 and 1996 -- Comparison of Guaranteed Investment
Contracts Segment Results -- Closed Book GRC".
In response to the losses associated with the Closed Book GRC investment
portfolio, the Company instituted an improved risk management process during
1995 and 1996. In addition, the Company recently enhanced its computerized
analytical systems to allow for more effective management of its portfolio
positions and potential exposures in an effort to identify possible
asset/liability mismatches earlier. As a result, all material portfolios,
including Closed Book GRC, are now reviewed on a monthly basis to determine if
the net economic sensitivity of the assets and the related liabilities to
interest rate changes are within a pre-determined range. For a further
discussion of the Company's risk management process, see "Business -- Investment
Operations". Nonetheless, there can be no assurance that such improvements will
eliminate the possibility that asset/liability mismatches may occur in the
future.
INVESTMENT PORTFOLIO EXPOSURE
The Company's investment portfolio consists primarily of investment-grade
debt securities. The market value of these investments varies depending on
general economic and market conditions and the interest rate environment. In
general, the market value of the fixed maturity securities held by the Company
increases or decreases in inverse relationship with fluctuations in interest
rates. For a further discussion of the effect of interest rates on the Company's
investment portfolio, particularly its MBSs and CMOs, and the related risk to
its results of operations, see "-- Interest Rate Risk".
The Company is also subject to credit risk relating to the uncertainty
associated with the continued ability of an issuer to make timely payments of
principal and interest. Although almost all fixed maturity securities held by
the Company in its portfolio are investment grade and the Company believes that
it maintains prudent issuer diversification, no assurance can be given that,
under certain unanticipated economic circumstances, issuer defaults would not
have a material adverse effect on the business, financial condition and results
of operations of the Company. See "Business -- Investment Operations".
DEPENDENCE ON CERTAIN THIRD-PARTY RELATIONSHIPS
The Company distributes its annuity and life insurance products through a
variety of distribution channels, including broker-dealers, banks, wholesalers,
its own internal sales force and other third-party marketing organizations. In
connection with the distribution or investment management of these products,
certain third-party service providers have materially contributed to the growth
of the Company, particularly in its individual annuity business. The Company
periodically negotiates renewal terms for these relationships and there can be
no assurance that such renewal terms will
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remain acceptable to the Company or such service providers. An interruption in
the Company's continuing relationship with certain of these third parties or the
impairment of their reputation or creditworthiness could materially and
adversely affect the Company's ability to market its products. There can be no
assurance that the Company would be able to find alternate sources of
distribution in a timely manner. See "Business -- Annuity -- Marketing and
Distribution".
ADVERSE EFFECT OF LEGISLATION AND REGULATORY ACTIONS
The insurance business of the Company is subject to comprehensive state and
federal regulation and supervision throughout the United States. The purpose of
such regulation is primarily to provide safeguards for policyholders rather than
to protect the interests of stockholders. The laws of the various state
jurisdictions establish supervisory agencies with broad administrative powers
with respect to, among other things, licensing to transact business, licensing
agents, admittance of assets, regulating premium rates, approving policy forms,
regulating unfair trade and claims practices, establishing reserve requirements
and solvency standards, fixing maximum interest rates on life insurance policy
loans and minimum rates for accumulation of surrender values, restricting
certain transactions between affiliates and regulating the type, amounts and
valuation of investments permitted. State insurance regulators and the National
Association of Insurance Commissioners (the "NAIC") continually re-examine
existing laws and regulations. It is impossible to predict the future impact of
potential state and federal regulations on the Company's operations, and there
can be no assurance that future insurance-related laws and regulations, or the
interpretation thereof, will not have an adverse effect on the operations of the
Company's business.
Although the United States federal government does not directly regulate
the insurance business, federal legislation and administrative policies in
several areas, including pension regulation, financial services regulation and
federal taxation, can significantly and adversely affect the insurance industry
and thus the Company. For example, Congress has from time to time considered
legislation relating to the deferral of taxation on the accretion of value
within certain annuities and life insurance products, the removal of barriers
preventing banks from engaging in the insurance business, changes in regulations
for the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
the alteration of the federal income tax structure and the availability of
Section 401(k) or individual retirement accounts. In particular, Congress is
currently considering enacting legislation that would reduce the tax rate
applicable to long-term capital gains. This may result in alternative financial
products becoming less tax disadvantaged versus variable annuities. It is not
possible to predict whether future legislation or regulation adversely affecting
the insurance industry may be enacted or, if enacted, the extent to which such
legislation or regulation would have an effect on the Company and its
competitors.
The Health Insurance Portability and Accountability Act of 1996 (the "HIPA
Act of 1996") phases out the deductibility of interest on policy loans under
COLI by 1998, thus eliminating all future sales of leveraged COLI. The Company's
leveraged COLI product has been an important contributor to its profitability in
recent years. During 1994, 1995 and 1996, leveraged COLI sales generated
revenues of $892 million, $1.226 billion and $1.298 billion, respectively, which
represented 25%, 30% and 30% of the Company's total revenues. Leveraged COLI
will continue to contribute to the profitability of the Company (although such
contribution will be reduced in the future due to the effects of this
legislation). As a result, net income contributed by COLI may be lower in the
future (particularly during 1999 and later years) due to the elimination of
leveraged COLI sales.
For additional information on other laws and regulations that affect the
Company's operations, see "Business -- Insurance Regulation".
HOLDING COMPANY STRUCTURE; RESTRICTIONS ON DIVIDENDS
As a holding company with no significant business operations of its own,
the Company relies on dividends from its subsidiaries, which are primarily
domiciled in the State of Connecticut, as the principal source of cash to meet
its obligations, including the payment of principal and interest on debt
obligations of the Company and the payment of dividends to holders of its
capital stock. The payment of dividends by Connecticut-domiciled insurers is
limited under the insurance holding company laws of Connecticut which require
notice to and approval by the Connecticut Insurance
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Commissioner for the declaration or payment of any dividend that, together with
other dividends or distributions made within the preceding twelve months,
exceeds the greater of (i) 10% of the insurer's policyholder surplus as of
December 31 of the preceding year or (ii) net gain from operations for the
twelve-month period ending on the December 31 last preceding, in each case
determined under statutory insurance accounting practices. In addition, if any
dividend of a Connecticut-domiciled insurer exceeds the insurer's earned
surplus, it requires the approval of the Connecticut Insurance Commissioner.
Based on these limitations and statutory results, as of December 31, 1996, the
Company would be able to receive $132 million in dividends in 1997 from Hartford
Life and Accident, the Company's direct subsidiary, without obtaining the
approval of the Connecticut Insurance Commissioner. There can be no assurance
that dividends will be declared by the Company in the future or if declared that
it will obtain any required approvals from the applicable state insurance
commissioners. See "Dividend Policy".
As discussed under "Certain Relationships and Transactions -- Intercompany
Arrangements -- Master Intercompany Agreement -- Approval of Corporate
Activities", the Company must obtain The Hartford's approval for the declaration
or payment of dividends other than dividends on the Common Stock which are
consistent with the Company's dividend policy then in effect. In addition, for
so long as the Line of Credit remains outstanding, its provisions limit the
payment of cash dividends by the Company following the Equity Offerings to,
among other things, the aggregate amount of cash dividends and distributions
received by the Company from its insurance subsidiaries.
From time to time, the NAIC and various state insurance regulators have
considered, and may in the future consider, proposals to further restrict
dividend payments that may be made by an insurance company without regulatory
approval. No assurance can be given that there will not be any further
regulatory action restricting the ability of the Company's insurance
subsidiaries to pay dividends. Inability to pay dividends to the Company in an
amount sufficient to enable the Company to meet its debt service and other cash
requirements (including dividend payments on the Common Stock) could have a
material adverse effect on the Company's business, financial condition and
results of operations.
POTENTIAL NEW ACCOUNTING POLICY FOR DERIVATIVES
In June 1996, the Financial Accounting Standards Board ("FASB") issued an
exposure draft of an accounting standard entitled "Accounting for Derivative and
Similar Financial Instruments and for Hedging Activities". This exposure draft,
if adopted in the form in which it was issued, would require companies to report
derivatives on the balance sheet at fair value with changes in fair value
recorded in income or equity. The exposure draft also would change the
accounting for derivatives used in hedging strategies from traditional deferral
accounting to a current recognition approach which could impact a company's
income statement and balance sheet and expand the definition of a derivative
instrument to include certain structured securities currently accounted for as
fixed maturities. Management expects that this accounting standard, in whatever
form, will not be effective until 1999. FASB's Rules of Procedure require that,
prior to approving a new accounting standard, extensive "due process" be
followed. FASB requests written comments from interested parties on an exposure
draft and also may hold public hearings. This exposure draft has drawn
widespread criticism primarily because the required accounting treatment would
not match the perceived economic effect of such hedging strategies. As a result
of, among other things, the concerns and criticisms in comment letters and at
public hearings held on this exposure draft, FASB continued to deliberate with
regard to this exposure draft during the first quarter of 1997 and has
emphasized that a final decision has not been reached. FASB has stated that it
expects to conclude its review of this matter in the second quarter of 1997. The
Company is unable to predict the form that the final accounting standard, if
adopted, may take and believes it would be inappropriate to speculate on the
effects of any such adoption at this time. However, the Company believes the
adoption of a new accounting standard similar to this exposure draft could cause
substantial volatility in the Company's reported net income if certain of the
Company's current derivatives and hedging strategies were continued after the
adoption of such accounting standard. Were the
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Company to continue to employ its current derivatives strategies, the Company's
reported net income as a general matter would, in the short-term, be adversely
affected as interest rates rise and positively affected as interest rates
decline. In addition, if adopted in its present form, the Company would be
required to make a cumulative effect adjustment to its net income and/or
stockholder's equity, which adjustment would vary based on its then current
holdings of derivatives and the economic and market circumstances present at the
time such adjustment was implemented. For a discussion of the Company's use of
derivatives, see "Business -- Investment Operations -- Asset/Liability
Management Strategies".
COMPETITION
The Company competes with over 2,000 life insurance companies in the United
States, as well as certain banks, securities brokerage firms, investment
advisors and other financial intermediaries marketing insurance products,
annuities, mutual funds and other retirement-oriented investments. Some of these
competitors have greater financial resources and currently have higher financial
strength and claims-paying ability ratings from major rating agencies than the
Company. National banks, in particular, may become more significant competitors
in the future for the Company as a result of certain recent court decisions and
regulatory actions discussed under "Business -- Insurance
Regulation -- Regulation at Federal Level". Although the effect of these recent
developments on the Company and its competitors is uncertain, both the
persistency of the Company's existing products and the Company's ability to sell
products could be materially impacted in the future. Also, several proposals to
repeal or modify the Glass-Steagall Act of 1933, as amended (the "Glass-Steagall
Act"), and the Bank Holding Company Act of 1956, as amended (the "Bank Holding
Company Act"), have been made by members of Congress and the Executive Branch.
Certain of these proposals would repeal or modify the current restrictions that
prevent banks from being affiliated with insurance companies. None of these
proposals has yet been enacted, and it is not possible to predict whether any of
these proposals will be enacted or, if enacted, what their potential effect on
the Company or its competitors would be.
The Company also competes for distributors of its products such as banks,
broker-dealers and wholesalers. Since the Company does not have a career agency
force, it must compete with other insurers and financial services providers to
attract and maintain productive independent distributors to sell its products.
Moreover, the Company does not have exclusive agency agreements with many of its
distributors and believes that certain of them sell products similar to those
marketed by the Company for other insurance companies. The Company's ability to
attract distributors of its products could be adversely affected if for any
reason the Company's products became less competitive or concerns arose
regarding the Company's asset quality or ratings.
In addition, the investment performance of investment managers chosen by
the Company to manage the assets related to its products may vary and
non-competitive investment performance could adversely affect the Company's
ability to market its products.
For additional information on the competitive forces affecting the Company,
see "Business -- Competition".
CERTAIN LITIGATION
Companies in the life insurance industry historically have been subject to
substantial litigation resulting from claims disputes and other matters. Most
recently, such companies have faced extensive claims, including class-action
lawsuits, alleging improper sales practices relating to sales of certain life
insurance products. Negotiated settlements of such class-action lawsuits have
had a material adverse effect on the business, financial condition and results
of operations of certain of these companies. The Company is not and has not been
a defendant in any such class-action lawsuit alleging improper sales practices.
No assurance can be given that such class-action lawsuits or other litigation
against the Company would not materially and adversely affect the Company's
business, financial condition or results of operations.
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NO PRIOR MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF COMMON STOCK PRICE AND
THE SECURITIES MARKETS
Prior to the Equity Offerings, there has been no public market for the
Class A Common Stock. The Class A Common Stock has been approved for listing,
subject to notice of issuance, on the NYSE. The initial public offering price of
the Class A Common Stock was determined through negotiations between the Company
and the representatives of the Underwriters. There can be no assurance that the
initial public offering price will correspond to the price at which the Class A
Common Stock will trade in the public market subsequent to the Equity Offerings
or that an active trading market for the Class A Common Stock will develop and
continue after the completion of the Equity Offerings. See "Underwriting". In
addition, the market price of the Class A Common Stock upon the completion of
the Equity Offerings could be subject to significant fluctuations in response to
variations in the Company's quarterly financial results or other developments,
such as announcements of new products by the Company or the Company's
competitors, enactment of legislation or regulation affecting the insurance
industry, interest rate movements or general economic conditions.
POSSIBLE FUTURE SALES OF COMMON STOCK BY THE HARTFORD
Subject to applicable federal and state securities laws and the
restrictions set forth below, after completion of the Equity Offerings, The
Hartford may sell any and all of the shares of Common Stock it beneficially owns
or distribute any or all of such shares of Common Stock to its stockholders.
Sales or distributions by The Hartford of substantial amounts of Common Stock in
the public market or to its stockholders, or the perception that such sales or
distributions could occur, could adversely affect prevailing market prices for
the shares of Class A Common Stock.
The Hartford has advised the Company that its current intention is to
continue to hold all the Common Stock it beneficially owns. However, The
Hartford has no contractual obligation to retain its shares of Common Stock,
except for a limited period described in "Underwriting". Each share of Class B
Common Stock is convertible into one share of Class A Common Stock at any time
and is convertible automatically in certain circumstances. See "Description of
Capital Stock -- Class A Common Stock and Class B Common Stock -- Conversion".
There can be no assurance that shares of Class B Common Stock will not be
converted into Class A Common Stock or that The Hartford or any other Rights
Holder would not seek to sell their shares of Common Stock following the Equity
Offerings pursuant to registration rights or otherwise. In addition, the Company
has agreed that it will, upon the request of The Hartford or any other Rights
Holder and pursuant to the terms of the Master Intercompany Agreement, except
for a limited period described in "Underwriting", use its best efforts to effect
the registration under applicable federal and state securities laws of any
shares of the Company's Common Stock held by The Hartford or any other such
Rights Holder, as applicable, or any of its affiliates (with such rights to be
assignable by The Hartford or any other Rights Holder under certain
circumstances), which would facilitate any future disposition. See "Certain
Relationships and Transactions -- Intercompany Arrangements -- Master
Intercompany Agreement -- Registration Rights" and "Shares Eligible for Future
Sale".
IMMEDIATE AND SIGNIFICANT DILUTION
Based on an initial public offering price of $28.25 per share and assuming
no exercise of the Underwriters' over-allotment options, the Company's net
tangible book value as of March 31, 1997, after giving effect to the
transactions set forth in "Capitalization", would be $10.80 per share of Common
Stock. Accordingly, purchasers of Class A Common Stock offered hereby would
suffer an immediate dilution in net tangible book value of $17.45 per share. See
"Dilution".
ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Certificate of Incorporation and
By-laws may be deemed to have anti-takeover effects and, although of little
practical significance for so long as The Hartford maintains controlling
beneficial ownership of the Company, may, under certain circumstances,
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<PAGE> 23
delay, defer or prevent a takeover attempt or the removal of the present
management of the Company which a stockholder might consider to be in its best
interest. Such provisions also may adversely affect prevailing market prices for
the Class A Common Stock. These provisions include (i) the availability of
50,000,000 shares of preferred stock, par value $.01 per share (the "Preferred
Stock"), for issuance from time to time at the discretion of the Board of
Directors; (ii) prohibitions against stockholders calling a special meeting of
stockholders or acting by written consent in lieu of a meeting; (iii) the
classification of the Board of Directors into three classes, each of which will
serve for different three-year periods; (iv) a requirement, pursuant to Section
141 of the General Corporation Law of the State of Delaware (the "DGCL"), that,
due to the classification of the Board of Directors, directors of the Company
may only be removed for cause; (v) a requirement that certain provisions of the
Certificate of Incorporation may be amended only with the approval of the
holders of at least 80% of the combined voting power of the Common Stock then
outstanding; (vi) requirements for advance notice for raising business or making
nominations at stockholders' meetings; and (vii) the ability of the Board of
Directors to increase the size of the board and to appoint directors to fill
newly created directorships. See "Certain Provisions of the Certificate of
Incorporation and By-Laws of the Company -- Potential Limits on Change of
Control".
23
<PAGE> 24
COMPANY FINANCING PLAN
The Company was formed in December 1996 to serve as the holding company for
Hartford Life and Accident and its subsidiaries. In connection with such
formation, Hartford Accident and Indemnity contributed its ownership of all the
outstanding capital stock of Hartford Life and Accident to the Company and the
Company issued to Hartford Accident and Indemnity all the outstanding shares of
capital stock of the Company. Subsequent to the initial capitalization of the
Company, the following transactions took place or will take place:
(1) Historically, for financial reporting purposes, The Hartford internally
allocated the Allocated Advances to the Company's life insurance subsidiaries.
Cash was contributed to the life insurance subsidiaries in connection with
certain of such Allocated Advances. In February 1997, the Company (i) declared a
dividend of $1.184 billion payable to Hartford Accident and Indemnity, (ii)
obtained the $1.3 billion Line of Credit, (iii) borrowed $1.084 billion under
the Line of Credit and (iv) paid to Hartford Accident and Indemnity the $1.184
billion dividend, which consisted of the $1.084 billion in cash borrowed under
the Line of Credit and the $100 Million Promissory Note. $893 million of such
dividend constituted a repayment of the Allocated Advances. In addition, on
April 4, 1997, the Company declared and paid a dividend of $25 million to
Hartford Accident and Indemnity in the form of the $25 Million Promissory Note.
(2) The Company will use the net proceeds of the Equity Offerings to make a
capital contribution of at least $150 million to its life insurance
subsidiaries, to reduce the Pre-Offering Indebtedness and for other general
corporate purposes.
(3) Promptly following the Equity Offerings, subject to market conditions,
the Company plans to offer approximately $650 million of the Debt Securities in
the Debt Offering pursuant to a shelf registration statement. The completion of
the Equity Offerings will not be conditioned on the completion of the Debt
Offering. The Company will use the net proceeds of the Debt Offering to further
reduce the Pre-Offering Indebtedness.
If the Underwriters' over-allotment options in respect of the Equity
Offerings are exercised in full, the Company intends to use the additional
proceeds to make an additional capital contribution to its life insurance
subsidiaries and/or to further reduce the Pre-Offering Indebtedness. To the
extent that the Debt Offering is not consummated, indebtedness that otherwise
would have been repaid from the net proceeds of the Debt Offering will remain
outstanding. Assuming the sale of $650 million of the Debt Securities, the
Company will have $350 million of debt securities and/or preferred stock
remaining available for sale in the public markets pursuant to the shelf
registration statement, which may be issued at any time following the Equity
Offerings. See "Use of Proceeds", "Capitalization" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources".
Upon completion of the Equity Offerings, Hartford Accident and Indemnity
may cancel a portion of the then outstanding Promissory Notes in light of the
Company's capital structure and its ability to access the capital markets.
However, Hartford Accident and Indemnity is not legally obligated to effect any
such cancellation in whole or in part.
24
<PAGE> 25
CAPITALIZATION
The table below sets forth the capitalization of the Company as of March
31, 1997 under the following circumstances: (i) on a historical basis (which
includes the borrowing of $1.084 billion under the Line of Credit and the
payment of a $1.184 billion dividend to Hartford Accident and Indemnity,
consisting of the $1.084 billion in cash borrowed under the Line of Credit and
the $100 Million Promissory Note, with $893 million of such dividend
constituting a repayment of the Allocated Advances); (ii) on a pro forma basis
to give effect to the reclassification of the 1,000 shares of authorized common
stock of the Company into Class B Common Stock and the authorization of the
Class A Common Stock and the declaration and payment to Hartford Accident and
Indemnity of a $25 million dividend in the form of the $25 Million Promissory
Note (together, the "Pre-Offering Transactions"); (iii) on an as adjusted basis
to give effect to the issuance and sale in the Equity Offerings of 23 million
shares of Class A Common Stock at an initial public offering price of $28.25 per
share and the application of the estimated net proceeds of $607.5 million to
make a capital contribution to the Company's insurance subsidiaries, to reduce
the Pre-Offering Indebtedness and for other general corporate purposes; and (iv)
as further adjusted to give effect to the completion of the Debt Offering
promptly following the Equity Offerings and the application of the estimated net
proceeds therefrom to further reduce the Pre-Offering Indebtedness. As of March
31, 1997, the pro forma ratio of total debt to total capital, excluding net
unrealized losses on investments, net of tax, of $93 million and after giving
effect to the completion of the Debt Offering following the Equity Offerings,
would be 32.6% (or 29.6% if the Underwriters' over-allotment options are
exercised in full). See "Use of Proceeds". To the extent the Debt Offering is
not consummated, the Pre-Offering Indebtedness of the Company that would
otherwise have been repaid from the net proceeds of the Debt Offering will
remain outstanding.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1997
---------------------------------------------------------------
PRO FORMA
FOR AS ADJUSTED AS FURTHER
PRE-OFFERING FOR EQUITY ADJUSTED FOR
HISTORICAL TRANSACTIONS OFFERINGS DEBT OFFERING
---------- ------------- ----------- -----------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Borrowings under Line of Credit(1)............................. $1,084 $ 1,084 $ 693 $ 43
Short-term debt due parent(2).................................. 100 125 82 82
Long-term debt:
Debt Offering................................................ -- -- -- 650
------ ------ ------ ------
Total debt................................................... $1,184 $ 1,209 $ 775 $ 775
------ ------ ------ ------
Stockholder's equity:
Preferred Stock, par value $.01 per share; 50,000,000 shares
authorized; no shares issued and outstanding............... -- -- -- --
Common stock, par value $.01 per share; 1,000 shares
authorized; 100 shares issued and outstanding,
historical................................................. -- -- -- --
Class A Common Stock, par value $.01 per share; 600,000,000
shares authorized; no shares issued and outstanding;
23,000,000 shares issued and outstanding, as adjusted and
as further adjusted........................................ -- -- -- --
Class B Common Stock, par value $.01 per share; 600,000,000
shares authorized; 114,000,000 shares issued and
outstanding, pro forma, as adjusted and as further
adjusted................................................... -- 1 1 1
Capital surplus.............................................. 585 584 1,192 1,192
Net unrealized capital gains (losses) on investments, net of
tax........................................................ (93) (93) (93) (93)
Retained earnings............................................ 432 407 407 407
------ ------ ------ ------
Total stockholder's equity................................. 924 899 1,507 1,507
------ ------ ------ ------
Total capitalization................................... $2,108 $ 2,108 $ 2,282 $ 2,282
====== ====== ====== ======
</TABLE>
- ---------------
(1) Represents $1.084 billion borrowed under the Line of Credit on February 18,
1997, with interest payable at the two-month Eurodollar rate, determined as
described below, plus 15 basis points (5.65% at the inception of the
borrowing) and principal payable on or before February 9, 1998. The
Eurodollar rate is determined by taking the average one, two, three or
six-month rate (based upon the applicable interest period selected by the
Company) at which deposits in U.S. dollars are offered by each of the four
participating lenders in London, England to prime banks in the London
interbank market, plus an applicable margin (based upon the Company's
current public debt ratings).
(2) Represents (i) the $100 Million Promissory Note executed by the Company for
the benefit of Hartford Accident and Indemnity, with interest payable at the
two-month Eurodollar rate, determined as described above with respect to the
Line of Credit, plus 15 basis points (initially 5.60% upon the execution of
the $100 Million Promissory Note) and principal payable on February 19,
1998, and (ii) the $25 Million Promissory Note executed by the Company for
the benefit of Hartford Accident and Indemnity, with interest payable at the
one-month Eurodollar rate, determined as described above with respect to the
Line of Credit, plus 15 basis points (initially 5.84% upon the execution of
the $25 Million Promissory Note) and principal payable on April 3, 1998.
25
<PAGE> 26
USE OF PROCEEDS
Based upon an initial public offering price of $28.25 per share, the net
proceeds to the Company from the sale of the Class A Common Stock in the Equity
Offerings are estimated to be $607.5 million (or $687.4 million if the
Underwriters' over-allotment options are exercised in full), after deducting the
underwriting discounts and estimated expenses for the Equity Offerings payable
by the Company. The Company will use the net proceeds to make a capital
contribution of at least $150 million to its life insurance subsidiaries, to
reduce the Pre-Offering Indebtedness by approximately $434 million and for other
general corporate purposes.
If the Underwriters' over-allotment options in respect of the Equity
Offerings are exercised in full, the Company intends to use the additional
proceeds to make an additional capital contribution to its life insurance
subsidiaries and/or to further reduce the Pre-Offering Indebtedness. To the
extent that the Debt Offering is not consummated, Pre-Offering Indebtedness that
otherwise would have been repaid from the proceeds of the Debt Offering will
remain outstanding. Assuming the sale of $650 million of the Debt Securities,
the Company will have $350 million of debt securities and/or preferred stock
remaining available for sale in the public markets pursuant to the shelf
registration statement, which may be issued at any time following the Equity
Offerings. See "Capitalization" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources".
DIVIDEND POLICY
The holders of Class A Common Stock and Class B Common Stock will share
ratably on a per share basis in all dividends and other distributions declared
by the Board of Directors. The Board of Directors currently intends to declare
quarterly dividends on the Common Stock and expects that the first quarterly
dividend payment will be $.09 per share (a rate of $.36 annually), with the
initial dividend to be declared and paid in the third quarter of 1997. The
Company expects that any dividends paid in 1997 will consist primarily of a
return of basis for U.S. federal income tax purposes. To the extent that any
such dividends in fact consist of a return of basis for U.S. federal income tax
purposes, such dividends will be ineligible for the dividends received deduction
otherwise available to certain corporate holders and will reduce a holder's
adjusted tax basis with respect to their shares of either Class A Common Stock
or Class B Common Stock, as the case may be. The Company further expects that
any dividends paid in 1998 and future years will constitute primarily taxable
dividends for U.S. federal income tax purposes and generally will be eligible
for the dividends received deduction available to certain corporate holders. See
"Certain United States Federal Tax Consequences to Non-United States Holders of
Class A Common Stock -- Dividends" for a discussion of certain tax consequences
related to dividends paid to Non-United States Holders (as defined therein).The
declaration and payment of dividends by the Company are subject to the
discretion of the Board of Directors. The determination to pay dividends will
depend upon, among other things, general business conditions, the Company's
financial results, contractual, legal and regulatory restrictions on the payment
of dividends by the Company's subsidiaries, the effect on claims-paying ability
and debt ratings of the Company and its subsidiaries and such other factors as
the Board of Directors may consider to be relevant. In addition, until The
Hartford and its affiliates no longer own at least 50% of the combined voting
power of all the outstanding Voting Stock, the approval of The Hartford,
pursuant to the Master Intercompany Agreement, is required for the payment by
the Company of dividends that are not consistent with the Company's then current
dividend policy. See "Certain Relationships and Transactions -- Intercompany
Arrangements -- Master Intercompany Agreements". Although there can be no
assurance that any dividends will be paid by the Company, management believes
that the Company's cash flows after the completion of the Equity Offerings
should be sufficiently strong such that, barring unforeseen circumstances, the
initial dividend rate can be maintained for the foreseeable future. See "Risk
Factors -- Holding Company Structure; Restrictions on Dividends" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources".
26
<PAGE> 27
DILUTION
At March 31, 1997, the pro forma net tangible book value of the Company
(after giving effect to the Pre-Offering Transactions) was approximately $872
million, or approximately $7.65 per share of Common Stock. "Net tangible book
value" per share of Common Stock represents the amount of the Company's total
tangible assets minus total liabilities, divided by the 114 million shares of
Common Stock outstanding. After giving effect to the sale by the Company of 23
million shares of Class A Common Stock in the Equity Offerings at an initial
public offering price of $28.25 per share and after deducting the underwriting
discounts and estimated expenses payable by the Company, the pro forma net
tangible book value of the Company at March 31, 1997 would have been
approximately $1.480 billion, or approximately $10.80 per share of Common Stock.
This represents an immediate increase in net tangible book value of $3.15 per
share of Class B Common Stock to The Hartford and an immediate dilution in net
tangible book value of $17.45 per share to new investors purchasing shares of
Class A Common Stock at the initial public offering price. The following table
illustrates this dilution on a per share basis:
<TABLE>
<S> <C>
Initial public offering price per share of Class A Common Stock............. $28.25
Pro forma net tangible book value per share before the Equity Offerings
(1)....................................................................... 7.65
Increase in net tangible book value per share attributable to the sale of
Class A Common Stock in the Equity Offerings (2).......................... 3.15
Pro forma net tangible book value per share after giving effect to the
Equity Offerings.......................................................... 10.80
------
Dilution in net tangible book value per share to the purchasers of Class A
Common Stock offered hereby (3)........................................... $17.45
======
</TABLE>
- ---------------
(1) The Company's intangible assets are $27 million of goodwill, equivalent to
$0.24 per share of Common Stock (after giving effect to the Pre-Offering
Transactions).
(2) After deducting the underwriting discounts and estimated expenses for the
Equity Offerings payable by the Company.
(3) Dilution is determined by subtracting pro forma net tangible book value per
share after giving effect to the Equity Offerings, from the initial public
offering price paid by a new investor for a share of Class A Common Stock.
27
<PAGE> 28
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated income statement data and balance sheet data set
forth below are derived in the relevant periods from the consolidated financial
statements and the notes thereto of the Company and its subsidiaries. The
Company's consolidated financial statements have been audited by Arthur Andersen
LLP, independent public accountants, as of December 31, 1995 and 1996, and for
each of the three years in the period ended December 31, 1996 and are included
elsewhere in this Prospectus, together with the report of Arthur Andersen LLP
thereon. The Company's consolidated financial statements as of December 31,
1992, 1993 and 1994 and for the years ended December 31, 1992 and 1993 were
derived from audited consolidated financial statements of certain of the
Company's subsidiaries and The Hartford and include all adjustments that
management considers necessary for a fair presentation of the data for such
periods. The selected consolidated income statement data and balance sheet data
for the three months ended March 31, 1996 and 1997, presented below, were
derived from the Company's unaudited consolidated financial statements that are
included elsewhere in this Prospectus and include, in the opinion of management,
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of the financial information for such periods. The results
of operations for the three months ended March 31, 1997 are not necessarily
indicative of the results of operations to be expected for the full fiscal year.
This selected consolidated financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", the Company's consolidated financial statements, the notes thereto
and the other financial information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF OR FOR THE
THREE MONTHS
AS OF OR FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
(IN MILLIONS,
(IN MILLIONS) UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenues:
Premiums and other considerations................ $ 1,273 $ 1,755 $ 2,139 $ 2,643 $ 3,069 $ 941 $ 679
Net investment income............................ 1,038 1,160 1,403 1,451 1,534 362 375
Net realized capital gains (losses).............. 10 7 1 (4) (219) -- 1
------- ------- ------- ------- ------- ------- -------
Total revenues................................. 2,321 2,922 3,543 4,090 4,384 1,303 1,055
------- ------- ------- ------- ------- ------- -------
Benefits, claims and expenses:
Benefits, claims and claim adjustment expenses... 1,663 1,903 2,254 2,395 2,727 651 659
Amortization of deferred policy acquisition
costs.......................................... 74 188 149 205 241 66 83
Dividends to policyholders(1).................... 48 228 419 675 635 286 54
Interest expense(2).............................. 26 25 29 35 55 11 16
Other insurance expense.......................... 360 377 469 554 695 230 143
------- ------- ------- ------- ------- ------- -------
Total benefits, claims and expenses............ 2,171 2,721 3,320 3,864 4,353 1,244 955
------- ------- ------- ------- ------- ------- -------
Income before income tax expense................... 150 201 223 226 31 59 100
Income tax expense................................. 49 71 72 76 7 20 37
Income before cumulative effect of changes in
accounting principles............................ 101 130 151 150 24 39 63
Cumulative effect of changes in accounting
principles(3).................................... (47) -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net income..................................... $ 54 $ 130 $ 151 $ 150 $ 24 $ 39 $ 63
======== ======== ======== ======== ======== ======== ========
BALANCE SHEET DATA
General account invested assets.................... $13,514 $15,866 $18,078 $20,072 $19,830 $19,593
Separate account assets(4)......................... 8,550 16,314 22,847 36,296 49,770 51,413
All other assets................................... 1,430 7,454 9,324 9,594 10,333 10,496
------- ------- ------- ------- ------- -------
Total assets..................................... $23,494 $39,634 $50,249 $65,962 $79,933 $81,502
======== ======== ======== ======== ======== ========
Policy liabilities................................. $13,040 $20,863 $25,208 $26,318 $26,239 $25,817
Separate account liabilities(4).................... 8,550 16,314 22,847 36,296 49,770 51,413
Allocated Advances from parent(2)(5)............... 375 425 525 732 893 --
All other liabilities.............................. 802 1,107 1,283 1,439 1,757 3,348
------- ------- ------- ------- ------- -------
Total liabilities................................ $22,767 $38,709 $49,863 $64,785 $78,659 $80,578
======== ======== ======== ======== ======== ========
Stockholder's equity(5)(6)......................... $ 727 $ 925 $ 386 $ 1,177 $ 1,274 $ 924
======== ======== ======== ======== ======== ========
Stockholder's equity, excluding net unrealized
capital gains (losses), net of tax(5)............ $ 727 $ 931 $ 1,116 $ 1,221 $ 1,245 $ 1,017
======== ======== ======== ======== ======== ========
</TABLE>
28
<PAGE> 29
<TABLE>
<CAPTION>
As of or for the
Three Months
As of or for the Year Ended December 31, Ended March 31,
--------------------------------------------------- ------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
(in millions,
(in millions) unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA (AFTER TAX)
Analysis of Net Income:
Annuity.................................... $ 35 $ 54 $ 84 $ 113 $ 145 $ 33 $ 43
Individual Life Insurance.................. 17 21 27 37 44 9 11
Employee Benefits.......................... 36 48 53 67 78 16 18
Guaranteed Investment Contracts............ 21 30 1 (67) (225) (15) --
Corporate Operation(7)..................... (16) (28) (14) 3 (18) (4) (10)
Unallocated net realized capital gains
(losses)(8).............................. 8 5 -- (3) -- -- 1
Cumulative effect of changes in accounting
principles(3)............................ (47) -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net income............................. $ 54 $ 130 $ 151 $ 150 $ 24 $ 39 $ 63
======= ======= ======= ======= ======= ======= =======
SELECTED SEGMENT DATA
Annuity:
Individual annuity sales................... $ 2,212 $ 4,232 $ 7,005 $ 6,947 $ 9,841 $ 2,240 $ 2,572
Group annuity sales........................ 326 370 366 495 634 90 165
Account value
General account.......................... 3,779 4,767 5,499 6,892 7,411 6,950 7,522
Guaranteed separate account(9)........... 2,663 3,989 7,026 8,996 9,130 8,790 9,189
Non-guaranteed separate account(10)...... 5,451 11,003 14,282 21,970 34,219 24,996 36,007
------- ------- ------- ------- ------- ------- -------
Total account value.................. $11,893 $19,759 $26,807 $37,858 50,760 $40,736 $52,718
======= ======= ======= ======= ======= ======= =======
Individual Life Insurance:
Individual life sales...................... $ 90 $ 96 $ 94 $ 107 $ 130 $ 22 $ 24
Account value
General account.......................... 816 1,127 1,456 1,579 1,998 1,622 2,023
Separate account......................... -- 736 836 979 1,238 1,034 1,307
------- ------- ------- ------- ------- ------- -------
Total account value.................. $ 816 $ 1,863 $ 2,292 $ 2,558 $ 3,236 $ 2,656 $ 3,330
======= ======= ======= ======= ======= ======= =======
Employee Benefits:
Group insurance premiums................... $ 841 $ 856 $ 974 $ 1,103 $ 1,329 $ 290 $ 362
Group insurance reserves................... 1,056 1,224 1,412 1,633 1,934 1,684 1,991
Total group insurance invested assets...... 1,046 1,212 1,400 1,617 1,917 1,668 1,973
COLI account value
General account.......................... 864 1,549 2,308 3,566 4,028 3,923 3,853
Separate account......................... -- -- 897 3,484 4,441 3,537 4,352
------- ------- ------- ------- ------- ------- -------
Total COLI account value............. $ 864 $ 1,549 $ 3,205 $ 7,050 $ 8,469 $ 7,460 $ 8,205
======= ======= ======= ======= ======= ======= =======
Guaranteed Investment Contracts:
Guaranteed investment contract sales....... $ 1,608 $ 1,730 $ 1,732 $ 893 $ 169 $ 70 $ 41
Account value
General account.......................... 5,673 6,216 7,257 5,722 4,124 5,318 3,758
Guaranteed separate account.............. 182 193 124 346 408 415 428
------- ------- ------- ------- ------- ------- -------
Total account value.................. $ 5,855 $ 6,409 $ 7,381 $ 6,068 $ 4,532 $ 5,733 $ 4,186
======= ======= ======= ======= ======= ======= =======
STATUTORY DATA(11)
Gains from operations........................ $ 59 $ 61 $ 45 $ 175 $ 148
Gains (losses)............................... 70 10 29 (62) 23
------- ------- ------- ------- -------
Net income................................... $ 129 $ 71 $ 74 $ 113 $ 171
======= ======= ======= ======= =======
Capital and surplus.......................... $ 824 $ 956 $ 1,088 $ 1,224 $ 1,320
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS
ADJUSTED
FOR EQUITY
HISTORICAL PRO FORMA(12) OFFERINGS
---------- ---------------- ----------
(IN MILLIONS, EXCEPT PER SHARE DATA, UNAUDITED)
<S> <C> <C> <C>
CAPITALIZATION DATA AS OF MARCH 31, 1997
Borrowings under Line of Credit............................... $1,084 $1,084 $ 693
Short-term debt due parent.................................... 100 125 82
Stockholder's equity(5)(6).................................... 924 899 1,507
PRO FORMA PER SHARE DATA(13)
As of or for the Three Months Ended March 31, 1997:
Net income(14)............................................ $ 0.51 $ 0.51
Book value(15)............................................ 7.89 11.00
As of or for the Year Ended December 31, 1996:
Net income(14)............................................ $ 0.19 $ 0.23
Book value(15)............................................ 8.40 11.43
</TABLE>
29
<PAGE> 30
(1) Growth in dividends to policyholders is a result of the November 1992
acquisition from Mutual Benefit of a block of participating leveraged COLI
business and the subsequent growth in the leveraged COLI business from 1993
to 1995. Policyholder dividends are expected to decline in the future since
sales of new leveraged COLI policies have been terminated as a result of
the HIPA Act of 1996.
(2) For financial reporting purposes, the Company has treated certain amounts
previously allocated by The Hartford to the Company's life insurance
subsidiaries as Allocated Advances from parent. Such Allocated Advances
were not treated as liabilities or indebtedness for tax and statutory
accounting purposes. Cash received in respect of Allocated Advances from
parent was used to support the growth of the life insurance subsidiaries
and was treated as surplus for statutory accounting purposes. Interest
expense prior to December 31, 1996 represents the expense internally
allocated to the Company with respect to the Allocated Advances based on
The Hartford's actual (third party) external borrowing costs. Such interest
expense paid was treated as dividends for tax and statutory accounting
purposes. The increase in Allocated Advances from parent in 1995 was
attributable to the ITT Spin-Off.
(3) Reflects the cumulative effect of adoption of SFAS No. 106, Employers'
Accounting for Postretirement Benefits Other Than Pensions, and SFAS No.
112, Employers' Accounting for Postemployment Benefits.
(4) Includes both non-guaranteed and guaranteed separate accounts.
(5) The Company has received capital contributions and paid or accrued
dividends to its stockholder for the five-year period ended December 31,
1996 and for the three months ended March 31, 1996 and 1997, as set forth
in the table below. The capital contributions described below exclude those
amounts classified as Allocated Advances from parent. Dividends exclude
those amounts classified as interest expense with respect to the Allocated
Advances from parent and paid to The Hartford as described in note (2)
above.
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------------- ---------------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ---- -----
(IN MILLIONS,
(IN MILLIONS) UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Capital contributions............... $ -- $100 $ 50 $180 $ -- $ -- $ --
Dividends........................... -- 24 17 226 -- -- 291
---- ---- ---- ---- ----- ----- -----
Net contributions............... $ -- $ 76 $ 33 $(46) $ -- $ -- $(291)
==== ==== ==== ==== ===== ===== =====
</TABLE>
(6) Stockholder's equity beginning December 31, 1994 reflects the adoption of
SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities. See Note 2 of notes to consolidated financial statements
included elsewhere in this Prospectus.
(7) The Company maintains a Corporate Operation through which it reports items
that are not directly allocable to any of its business segments. Included
in the Corporate Operation are: (i) unallocated income and expense, (ii)
the Company's group medical business, which it exited in 1993, and (iii)
certain other items not directly allocable to any business segment such as
ITT Spin-Off related items. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Results of Operations for
the Years Ended December 31, 1994, 1995 and 1996 -- Corporate Operation".
The following table details the components of the Corporate Operation:
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------------- ---------------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ---- ----
(IN MILLIONS,
(IN MILLIONS) UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Unallocated income and expense....... $(11) $ (3) $ (7) $(14) $(18) $ (4) $(10)
Group medical business............... (5) (25) (7) (1) 1 -- --
ITT Spin-Off related items and
other.............................. -- -- -- 18 (1) -- --
---- ---- ---- ---- ---- ---- ----
Total Corporate Operation........ $(16) $(28) $(14) $ 3 $(18) $ (4) $(10)
===== ===== ===== ===== ===== ===== =====
</TABLE>
(8) Represents net realized capital gains (losses) that are not allocable to
any of the Company's business segments.
(9) Guaranteed separate accounts represent policyholder funds that are
segregated from the general account of the Company and on which the Company
contractually guarantees a minimum return, subject, in most cases, to an
MVA feature if the relevant product is surrendered prior to the end of the
applicable guarantee period.
(10) Non-guaranteed separate accounts represent policyholder funds that are
segregated from the general account of the Company and as to which the
Company does not guarantee a minimum return.
(11) Statutory data has been derived from Annual Statements of Hartford Life and
Accident, Hartford Life and ITT Hartford Life and Annuity filed with
insurance regulatory authorities, each in accordance with statutory
accounting practices. Gains (losses) are net of IMR and taxes.
30
<PAGE> 31
(12) The pro forma data as of or for the three months ended March 31, 1997
reflects the Pre-Offering Transactions, as if such transactions had
occurred as of such date. The pro forma data as of or for the year ended
December 31, 1996 reflects the borrowing of $1.084 billion under the Line
of Credit, the execution of the $100 Million Promissory Note, the payment
of $1.184 billion as a dividend to Hartford Accident and Indemnity ($893
million of such dividend constituting a repayment of the Allocated Advances
from parent) and the Pre-Offering Transactions, as if such transactions had
occurred as of such date.
(13) Pro forma per share data is calculated based upon the 114 million shares of
Class B Common Stock owned by The Hartford immediately prior to the Equity
Offerings plus an assumed issuance of 8.67 million shares (for the three
months ended March 31, 1997) and 11.06 million shares (for the year ended
December 31, 1996), as applicable, of Class A Common Stock in the Equity
Offerings (the number of shares which, based on the initial public offering
price set forth on the cover page of this Prospectus and the underwriting
discounts and estimated expenses payable by the Company, would result in
estimated net proceeds equal to the excess of the amount of the February
and April 1997 dividends over, with respect to the March 31, 1997 data, the
earnings for the year ended December 31, 1996 and the three months ended
March 31, 1997 and the Allocated Advances from parent and, with respect to
the December 31, 1996 data, the earnings for the year ended December 31,
1996 and the Allocated Advances from parent, as applicable). Pro forma net
income per share (unaudited) of $.19 for the year ended December 31, 1996
and $.51 for the three months ended March 31, 1997, as included in the
Company's consolidated financial statements and condensed consolidated
financial statements, respectively (each included elsewhere in this
Prospectus), were determined on the basis of an assumed initial public
offering price of $25.50 per share.
(14) As adjusted net income per share is calculated based upon the 114 million
shares of Class B Common Stock owned by The Hartford immediately prior to
the Equity Offerings, an assumed issuance of 8.67 million shares (for the
three months ended March 31, 1997) and 11.06 million shares (for the year
ended December 31, 1996), as applicable, of Class A Common Stock in the
Equity Offerings (as discussed in note (13) above) and an additional
assumed issuance of 4.47 million shares of Class A Common Stock (the number
of shares which, based on the initial public offering price set forth on
the cover page of this Prospectus and the underwriting discounts and
estimated expenses payable by the Company, would result in a reduction of
the Pre-Offering Indebtedness and Allocated Advances from parent by $118
million). As adjusted net income per share is based upon historical amounts
adjusted to reflect a reduction in interest expense, net of tax, from
historical levels that would result from the completion of the Equity
Offerings. The foregoing assumes that the Company does not cancel any
portion of the Promissory Notes. See "Company Financing Plan".
(15) As adjusted book value per share, as of March 31, 1997, represents total
stockholder's equity, as of such date, together with the effect of the
Pre-Offering Transactions and the $607.5 million of estimated net proceeds
from the issuance and sale of 23 million shares of Class A Common Stock. As
adjusted book value per share, as of December 31, 1996, represents total
stockholder's equity, as of such date, together with the effect of the
borrowing of $1.084 billion under the Line of Credit, the execution of the
$100 Million Promissory Note, the payment of $1.184 billion as a dividend
to Hartford Accident and Indemnity ($893 million of such dividend
constituting a repayment of the Allocated Advances from parent), the
Pre-Offering Transactions and the $607.5 million of estimated net proceeds
from the issuance and sale of 23 million shares of Class A Common Stock.
The foregoing assumes that the Company does not cancel any portion of the
Promissory Notes. See "Company Financing Plan".
31
<PAGE> 32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations of the Company is prepared as if the Company were a separate entity
for all periods presented and should be read in conjunction with the "Selected
Consolidated Financial Data", the Company's consolidated financial statements,
the notes thereto and the other financial information included elsewhere in this
Prospectus.
GENERAL
The Company is a leading insurance and financial services company that
provides pre-retirement savings, estate planning and employee benefit products.
The Company offers variable and fixed annuities, retirement plan services,
mutual funds and life and disability insurance on both an individual and group
basis. Prior to the completion of the Equity Offerings, the Company operated its
businesses as part of The Hartford.
The Company attempts to attain a pre-determined return on stockholder's
equity for each of its business segments. Management facilitates this
"bottom-line" approach by operating the Company as a series of micro-enterprises
within each of its business segments. These micro-enterprises are managed by
individuals with accountability for the profit or loss of the specific
operation. The Company assigns capital to each micro-enterprise based on
internal formulae and each of the managers is expected to earn the Company's
targeted return on the assigned capital.
The Company derives its revenues principally from (i) asset management fees
and mortality and expense fees on separate accounts, (ii) premiums, (iii) net
investment income on general account assets, including the general account
portion of variable annuities, and (iv) certain other fees earned by the
Company. The Company generates investment and mortality and expense fees
primarily from the separate account assets deposited with the Company through
the sale of individual annuities and variable life products. Premium revenues
are derived primarily from the sale of individual life, group life and group
disability insurance and COLI. The Company's operating expenses consist of
insurance benefits provided, interest credited on general account liabilities,
the cost of selling and servicing the various products sold by the Company,
including commissions to the various sales representatives (net of any
deferrals), and general business expenses.
The Company's profitability depends in large part upon (i) the amount of
its assets, (ii) the adequacy of its product pricing (which is primarily a
function of competitive conditions, management's ability to assess and manage
trends in mortality and morbidity experience as compared to the level of benefit
payments and its ability to maintain expenses within pricing assumptions), (iii)
the maintenance of the Company's target spreads between its customer CREDITED
RATES and its earned investment rates and (iv) the persistency of its policies
and premiums (which determines the recoverability of the costs incurred in
selling a policy). External factors, such as the impact of legislation on the
Company's products, also affect the Company's profitability.
From time to time, the Company has acquired certain COLI and individual
life insurance and annuity blocks of businesses from distressed carriers. These
acquisitions have contributed to the Company's growth in assets. The Company
assumed COLI blocks of business of approximately $5.6 billion in 1992 and $300
million in 1993 from Mutual Benefit Life Insurance Company ("Mutual Benefit")
and individual life insurance and annuity policies of $3.2 billion in 1993 from
Fidelity Bankers Life Insurance Company ("Fidelity Bankers"), $434 million in
1994 from Pacific Standard Life Insurance Company ("Pacific Standard") and $77
million in 1996 from Investors Equity Life Insurance Company of Hawaii
("Investors Equity").
The Company's income prior to the cumulative effect of changes in the
Company's accounting principles grew from $101 million in 1992 to $151 million
in 1994, a compound annual growth rate of 22%, due in part to internal growth
and the acquisitions discussed above. In 1995 and 1996, the
32
<PAGE> 33
Company's net income fell to $150 million and $24 million, respectively, mainly
due to losses within the Guaranteed Investment Contracts segment. Because the
Company does not expect any material income or loss from the Guaranteed
Investment Contracts segment in the years subsequent to 1996, management
believes that future earnings will be dependent on income from the Annuity,
Individual Life Insurance and Employee Benefits segments, net of the Corporate
Operation. Net income of these segments, net of the Corporate Operation, was
$150 million, $217 million and $249 million in 1994, 1995 and 1996,
respectively, representing a compound annual growth rate over such period of
29%.
The results of the Guaranteed Investment Contracts segment were materially
and adversely affected by lower investment rates and earnings in the investment
portfolio supporting such segment due to prepayments on MBSs and CMOs
substantially in excess of assumed and historical levels, as well as the
interest rate rise in 1994, which caused a mismatch in the duration of such
assets and liabilities. In 1995, the Company substantially withdrew from the
general account GRC business. In 1996, the Company initiated certain asset sales
and hedging transactions to insulate itself from any ongoing income or loss
associated with the Closed Book GRC investment portfolio. As a result, due to
the foregoing actions, management expects that the net income (loss) from this
segment in the years subsequent to 1996 will be immaterial. See "Risk
Factors -- Interest Rate Risk" and "-- Results of Operations for the Years Ended
December 31, 1994, 1995 and 1996 -- Comparison of Guaranteed Investment
Contracts Segment Results -- Closed Book GRC".
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
COMPARISON OF CONSOLIDATED RESULTS
The following table details the Company's consolidated net income for the
three months ended March 31, 1996 and 1997.
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS
ENDED MARCH 31,
----------------
1996 1997
------ ------
(IN MILLIONS,
UNAUDITED)
<S> <C> <C>
Revenues:
Premiums and other considerations....................................... $ 941 $ 679
Net investment income................................................... 362 375
Net realized capital gains (losses)..................................... -- 1
------ ------
Total revenues....................................................... 1,303 1,055
------ ------
Benefits, claims and expenses:
Benefits, claims and claim adjustment expenses.......................... 651 659
Amortization of deferred policy acquisition costs....................... 66 83
Dividends to policyholders.............................................. 286 54
Interest expense(1)..................................................... 11 16
Other insurance expense................................................. 230 143
------ ------
Total benefits, claims and expenses.................................. 1,244 955
------ ------
Income before income tax expense.......................................... 59 100
Income tax expense........................................................ 20 37
------ ------
Net income........................................................... $ 39 $ 63
====== ======
</TABLE>
- ---------------
(1) For financial reporting purposes, the Company has treated certain amounts
previously allocated by The Hartford to the Company's life insurance
subsidiaries as Allocated Advances from parent. Such Allocated Advances were
not treated as liabilities or indebtedness for tax and statutory accounting
purposes. Cash received in respect of Allocated Advances from parent was
used to support the growth of the life insurance subsidiaries and was
treated as surplus for statutory accounting purposes. Interest expense prior
to December 31, 1996 represents the expense internally allocated to the
Company with respect to the Allocated Advances based on The Hartford's
actual (third party) external borrowing costs. Such interest expense paid
was treated as dividends for tax and statutory accounting purposes.
33
<PAGE> 34
Revenues decreased $248 million, or 19%, to $1.055 billion in the first
quarter of 1997 from $1.303 billion in the first quarter of 1996 due to a
decrease in revenues from COLI of $365 million primarily due to significantly
less premiums from leveraged COLI as a result of the HIPA Act of 1996. This
legislation phases out the deductibility of interest on policy loans under COLI
by 1998, thus eliminating all future sales of leveraged COLI. Leveraged COLI
will continue to contribute to the profitability of the Company (although such
contribution will be reduced in the future due to the effects of this
legislation). As a result, net income contributed by COLI may be lower in the
future (particularly during 1999 and later years). The decrease in COLI revenues
was partially offset by an increase in revenues of $117 million, or 15%, in the
Company's other operations, primarily due to a $79 million increase in group
insurance revenues and a $47 million increase in revenues from the Annuity
segment. Similar factors caused benefits, claims and expenses to decrease by
$289 million, or 23%, to $955 million in the first quarter of 1997 from $1.244
billion in the first quarter of 1996.
Net income increased $24 million, or 62%, to $63 million in the first
quarter of 1997 from $39 million in the first quarter of 1996 due to growth in
the Annuity, Individual Life Insurance and Employee Benefits segments of 30%,
22% and 13%, respectively, and the elimination of losses in the Guaranteed
Investment Contracts segment, partially offset by higher unallocated expense in
the Corporate Operation primarily due to an increase in interest expense of $5
million to $16 million in the first quarter of 1997 from $11 million in the
first quarter of 1996. This increase was primarily related to the Pre-Offering
Indebtedness.
COMPARISON OF SEGMENT RESULTS
The following table details the Company's net income by segment for the
three months ended March 31, 1996 and 1997.
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS
ENDED MARCH
31,
-------------
1996 1997
---- ----
(IN MILLIONS,
UNAUDITED)
<S> <C> <C>
Annuity...................................................................... $ 33 $ 43
Individual Life Insurance.................................................... 9 11
Employee Benefits............................................................ 16 18
Guaranteed Investment Contracts(1)........................................... (15) --
Corporate Operation(2)....................................................... (4) (10)
Unallocated net realized capital gains (losses)(3)........................... -- 1
--- ----
Net income................................................................. $ 39 $ 63
=== ====
</TABLE>
- ---------------
(1) The Company substantially withdrew from the general account GRC business in
1995. Management expects no material income or loss from the Guaranteed
Investment Contracts segment in the future as described herein.
(2) The Company maintains a Corporate Operation through which it reports items
that are not directly allocable to any of its business segments. Included in
the Corporate Operation are: (i) unallocated income and expense, (ii) the
Company's group medical business, which it exited in 1993, and (iii) certain
other items not directly allocable to any segment such as items related to
the ITT Spin-Off. For a discussion of the Corporate Operation, see
"-- Results of Operations for the Years Ended December 31, 1994, 1995 and
1996 -- Corporate Operation".
(3) Represents net realized capital gains (losses) that are not allocable to any
of the Company's business segments.
34
<PAGE> 35
The following tables detail the Annuity segment's sales, account value and
individual annuity sales by distribution channel as of or for the three months
ended March 31, 1996 and 1997.
<TABLE>
<CAPTION>
AS OF OR FOR THE
THREE MONTHS
ENDED MARCH 31,
-----------------
1996 1997
------- -------
(IN MILLIONS,
UNAUDITED)
<S> <C> <C>
ANNUITY
Quarterly sales by product
Individual variable annuities....................................... $ 2,200 $ 2,452
Fixed MVA/Other individual annuities................................ 40 120
Mutual funds........................................................ -- 88
Group annuities..................................................... 90 165
Account value
Individual annuities
General account................................................... $ 2,576 $ 2,924
Guaranteed separate account....................................... 8,790 9,024
Non-guaranteed separate account................................... 21,259 31,666
------- -------
Total account value............................................ $32,625 $43,614
======= =======
Group annuities
Total account value............................................ $ 8,111 $ 9,104
Individual variable annuity total account value
Beginning total account value, January 1............................ $20,691 $32,397
Sales and other deposits.......................................... 2,200 2,457
Acquisitions...................................................... -- --
Market appreciation............................................... 842 (155)
Surrenders........................................................ (210) (444)
------- -------
Ending total account value, March 31................................ $23,523 $34,255
======= =======
Individual annuity sales by distribution channel
Broker-dealers...................................................... $ 1,509 $ 1,703
Banks............................................................... 731 869
------- -------
Total.......................................................... $ 2,240 $ 2,572
======= =======
</TABLE>
The following tables detail the Individual Life Insurance segment's sales,
account value, insurance in force and revenues excluding a block of business
acquired from Investors Equity as of or for the three months ended March 31,
1996 and 1997.
<TABLE>
<CAPTION>
AS OF OR FOR THE
THREE MONTHS
ENDED MARCH 31,
-----------------
1996 1997
------- -------
(IN MILLIONS,
UNAUDITED)
<S> <C> <C>
INDIVIDUAL LIFE
Quarterly sales by product
Variable life....................................................... $ 10 $ 15
Universal life/Interest-sensitive WHOLE LIFE........................ 11 8
TERM LIFE........................................................... 1 1
Other............................................................... -- --
------- -------
Total.......................................................... $ 22 $ 24
======= =======
Total account value.................................................... $ 2,656 $ 3,330
Total IN FORCE......................................................... $48,567 $52,277
Revenues excluding block of business acquisition from Investors
Equity.............................................................. $ 113 $ 118
</TABLE>
35
<PAGE> 36
The following tables detail the Employee Benefits segment's group insurance
premiums, group insurance reserves and COLI account value as of or for the three
months ended March 31, 1996 and 1997.
<TABLE>
<CAPTION>
AS OF OR FOR THE
THREE MONTHS
ENDED MARCH 31,
-----------------
1996 1997
------- -------
(IN MILLIONS,
UNAUDITED)
<S> <C> <C>
EMPLOYEE BENEFITS
Group insurance premiums
Group disability.................................................... $ 106 $ 152
Group life.......................................................... 101 118
Other............................................................... 83 92
------- -------
Total.......................................................... $ 290 $ 362
======= =======
Group insurance reserves
Group disability.................................................... $ 1,048 $ 1,296
Group life.......................................................... 328 409
Other............................................................... 308 286
------- -------
Total.......................................................... $ 1,684 $ 1,991
======= =======
COLI account value
General account..................................................... $ 3,923 $ 3,853
Separate account.................................................... 3,537 4,352
------- -------
Total.......................................................... $ 7,460 $ 8,205
======= =======
</TABLE>
The following tables detail the Guaranteed Investment Contracts segment's
sales and account value as of or for the three months ended March 31, 1996 and
1997.
<TABLE>
<CAPTION>
AS OF OR FOR THE
THREE MONTHS
ENDED MARCH 31,
-----------------
1996 1997
------- -------
(IN MILLIONS,
UNAUDITED)
<S> <C> <C>
GUARANTEED INVESTMENT CONTRACTS
Guaranteed investment contract sales
General account..................................................... $ 28 $ 13
Separate account.................................................... 42 28
------- -------
Total.......................................................... $ 70 $ 41
======= =======
Account value
General account..................................................... $ 5,318 $ 3,758
Guaranteed separate account......................................... 415 428
------- -------
Total.......................................................... $ 5,733 $ 4,186
======= =======
</TABLE>
36
<PAGE> 37
COMPARISON OF ANNUITY SEGMENT RESULTS
The following table details the Annuity segment's net income for the three
months ended March 31, 1996 and 1997.
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS
ENDED MARCH 31,
---------------
1996 1997
---- ----
(IN MILLIONS,
UNAUDITED)
<S> <C> <C>
Revenues:
Premiums and other considerations...................................... $126 $164
Net investment income.................................................. 109 118
Net realized capital gains (losses).................................... -- --
---- ----
Total revenues...................................................... 235 282
---- ----
Benefits, claims and expenses:
Benefits, claims and claim adjustment expenses......................... 105 118
Amortization of deferred policy acquisition costs...................... 44 55
Dividends to policyholders............................................. -- --
Other insurance expense................................................ 35 42
---- ----
Total benefits, claims and expenses................................. 184 215
---- ----
Income before income tax expense......................................... 51 67
Income tax expense....................................................... 18 24
---- ----
Net income.......................................................... $ 33 $ 43
==== ====
</TABLE>
Revenues increased $47 million, or 20%, to $282 million in the first
quarter of 1997 from $235 million in the first quarter of 1996 primarily as a
result of an increase in individual annuity account value, particularly
individual variable annuity account value, which generated significantly higher
fee income. As of March 31, 1997, individual annuity account value increased by
$11.0 billion, or 34%, to $43.6 billion from $32.6 billion as of March 31, 1996.
The growth in account value was the result of strong sales over the past twelve
months, coupled with growth in the Company's separate accounts due to the rise
in the stock market in the fourth quarter of 1996. Annuity sales were $2.57
billion in the first quarter of 1997, as compared with $2.24 billion for the
first quarter of 1996, with variable annuities comprising $2.45 billion, or 96%,
of such amount. Similar factors resulted in an increase in benefits, claims and
expenses of $31 million, or 17%, to $215 million in the first quarter of 1997
from $184 million in the first quarter of 1996.
Net income increased $10 million, or 30%, to $43 million in the first
quarter of 1997 from $33 million in the first quarter of 1996 as the total
average account value for this segment increased $12.4 billion, or 32%, to $51.7
billion in the first quarter of 1997 from $39.3 billion in the first quarter of
1996.
37
<PAGE> 38
COMPARISON OF INDIVIDUAL LIFE INSURANCE SEGMENT RESULTS
The following table details the Individual Life Insurance segment's net
income for the three months ended March 31, 1996 and 1997.
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS
ENDED MARCH 31,
---------------
1996 1997
---- ----
(IN MILLIONS,
UNAUDITED)
<S> <C> <C>
Revenues:
Premiums and other considerations........................................ $ 88 $ 78
Net investment income.................................................... 34 40
Net realized capital gains (losses)...................................... -- --
---- ----
Total revenues........................................................ 122 118
---- ----
Benefits, claims and expenses:
Benefits, claims and claim adjustment expenses........................... 70 55
Amortization of deferred policy acquisition costs........................ 21 26
Dividends to policyholders............................................... -- --
Other insurance expense.................................................. 18 20
---- ----
Total benefits, claims and expenses................................... 109 101
---- ----
Income before income tax expense........................................... 13 17
Income tax expense......................................................... 4 6
---- ----
Net income............................................................ $ 9 $ 11
==== ====
</TABLE>
Revenues decreased $4 million, or 3%, to $118 million in the first quarter
of 1997 from $122 million in the first quarter of 1996 primarily as a result of
an assumption of a block of business from Investors Equity, which increased
revenues by $9 million in the first quarter of 1996, and a shift in the
Company's mix of business towards variable universal life insurance, which
generates less revenues than traditional life insurance. Similar factors
resulted in benefits, claims and expenses decreasing by $8 million, or 7%, to
$101 million in the first quarter of 1997 from $109 million in the first quarter
of 1996.
Net income increased $2 million, or 22%, to $11 million in the first
quarter of 1997 from $9 million in the first quarter of 1996 primarily due to
strong sales over the past twelve months, which increased the amount of
individual life insurance in force, and favorable mortality experience.
Individual life insurance sales were $24.4 million in the first quarter of 1997,
as compared with $22.5 million in the first quarter of 1996.
38
<PAGE> 39
COMPARISON OF EMPLOYEE BENEFITS SEGMENT RESULTS
The following table details the Employee Benefits segment's net income for
the three months ended March 31, 1996 and 1997.
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS
ENDED MARCH 31,
---------------
1996 1997
---- ----
(IN MILLIONS,
UNAUDITED)
<S> <C> <C>
Revenues:
Premiums and other considerations........................................ $727 $435
Net investment income.................................................... 137 143
Net realized capital gains (losses)...................................... -- --
---- ----
Total revenues........................................................ 864 578
---- ----
Benefits, claims and expenses:
Benefits, claims and claim adjustment expenses........................... 376 416
Amortization of deferred policy acquisition costs........................ 1 2
Dividends to policyholders............................................... 286 54
Other insurance expense.................................................. 176 76
---- ----
Total benefits, claims and expenses................................... 839 548
---- ----
Income before income tax expense........................................... 25 30
Income tax expense......................................................... 9 12
---- ----
Net income............................................................ $ 16 $ 18
==== ====
</TABLE>
Revenues decreased $286 million, or 33%, to $578 million in the first
quarter of 1997 from $864 million in the first quarter of 1996 due to a decrease
in revenues from COLI of $365 million. The decrease in COLI revenues resulted
from significantly less leveraged COLI premiums as a result of the HIPA Act of
1996. Such decrease was partially offset by a $79 million increase, or 25%, in
group insurance revenues. Similar factors resulted in benefits, claims and
expenses decreasing by $291 million, or 35%, to $548 million in the first
quarter of 1997 from $839 million in the first quarter of 1996.
Net income increased $2 million, or 13%, to $18 million in the first
quarter of 1997 from $16 million in the first quarter of 1996 primarily due to
growth in group insurance premiums and favorable morbidity experience. Premiums
from group insurance were $362 million in the first quarter of 1997, as compared
with $290 million in the first quarter of 1996.
39
<PAGE> 40
COMPARISON OF GUARANTEED INVESTMENT CONTRACTS SEGMENT RESULTS
The following table details the Guaranteed Investment Contracts segment's
net loss for the three months ended March 31, 1996 and 1997.
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
MARCH 31,
----------------
1996 1997
----- ----
(IN MILLIONS,
UNAUDITED)
<S> <C> <C>
Revenues:
Premiums and other considerations........................................ $ 1 $ 1
Net investment income.................................................... 72 71
Net realized capital gains (losses)...................................... -- --
----- ----
Total revenues........................................................ 73 72
----- ----
Benefits, claims and expenses:
Benefits, claims and claim adjustment expenses........................... 93 70
Amortization of deferred policy acquisition costs........................ 1 --
Dividends to policyholders............................................... -- --
Other insurance expense.................................................. 2 2
----- ----
Total benefits, claims and expenses................................... 96 72
----- ----
Loss before income tax expense............................................. (23) --
Income tax benefit......................................................... (8) --
----- ----
Net loss.............................................................. $ (15) $--
====== ====
</TABLE>
This segment had no net income in the first quarter of 1997, as compared
with a $15 million loss in the first quarter of 1996, consistent with
management's expectations that net income (loss) from Closed Book GRC in the
years subsequent to 1996 will be immaterial based on the Company's current
projections for the performance of the assets and liabilities associated with
Closed Book GRC.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
SEGMENT DISCUSSION
The following table details the Company's net income by segment for the
five-year period ended December 31, 1996.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- -----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Annuity............................................... $ 35 $ 54 $ 84 $113 $ 145
Individual Life Insurance............................. 17 21 27 37 44
Employee Benefits..................................... 36 48 53 67 78
Guaranteed Investment Contracts....................... 21 30 1 (67) (225)
Corporate Operation(1)................................ (16) (28) (14) 3 (18)
Unallocated net realized capital gains (losses)(2).... 8 5 -- (3) --
Cumulative effect of changes in accounting
principles(3)....................................... (47) -- -- -- --
---- ---- ---- ---- -----
Net Income....................................... $ 54 $130 $151 $150 $ 24
===== ===== ===== ===== ======
</TABLE>
- ---------------
(1) The Company maintains a Corporate Operation through which it reports items
that are not directly allocable to any of its business segments. Included in
the Corporate Operation are: (i) unallocated income and expense, (ii) the
Company's group medical business, which it exited in 1993, and (iii) certain
other items not directly allocable to any business segment such as ITT
Spin-Off related items. See "-- Results of Operations for the Years Ended
December 31, 1994, 1995 and 1996 -- Corporate Operation".
(2) Represents net realized capital gains (losses) that are not allocable to any
of the Company's business segments.
(3) Reflects the cumulative effect of adoption of SFAS No. 106, Employers'
Accounting for Postretirement Benefits Other Than Pensions, and SFAS No.
112, Employers' Accounting for Postemployment Benefits.
40
<PAGE> 41
The Annuity segment focuses on the savings and retirement needs of the
growing number of individuals who are preparing for retirement or have already
retired. The variety of products sold within this segment reflects the diverse
nature of the market. These products include individual variable annuities,
fixed MVA annuities, deferred compensation and retirement plan services for
municipal governments and corporations, STRUCTURED SETTLEMENT CONTRACTS and
other special purpose annuity contracts, investment management contracts and
mutual funds. The Annuity segment distributes its products primarily through
broker-dealers and financial institutions for individual sales, and through
employees of the Company for institutional sales. Account value in this segment
has grown from $12 billion in 1992 to $51 billion in 1996, which, along with
favorable expense trends, has resulted in an increase in this segment's net
income from $35 million in 1992 to $145 million in 1996, a compound annual
growth rate of 43%.
The Individual Life Insurance segment focuses on individuals' needs
regarding the transfer of wealth between generations, as well as the protection
of individuals and their families against lost earnings resulting from death.
The chief products sold in this market include both variable and fixed universal
life insurance-type contracts (including interest-sensitive whole life
insurance), as well as single premium variable life and term life insurance
products. The Individual Life Insurance segment distributes its products through
insurance agents, broker-dealers and financial institutions, typically assisted
by a dedicated group of Company employees. Life insurance in force has increased
from $29 billion in 1992 to $52 billion in 1996, of which $4.4 billion was
derived from acquisitions. The Company's growth in insurance in force, together
with favorable mortality results and a declining expense ratio, has resulted in
an increase in this segment's net income from $17 million in 1992 to $44 million
in 1996, a compound annual growth rate of 27%.
The Employee Benefits segment focuses on the needs of employers and
associations to purchase group insurance products. A significant amount of the
revenue and net income in this segment is derived from the sale of group life
insurance and group long-term and short-term disability products. This segment
also contains specialty businesses such as COLI, life/health reinsurance and
several international operations of the Company. The Employee Benefits segment
distributes its products through insurance agents and brokers, usually assisted
by a dedicated group of Company employees. Group insurance premiums have
increased from $841 million in 1992 to $1.329 billion in 1996, which, along with
favorable underwriting results, disciplined claims and expense management and
sales of COLI, have resulted in an increase in this segment's net income from
$36 million in 1992 to $78 million in 1996, a compound annual growth rate of
21%.
The Guaranteed Investment Contracts segment consists of GRC that are
supported by assets held in either the Company's general account or a guaranteed
separate account and includes Closed Book GRC. Historically, a significant
majority of these contracts were sold as general account GRC with fixed rates
and fixed maturities. The Company decided in 1995, after a thorough review of
its GRC business, that it would significantly de-emphasize general account GRC,
choosing to focus its distribution efforts on other products sold through other
segments. As a result, the Company has substantially withdrawn from the general
account GRC business. As discussed in "-- Results of Operations for the Years
Ended December 31, 1994, 1995 and 1996 -- Comparison of Guaranteed Investment
Contracts Segment Results", this segment has reported significant losses in
recent years. Management expects no material income or loss from the Guaranteed
Investment Contracts segment in the future.
The Company also maintains a Corporate Operation through which it reports
items that are not directly allocable to any of its business segments. Included
in the Corporate Operation are: (i) unallocated income and expense, (ii) the
Company's group medical business, which it exited in 1993, and (iii) certain
other items not directly allocable to any business segment such as ITT Spin-Off
related items. For a further discussion of the Corporate Operation, see
"-- Results of Operations for the Years Ended December 31, 1994, 1995 and
1996 -- Corporate Operation".
41
<PAGE> 42
COMPARISON OF CONSOLIDATED RESULTS
The following table details the Company's consolidated net income for the
three-year period ended December 31, 1996.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER
31,
----------------------------
1994 1995 1996
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Revenues:
Premiums and other considerations............................ $2,139 $2,643 $3,069
Net investment income........................................ 1,403 1,451 1,534
Net realized capital gains (losses).......................... 1 (4) (219)
------ ------ ------
Total revenues............................................ 3,543 4,090 4,384
------ ------ ------
Benefits, claims and expenses:
Benefits, claims and claim adjustment expenses............... 2,254 2,395 2,727
Amortization of deferred policy acquisitions costs........... 149 205 241
Dividends to policyholders(1)................................ 419 675 635
Interest expense(2).......................................... 29 35 55
Other insurance expense...................................... 469 554 695
------ ------ ------
Total benefits, claims and expenses....................... 3,320 3,864 4,353
------ ------ ------
Income before income tax expense............................... 223 226 31
Income tax expense............................................. 72 76 7
------ ------ ------
Net income................................................ $ 151 $ 150 $ 24
====== ====== ======
</TABLE>
- ---------------
(1) Growth in dividends to policyholders is a result of the November 1992
acquisition from Mutual Benefit of a block of participating leveraged COLI
business and the subsequent growth in the leveraged COLI business from 1993
to 1995. Policyholder dividends are expected to decline in the future since
sales of new leveraged COLI policies have been terminated as a result of the
HIPA Act of 1996.
(2) For financial reporting purposes, the Company has treated certain amounts
previously allocated by The Hartford to the Company's life insurance
subsidiaries as Allocated Advances from parent. Such Allocated Advances were
not treated as liabilities or indebtedness for tax and statutory accounting
purposes. Cash received in respect of Allocated Advances from parent was
used to support the growth of the life insurance subsidiaries and was
treated as surplus for statutory accounting purposes. Interest expense prior
to December 31, 1996 represents the expense internally allocated to the
Company with respect to the Allocated Advances based on The Hartford's
actual (third party) external borrowing costs. Such interest expense paid
was treated as dividends for tax and statutory accounting purposes.
PREMIUMS AND OTHER CONSIDERATIONS. Premiums and other considerations
(including maintenance and expenses fees, COST OF INSURANCE charges and premiums
on traditional life, group life and group disability contracts) increased $426
million, or 16%, to $3.069 billion in 1996 from $2.643 billion in 1995. This
increase was principally the result of (i) a $216 million increase in the
Annuity segment due to a substantial increase in aggregate fees earned on a
larger block of separate account assets stemming from strong annuity sales and
market appreciation and (ii) a $167 million increase in the Employee Benefits
segment driven by an increase in group insurance premiums of $226 million in
1996 from strong group disability sales and renewals, partially offset by a
decline in COLI premiums from 1995 levels primarily due to the enactment of the
HIPA Act of 1996.
Premiums and other considerations increased $504 million, or 24%, to $2.643
billion in 1995 from $2.139 billion in 1994. This increase primarily reflects a
$505 million increase in the Employee Benefits segment, of which $376 million
was due to growth in the COLI business and the remainder of which was due to
increased group insurance premiums from strong group disability sales and
renewals.
NET INVESTMENT INCOME. Net investment income increased $83 million, or 6%,
to $1.534 billion in 1996 from $1.451 billion in 1995 due to growth in general
account assets, other than Closed Book GRC. Net investment income in Closed Book
GRC declined by $130 million as the average assets supporting Closed Book GRC
declined to $4.4 billion in 1996 from $6.2 billion in 1995. Excluding
42
<PAGE> 43
Closed Book GRC, net investment income increased $213 million, or 19%, to $1.327
billion in 1996 from $1.114 billion in 1995.
Net investment income increased $48 million, or 3%, to $1.451 billion in
1995 from $1.403 billion in 1994 also due to growth in general account assets,
other than Closed Book GRC. Net investment income in Closed Book GRC declined by
$144 million as the average assets supporting Closed Book GRC declined to $6.2
billion in 1995 from $6.7 billion in 1994. Excluding Closed Book GRC, net
investment income increased $192 million, or 21%, to $1.114 billion in 1995 from
$922 million in 1994.
NET REALIZED CAPITAL GAINS (LOSSES). In 1996, the Company's net realized
capital losses were $219 million due to Closed Book GRC. For additional
information on the losses related to Closed Book GRC, see "-- Comparison of
Guaranteed Investment Contracts Segment Results -- Closed Book GRC". The
Company's net realized capital losses in 1995 and net realized capital gains in
1994 were immaterial.
BENEFITS, CLAIMS AND CLAIM ADJUSTMENT EXPENSES. Benefits, claims and claim
adjustment expenses increased $332 million, or 14%, to $2.727 billion in 1996
from $2.395 billion in 1995. This increase was caused primarily by (i) a $311
million increase in the Employee Benefits segment chiefly due to increased
blocks of group disability and COLI business and (ii) a $99 million increase in
the Annuity segment principally due to increased interest credited on general
account liabilities, including the general account portion of the individual
variable annuity products, partially offset by a decline of $124 million in
Closed Book GRC as the average assets supporting Closed Book GRC declined to
$4.4 billion in 1996 from $6.2 billion in 1995.
Benefits, claims and claim adjustment expenses increased $141 million, or
6%, to $2.395 billion in 1995 from $2.254 billion in 1994. This increase
principally reflects (i) a $173 million increase in the Employee Benefits
segment primarily due to an increase in the COLI block of business to $7.1
billion in 1995 from $3.2 billion in 1994 and (ii) a $27 million increase in the
Annuity segment due to increased interest credited on the growth in general
account liabilities, including the general account portion of the individual
variable annuity products, partially offset by (iii) the one-time effect of the
reserves assumed in connection with the Pacific Standard acquisition in 1994,
thereby creating a one-time increase in such expenses in 1994, and (iv) a
decline of $50 million in Closed Book GRC as the average assets supporting
Closed Book GRC declined to $6.2 billion in 1995 from $6.7 billion in 1994.
AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS. In connection with the
sale of individual life and annuity contracts, the Company defers certain policy
acquisition costs ("DPAC"), records such costs as assets and amortizes such
costs against earnings over the estimated life of the contracts. The
amortization of DPAC increased $36 million, or 18%, to $241 million in 1996 from
$205 million in 1995 primarily due to increased sales and total account value in
the Annuity segment. In 1996, approximately 70% of the Company's DPAC related to
its individual annuity business. The amortization of DPAC increased $56 million,
or 38%, to $205 million in 1995 from $149 million in 1994 primarily due to an
increase in assets in the Annuity segment and an increase in the individual life
insurance in force.
DIVIDENDS TO POLICYHOLDERS. The Company's dividends to policyholders arise
out of the Company's leveraged COLI business, a substantial portion of which was
written on a participating basis. Dividends to policyholders decreased $40
million, or 6%, to $635 million in 1996 from $675 million primarily due to the
elimination of sales of leveraged COLI as a result of the enactment of the HIPA
Act of 1996. Dividends to policyholders increased $256 million, or 61%, to $675
million in 1995 from $419 million in 1994 primarily due to the substantial
growth of the COLI block of business from 1994.
INTEREST EXPENSE. Interest expense increased $20 million, or 57%, to $55
million in 1996 from $35 million in 1995 primarily due to an increase in
Allocated Advances from parent of $207 million at December 31, 1995 and $75
million at June 30, 1996. Interest expense increased $6 million, or 21%,
43
<PAGE> 44
to $35 million in 1995 from $29 million in 1994 mainly due to an increase in
Allocated Advances from parent of $100 million in 1994. The increase in
Allocated Advances from parent in June 1996 was in respect of a capital
contribution by The Hartford to support the Company's business growth. Allocated
Advances from parent increased in 1995 as a result of the increase of
indebtedness of The Hartford associated with transactions in connection with the
ITT Spin-Off, a portion of which indebtedness was allocated internally by The
Hartford to the Company as Allocated Advances.
OTHER INSURANCE EXPENSE. Other insurance expense, including premium taxes,
commissions and other general expenses, net of deferral, increased $141 million,
or 25%, to $695 million in 1996 from $554 million in 1995, primarily reflecting
increased blocks of group disability and COLI and strong individual annuity and
individual life insurance sales.
Other insurance expense increased $85 million, or 18%, to $554 million in
1995 from $469 million in 1994 primarily reflecting factors largely similar to
those described in the preceding paragraph as well as additional growth in the
Individual Life Insurance segment due to the Pacific Standard acquisition in
1994.
INCOME TAX EXPENSE. Income tax expense decreased $69 million in 1996 to $7
million in 1996 from $76 million in 1995 as a result of the charges associated
with Closed Book GRC. See "-- Comparison of Guaranteed Investment Contracts
Segment Results -- Closed Book GRC". Income tax expense increased $4 million to
$76 million in 1995 from $72 million in 1994 due to higher pre-tax income in the
Annuity, Individual Life Insurance and Employee Benefits segments, partially
offset by a decline in Closed Book GRC within the Guaranteed Investment
Contracts segment. The Company's effective tax rate is below the statutory tax
rate of 35% primarily due to the availability of the corporate dividends
received deduction.
NET INCOME. Net income decreased $126 million to $24 million in 1996 from
$150 million in 1995, chiefly reflecting a $158 million decrease owing to the
Guaranteed Investment Contracts segment, partially offset by growth in the
Company's three other business segments. Net income was essentially unchanged in
1995 at $150 million from $151 million in 1994 primarily due to a $68 million
decrease in the Guaranteed Investment Contracts segment, essentially offset by
growth in the Company's three other business segments.
44
<PAGE> 45
COMPARISON OF ANNUITY SEGMENT RESULTS
The following table details the Annuity segment's net income for the
three-year period ended December 31, 1996.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
------------------------
1994 1995 1996
---- ---- ------
(IN MILLIONS)
<S> <C> <C> <C>
Revenues:
Premiums and other considerations................................ $264 $323 $ 539
Net investment income............................................ 330 397 434
Net realized capital gains (losses).............................. -- -- --
----- ----- -----
Total revenues................................................ 594 720 973
----- ----- -----
Benefits, claims and expenses:
Benefits, claims and claim adjustment expenses................... 290 317 416
Amortization of deferred policy acquisition costs................ 90 117 174
Dividends to policyholders....................................... -- -- --
Other insurance expense.......................................... 85 118 159
----- ----- -----
Total benefits, claims and expenses........................... 465 552 749
----- ----- -----
Income before income tax expense................................... 129 168 224
Income tax expense................................................. 45 55 79
----- ----- -----
Net income.................................................... $ 84 $113 $ 145
===== ===== =====
</TABLE>
Revenues increased $253 million, or 35%, to $973 million in 1996 from $720
million in 1995. This increase was principally the result of a $216 million
increase in premiums and other considerations, reflecting a substantial increase
in aggregate fees earned due to the Company's growing block of separate account
assets. The average separate account assets of this segment increased to $37.2
billion in 1996 from $26.1 billion in 1995 primarily due to sales of individual
annuities of approximately $10 billion in 1996 and $7 billion in 1995, as well
as strong market appreciation in both 1996 and 1995. In addition, the average
general account invested assets of this segment increased to $7.2 billion in
1996 from $6.2 billion in 1995 largely as a result of growth in the general
account portion of the individual variable annuity products of the Company. The
growth in this segment in 1996 also resulted in an increase in total benefits,
claims and expenses of $197 million, or 36%, to $749 million in 1996 from $552
million in 1995. The 37% growth in average account value in 1996, coupled with
an overall reduction in individual annuity expenses as a percentage of total
individual annuity account value to 28 basis points in 1996 from 31 basis points
in 1995, has contributed to the growth in net income of $32 million, or 28%, to
$145 million in 1996 from $113 million in 1995. Similar factors generated an
increase in 1995, as compared with 1994, in revenues of $126 million, or 21%,
average general account invested assets of $1.1 billion, or 21%, average
separate account assets of $8.0 billion, or 44%, total benefits, claims and
expenses of $87 million, or 19%, net income of $29 million, or 35%, and a
reduction in individual annuity expenses as a percentage of total individual
annuity account value to 31 basis points in 1995 from 35 basis points in 1994.
45
<PAGE> 46
COMPARISON OF INDIVIDUAL LIFE INSURANCE SEGMENT RESULTS
The following table details the Individual Life Insurance segment's net
income for the three-year period ended December 31, 1996.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
---------------------------
1994 1995 1996
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Revenues:
Premiums and other considerations................................ $ 277 $ 266 $ 313
Net investment income............................................ 113 142 159
Net realized capital gains (losses).............................. 1 -- --
---- ---- ----
Total revenues................................................ 391 408 472
---- ---- ----
Benefits, claims and expenses:
Benefits, claims and claim adjustment expenses................... 252 217 266
Amortization of deferred policy acquisition costs................ 52 72 63
Dividends to policyholders....................................... -- -- 1
Other insurance expense.......................................... 47 61 74
---- ---- ----
Total benefits, claims and expenses........................... 351 350 404
---- ---- ----
Income before income tax expense................................... 40 58 68
Income tax expense................................................. 13 21 24
---- ---- ----
Net income.................................................... $ 27 $ 37 $ 44
==== ==== ====
</TABLE>
Revenues increased $64 million, or 16%, to $472 million in 1996 from $408
million in 1995. This increase was chiefly due to a $47 million increase in
premiums and other considerations, reflecting the cost of insurance charges and
variable life insurance fees applied to a larger block of business as insurance
in force increased to $52 billion in 1996 from $48 billion in 1995. Total
benefits, claims and expenses increased $54 million, or 15%, to $404 million in
1996 from $350 million in 1995. This increase also reflects the increase in the
block of individual life insurance business. Additionally, in recent years,
mortality results have been favorable. The combination of growth of the
Company's business and favorable mortality experience resulted in an increase in
net income in this segment of $7 million, or 19%, to $44 million in 1996 from
$37 million in 1995.
In addition, two other events, along with those mentioned above, influenced
the results of 1995 as compared with 1994. In 1994, the Company assumed $218
million of individual life insurance reserves from Pacific Standard. This
affected both revenues and total benefits, claims and expenses for 1994.
Expenses were also positively influenced by the consolidation of the
professional functions previously performed in Minneapolis, Minnesota into the
Company's Simsbury, Connecticut operations. The combination of this acquisition,
internal Company growth, expense management and favorable mortality experience
caused net income in this segment to increase $10 million, or 37%, to $37
million in 1995 from $27 million in 1994.
46
<PAGE> 47
COMPARISON OF EMPLOYEE BENEFITS SEGMENT RESULTS
The following table details the Employee Benefits segment's net income for
the three-year period ended December 31, 1996.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
----------------------------
1994 1995 1996
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Revenues:
Premiums and other considerations............................ $1,543 $2,048 $2,215
Net investment income........................................ 443 467 618
Net realized capital gains (losses).......................... -- -- --
------ ------ ------
Total revenues............................................ 1,986 2,515 2,833
------ ------ ------
Benefits, claims and expenses:
Benefits, claims and claim adjustment expenses............... 1,200 1,373 1,684
Amortization of deferred policy acquisition costs............ 3 4 4
Dividends to policyholders(1)................................ 419 675 634
Other insurance expense...................................... 283 362 396
------ ------ ------
Total benefits, claims and expenses....................... 1,905 2,414 2,718
------ ------ ------
Income before income tax expense............................... 81 101 115
Income tax expense............................................. 28 34 37
------ ------ ------
Net income................................................ $ 53 $ 67 $ 78
====== ====== ======
</TABLE>
- ---------------
(1) Growth in dividends to policyholders is a result of the November 1992
acquisition from Mutual Benefit of a block of participating leveraged COLI
business and the subsequent growth in the leveraged COLI business from 1993
to 1995. Policyholder dividends are expected to decline in the future since
sales of new leveraged COLI policies have been terminated as a result of the
HIPA Act of 1996.
Revenues increased $318 million, or 13%, to $2.833 billion in 1996 from
$2.515 billion in 1995. This increase was largely the result of (i) a $167
million increase in premiums and other considerations, reflecting a $226 million
increase in group insurance premiums from strong group disability sales and
renewals, partially offset by a decline in leveraged COLI premiums primarily due
to the enactment of the HIPA Act of 1996, and (ii) a $151 million increase in
net investment income primarily due to an increase in the Company's COLI account
value. Total benefits, claims and expenses increased $304 million, or 13%, to
$2.718 billion in 1996 from $2.414 billion in 1995. This increase generally
reflected an increased block of group disability business and other group
insurance and an increase in the Company's COLI block of business, partially
offset by a $41 million decrease in dividends to policyholders primarily due to
the elimination of sales of leveraged COLI as a result of the enactment of the
HIPA Act of 1996. This legislation phases out the deductibility of interest on
policy loans under COLI by 1998, thus eliminating all future sales of leveraged
COLI. Leveraged COLI will continue to contribute to the profitability of the
Company (although such contribution will be reduced in the future due to the
effects of this legislation). As a result, net income contributed by COLI may be
lower in the future (particularly during 1999 and later years). In addition,
expenses in the group insurance business, as a percentage of premiums, have
declined over the past several years. This trend, along with favorable mortality
and morbidity experience, as well as the factors mentioned above, resulted in an
increase in net income in this segment of $11 million, or 16%, to $78 million in
1996 from $67 million in 1995.
The Company had $306 million and $867 million of leveraged COLI sales in
1994 and 1995, respectively, which significantly affected the results of 1995
compared with 1994. Revenues increased $529 million, or 27%, in 1995 primarily
due to a $353 million increase related to COLI premiums. Total benefits, claims
and expenses increased $509 million, or 27%, in 1995 of which $344 million
related to COLI. The additional growth in COLI, coupled with factors similar to
those discussed above for 1996 compared with 1995, caused net income in this
segment to increase $14 million, or 26%, to $67 million in 1995 from $53 million
in 1994.
47
<PAGE> 48
In general, the growth in COLI account value has been a significant
component of earnings for the Employee Benefits segment over the past three
years, representing $26 million, or 33%, in 1996, $22 million, or 33%, in 1995
and $16 million, or 30%, in 1994 of this segment's total earnings.
COMPARISON OF GUARANTEED INVESTMENT CONTRACTS SEGMENT RESULTS
GENERAL. The following table details the Guaranteed Investment Contracts
segment's net income (loss) for the three-year period ended December 31, 1996.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
------------------------
1994 1995 1996
---- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Revenues:
Premiums and other considerations............................... $ -- $ 1 $ 2
Net investment income........................................... 481 377 251
Net realized capital losses..................................... -- -- (219)
----- ------ ------
Total revenues............................................... 481 378 34
----- ------ ------
Benefits, claims and expenses:
Benefits, claims and claim adjustment expenses.................. 467 453 332
Amortization of deferred policy acquisition costs............... 4 12 1
Dividends to policyholders...................................... -- -- --
Other insurance expense......................................... 8 16 47
----- ------ ------
Total benefits, claims, and expenses......................... 479 481 380
----- ------ ------
Income (loss) before income tax expense (benefit)................. 2 (103) (346)
Income tax expense (benefit)...................................... 1 (36) (121)
----- ------ ------
Net income (loss)............................................ $ 1 $ (67) $(225)
====== ====== ======
</TABLE>
The results of this segment have been materially and adversely affected by
lower investment rates and earnings from the investment portfolio supporting
Closed Book GRC due to prepayments on MBSs and CMOs substantially in excess of
assumed and historical levels. Closed Book GRC also was negatively affected by
an interest rate rise in 1994 which caused a mismatch in the duration of the
related assets and liabilities.
In 1995, the Company substantially withdrew from the general account GRC
business and now writes a limited amount of such business primarily as an
accommodation to customers. In 1996, the Company initiated certain asset sales
and hedging transactions to insulate itself from any ongoing income or loss
associated with the Closed Book GRC investment portfolio. As a result of the
foregoing actions, management expects that the net income (loss) from this
segment will be immaterial in the years subsequent to 1996.
Revenues decreased $344 million to $34 million in 1996 from $378 million in
1995 due to $219 million in net realized capital losses and a decline in net
investment income of $126 million. The net realized capital losses were the
result of asset sales and an other than temporary impairment charge in respect
of certain assets within the Closed Book GRC investment portfolio which
contributed $84 million and $135 million, respectively, of net realized capital
losses. Net investment income declined as the assets of this segment declined to
$4.5 billion in 1996 from $6.1 billion in 1995. This decline in assets also was
the principal cause of the decrease in benefits, claims and expenses of $101
million to $380 million in 1996 from $481 million in 1995. In addition,
amortization of DPAC was lower in 1996 because the unamortized DPAC asset for
all policies sold prior to January 1995 was fully amortized in 1995.
Revenues decreased $103 million to $378 million in 1995 from $481 million
in 1994 primarily due to lower net investment income on the assets supporting
this segment as result of the MBS and CMO prepayments discussed above. Benefits,
claims and expenses of $481 million in 1995 were
48
<PAGE> 49
essentially flat as compared with 1994 as a decline in assets to $6.1 billion in
1995 from $7.3 billion in 1994 was offset by higher credited rates on policies
sold in 1994 due to the rise in the general level of interest rates, higher
expenses and the DPAC amortization discussed above.
CLOSED BOOK GRC. Closed Book GRC contains a segregated portfolio of assets
monitored and managed by the Company on a liquidating basis; however, such
designation as a "segregated" portfolio is only for internal management purposes
and has no legal or regulatory effect. As of December 31, 1996, Closed Book GRC
had general account assets of $3.6 billion and general account liabilities of
$3.6 billion. Closed Book GRC assets consisted of $2.7 billion of fixed maturity
securities (including $21 million of MBSs and $1.03 billion of CMOs), a $471
million market-neutral portfolio based on London interbank offered quotations
for U.S. dollar deposits ("LIBOR") and $432 million of cash or short-term
instruments. Of the $3.6 billion in Closed Book GRC liabilities remaining as of
December 31, 1996, the scheduled maturity is as follows: $1.2 billion, or 33%,
in 1997, $1.1 billion, or 31%, in 1998, $0.8 billion, or 22%, in 1999 and $0.5
billion, or 14%, thereafter.
Although the Closed Book GRC asset portfolio as a whole is duration matched
with its liabilities, certain investments continue to have a longer maturity
than their corresponding liabilities and will need to be liquidated prior to
maturity in order to meet the specific liability commitments. To protect the
existing value of these investments, the Company entered into various interest
rate swap, cap and floor transactions in late September 1996 with the objective
of offsetting the market price sensitivity of hedged assets to changes in
interest rates. The interest rate swap transactions primarily require the
Company to pay fixed rates and receive variable rates. The swaps mature between
1997 and 2003. The interest rate caps mature between 1997 and 2000 and have a
weighted average strike price of 7.49% (ranging from 4.5% to 8.8%). The interest
rate floors mature between 1997 and 2001 and have a weighted average strike
price of 5.62% (ranging from 3.7% to 6.75%). The caps and floors were entered
into to support certain portfolio assets that are subject to prepayment or
payment extension risk. As a result of the hedges, the Company substantially
eliminated further fluctuation in the fair value of these investments due to
interest rate changes, thereby substantially reducing the likelihood of any
further loss on the assets due to such changes.
During 1996, Closed Book GRC incurred a $51 million after-tax loss from
operations as a result of negative interest spread, as compared with an
after-tax loss from operations of $68 million in 1995. With the initiation of
the hedge transactions discussed above, which eliminated the possibility that
the fair value of Closed Book GRC investments would recover to their current
amortized cost prior to sale, an other than temporary impairment loss of $82
million, after tax, was determined to have occurred and was recorded in
September 1996. An additional other than temporary impairment loss of $6
million, after tax, occurred in the fourth quarter of 1996 bringing the total
1996 impairment to $88 million. Also, during the third quarter of 1996, Closed
Book GRC had asset sales resulting in proceeds of approximately $500 million and
a realized loss of $55 million, after tax. The asset sales were undertaken as a
result of liquidity needs and favorable market conditions for certain
securities. Other charges of $32 million, after tax, which primarily reflect an
interest accrual on potential tax assessments, also were recorded in the third
quarter of 1996. The interest accrual reflects the Company's assessment of the
probable outcome of a United States Internal Revenue Service (the "Internal
Revenue Service") examination of the tax treatment of certain hedges employed in
respect of the products included in Closed Book GRC.
In response to the losses associated with Closed Book GRC, the Company
instituted an improved risk management process. The Company, among other
actions, established a separate risk management unit and increased the frequency
with which its material portfolios are reviewed. See "Business -- Investment
Operations -- General". Management expects that the net income (loss) from
Closed Book GRC in the years subsequent to 1996 will be immaterial based on the
Company's current projections for the performance of the assets and liabilities
associated with Closed Book GRC, the Company's expectations regarding future
sales of assets from the Closed Book GRC investment portfolio from time to time
in order to make the necessary payments on maturing Closed Book GRC liabilities
and the stabilizing effect of the hedge transactions. To date, such asset sales
have been consistent with the Company's expectations. There are no legal or
49
<PAGE> 50
regulatory restrictions that affect the Company's ability to sell any of its
general account assets to satisfy any obligations in respect of Closed Book GRC
liabilities. In determining the projected Closed Book GRC net income in years
subsequent to 1996, the Company assumed that yield spreads implicit in market
values would be consistent with historic trends. In addition, the Company
assumed that there would be no material credit losses in respect of assets
supporting Closed Book GRC. However, no assurance can be given that, under
certain unanticipated economic circumstances which result in the Company's
assumptions proving inaccurate, further losses in respect of Closed Book GRC
will not occur in the future.
CORPORATE OPERATION
GENERAL. The Corporate Operation includes (i) unallocated income and
expense, (ii) the Company's group medical business, which it exited in 1993, and
(iii) certain other items not directly allocable to any business segment such as
ITT Spin-Off related items.
The following table details the components of the Corporate Operation
(after tax) for the three-year period ended December 31, 1996:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------
1994 1995 1996
---- ---- -----
(IN MILLIONS)
<S> <C> <C> <C>
Unallocated income and expense..................................... (7) (14) (18)
Group medical business............................................. (7) (1) 1
ITT Spin-Off related items and other............................... -- 18 (1)
---- ---- -----
Total Corporate Operation................................ $(14) $ 3 $ (18)
===== ===== ======
</TABLE>
UNALLOCATED INCOME AND EXPENSE. The Company includes in the Corporate
Operation net investment income on assets representing surplus not assigned to
any of its business segments, interest expense on Allocated Advances and certain
other revenues and expenses not specifically allocable to any of its business
segments. Excluding the impact of the other items described under "-- Group
Medical Business" and "-- Other", the Corporate Operation experienced a net loss
of $7 million, $14 million and $18 million in 1994, 1995, and 1996,
respectively. The increase in the net loss experienced by the unallocated income
and expense component of the Corporate Operation was principally due to the
increase in interest expense reported over 1994, 1995 and 1996, which was
partially offset by increased net investment income on capital contributions
made to the Company's life insurance subsidiaries.
In connection with the 1997 increase in the Company's indebtedness as a
result of the borrowing under the Line of Credit and the execution of the $100
Million Promissory Note and the $25 Million Promissory Note, interest expense is
expected to increase in 1997 as compared with prior years.
GROUP MEDICAL BUSINESS. The Company also previously marketed group medical
insurance to its customers. The Company exited this business in 1993. Management
had determined that the projected future return on assigned capital for the
group medical business was inadequate. This decision allowed the Company to
focus its group insurance operation on group life and group disability coverage.
All known material obligations related to the Company's exit from the group
medical business expired as of December 31, 1996. The Company's group medical
business reported a net loss of $7 million and $1 million in 1994 and 1995,
respectively, and net income of $1 million in 1996.
OTHER. In addition, the effects of an insurance guaranty fund adjustment of
$10 million in 1995 made to reflect lower than expected insolvencies in the
insurance industry and the impact of certain assets and liabilities assumed by
the Company in 1995 in connection with the ITT Spin-Off impacted the results of
the Company's Corporate Operation. Prior to 1995, as a response to certain
significant insolvencies experienced in the life insurance industry during the
late 1980s and early 1990s, the Company took an approach which incorporated an
assumption that more companies experiencing financial difficulties would be
formally determined to be insolvent, resulting in increased assessments based on
the Company's premiums. As more historical data became available from outside
50
<PAGE> 51
sources such as the National Organization of Life and Health Guaranty
Associations, the Company re-estimated reserves based on specific state
assessment data and determined that $10 million of such reserves could be
released.
INTERCOMPANY ARRANGEMENTS
The Company's relationship with The Hartford generally will be governed by
a series of agreements to be entered into in connection with the Equity
Offerings. These agreements generally will maintain the relationship between the
Company and The Hartford in a manner consistent in all material respects with
past practice. As a result, management believes that none of these arrangements
will have a material impact on the results of operations and liquidity of the
Company. In general, these arrangements are intended to remain in effect for so
long as The Hartford continues to maintain controlling beneficial ownership of
the Company.
Under the terms of the Master Intercompany Agreement, the Company and The
Hartford will agree to provide to each other, after the completion of the Equity
Offerings, services largely similar to those which they provided prior to the
Equity Offerings. In addition, The Hartford will agree to license to the Company
and certain of its subsidiaries all the trade names, service marks, logos
(including the Stag Logo) and other trademarks currently used by the Company in
its domestic and international operations. Furthermore, the Master Intercompany
Agreement will (i) require the Company to obtain prior written approval from The
Hartford with respect to certain corporate activities, (ii) provide for the
assumption of liabilities and cross-indemnities allocating liabilities between
the parties and (iii) grant certain registration rights to The Hartford and any
other Rights Holder. The Master Intercompany Agreement will contain various
termination provisions, including the ability of either party to terminate the
agreement with respect to the provision of services, upon six months' written
notice, in the event that The Hartford ceases to own 50% or more of the combined
voting power of the outstanding Voting Stock. See "Certain Relationships and
Transactions -- Intercompany Arrangements -- Master Intercompany Agreement".
The Tax Sharing Agreement will provide that The Hartford and its
subsidiaries, including the Company, will file a consolidated federal income tax
return and that The Hartford will have all the rights of a parent of a
consolidated group. However, The Hartford and its subsidiaries will make
payments to each other such that the amount of taxes each such party pays
generally would be that amount it would be required to pay as a separate filer.
As the controlling beneficial owner of the Company, The Hartford will control
all the tax decisions in respect of the Company. The Tax Sharing Agreement will
terminate when the Company ceases to be a subsidiary of The Hartford. See
"Certain Relationships and Transactions -- Intercompany Arrangements -- Tax
Sharing Agreement and Tax Consolidation".
The Investment Management Agreements will provide that the investment staff
of The Hartford will implement the investment strategies of the Company and act
as advisor to certain of the Company's non-guaranteed separate accounts and
mutual funds for a fee based on the actual costs of providing such services.
During their respective initial three-year terms, the Investment Management
Agreements generally will not be terminable by The Hartford and will be
terminable by the Company, upon six months' written notice, only if The Hartford
fails to satisfy certain performance benchmarks. In general, either party may
terminate any of the Investment Management Agreements upon and after the end of
the initial three-year term, upon 180 days' prior written notice. The Investment
Management Agreements relating to the Company's mutual funds are terminable at
any time. See "Certain Relationships and Transactions -- Intercompany
Arrangements -- Investment Management Agreements".
The Company will sublease its headquarters from Hartford Fire pursuant to
the Simsbury Sublease which currently leases it from a third party pursuant to a
sale-leaseback arrangement. Hartford Fire will retain the right to purchase the
facility and the renewal option in respect of such arrangement. The rental
payments will be fixed (but not level) over the term of the lease and sublease.
See "Certain Relationships and Transactions -- Intercompany
Arrangements -- Simsbury Sublease".
51
<PAGE> 52
LIQUIDITY AND CAPITAL RESOURCES
HOLDING COMPANY
Management believes that the liquidity requirements of the Company will be
met by funds from the operations of its subsidiaries. As a holding company, the
Company's principal source of funds is dividends from its operating
subsidiaries. For financial reporting purposes, the Company has treated certain
amounts previously allocated by The Hartford to the Company's life insurance
subsidiaries as Allocated Advances. Such Allocated Advances were not treated as
liabilities or indebtedness for tax and statutory accounting purposes. Cash
received in respect of Allocated Advances was used to support the growth of the
life insurance subsidiaries and was treated as surplus for statutory accounting
purposes. In return, the Company paid The Hartford certain dividends (so treated
for tax and statutory accounting purposes) based on The Hartford's actual (third
party) external borrowing costs. In general, the Company seeks to maintain a
conservative liquidity position and actively manages its capital levels,
asset/liability matching and the diversification, duration and credit quality of
its investments to ensure that it is able to meet its obligations.
Historically, The Hartford has provided capital, including the Allocated
Advances, to the Company's insurance subsidiaries. Following the Equity
Offerings, the Company intends to independently address any capital requirements
that may arise. However, for so long as The Hartford maintains a controlling
interest in the Company, any deterioration in the financial condition or ratings
of The Hartford (as well as the Company) could have the effect of increasing the
Company's borrowing costs and/or impairing its access to the capital markets. In
addition, The Hartford will have the ability, through its controlling beneficial
ownership of the Company and the terms of the Master Intercompany Agreement, to
limit or otherwise restrict the Company's ability to raise common or preferred
equity capital or incur debt. See "Risk Factors -- Control by and Relationship
with The Hartford" and "Certain Relationships and Transactions -- Intercompany
Arrangements -- Master Intercompany Agreement".
The following table sets forth the historical amounts of capital
contributed by The Hartford to the Company and the related dividends accrued or
paid or interest expense paid by the Company to The Hartford in respect thereof.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Capital contributed................................ $ -- $100 $ 50 $180 $ --
Cash received in respect of Allocated
Advances(1)...................................... -- 50 100 -- 115
Dividends accrued or paid.......................... -- 24 17 226 --
Interest accrued and paid.......................... 26 25 29 35 55
---- ---- ---- ---- ----
Net Capital................................... $(26) $101 $104 $(81) $ 60
==== ==== ==== ==== ====
</TABLE>
- ---------------
(1) Excludes non-cash Allocated Advances of $207 million in 1995 and $46 million
in 1996.
The payment of dividends to the Company from its life insurance
subsidiaries is subject to certain regulatory restrictions. The payment of
dividends by Connecticut-domiciled life insurers is limited under the insurance
holding company laws of Connecticut. The Company adheres to these laws which
require notice to and approval by the Connecticut Insurance Commissioner for the
declaration or payment of any dividend that, together with other dividends or
distributions made within the preceding twelve months, exceeds the greater of
(i) 10% of the insurer's policyholder surplus as of December 31 of the preceding
year or (ii) net gain from operations for the twelve-month period ending on the
December 31 last preceding, in each case determined under statutory insurance
accounting practices. In addition, if any dividend of a Connecticut-domiciled
insurer
52
<PAGE> 53
exceeds the insurer's earned surplus, it requires the approval of the
Connecticut Insurance Commissioner. Based on these limitations and 1996
statutory results, the Company would be able to receive $132 million in
dividends in 1997 from Hartford Life and Accident, the Company's direct wholly
owned subsidiary, without obtaining the approval of the Connecticut Insurance
Commissioner. See "Risk Factors -- Holding Company Structure; Restrictions on
Dividends".
On February 20, 1997, the Company made a payment of $1.184 billion as a
dividend to Hartford Accident and Indemnity. $893 million of such dividend
constituted a repayment of the Allocated Advances. This dividend was paid with
the $1.084 billion in cash borrowed by the Company under the Line of Credit,
with interest payable at the two-month Eurodollar rate, determined as described
below, plus 15 basis points (5.65% at the inception of the borrowing) and
principal payable on or before February 9, 1998, and the $100 Million Promissory
Note, with interest payable at the two-month Eurodollar rate, determined as
described below with respect to the Line of Credit, plus 15 basis points
(initially 5.60% upon the execution of the $100 Million Promissory Note) and
principal payable on February 19, 1998. Under the terms of the Line of Credit,
the Eurodollar rate is determined by taking the average one, two, three or
six-month rate (based upon the applicable interest period selected by the
Company) at which deposits in U.S. dollars are offered by each of the four
participating lenders in London, England to prime banks in the London interbank
market, plus an applicable margin (based upon the Company's current public debt
ratings). The Line of Credit includes covenants that limit mergers, liens and
dividends, as well as financial covenants that require minimum levels of
consolidated statutory surplus, risk based capital and net worth, and certain
other terms and provisions that are normal and customary for agreements of this
type. In addition, on April 4, 1997, the Company made an additional payment of
$25 million as a dividend to Hartford Accident and Indemnity. The dividend was
paid in the form of the $25 Million Promissory Note, with interest payable at
the one-month Eurodollar rate, determined as described above with respect to the
Line of Credit, plus 15 basis points (initially 5.84% upon the execution of the
$25 Million Promissory Note) and principal payable on April 3, 1998. See
"Company Financing Plan".
Promptly following the Equity Offerings, subject to market conditions, the
Company plans to offer approximately $650 million of the Debt Securities in the
Debt Offering pursuant to a shelf registration statement. The Company expects
that the Debt Offering will involve the sale of fixed rate, multi-tranche
securities of varying maturities and may include redemption provisions. The
Company intends to use the net proceeds of the Debt Offering, as well as a
portion of the Equity Offerings, to substantially reduce the borrowing under the
Line of Credit. See "Capitalization". The Company believes that, after giving
effect to all of the foregoing transactions, it will have sufficient liquidity
to service its debt obligations. Furthermore, the Company believes that because
each of the transactions described in this and the foregoing paragraph took
place at the holding company level (i.e., at the Company), they will have no
impact on the statutory surplus of the Company's insurance subsidiaries, other
than an increase in statutory surplus to the extent of capital contributions
received from the Company in respect of the Equity Offerings.
The Company's fixed maturity investments are classified as
"available-for-sale" and, accordingly, are reflected in the Company's
consolidated financial statements at fair value with the corresponding impact
included as a component of stockholder's equity. Changes in interest rates,
accordingly, can have a significant impact on stockholder's equity. The effect
of Statement of Financial Accounting Standards ("SFAS") No. 115 on stockholder's
equity, which represents the net unrealized capital gain (loss), net of tax, on
fixed maturity investments, was a decrease of $725 million (including a
cumulative adjustment with respect to the adoption of SFAS No. 115 which
increased stockholder's equity by $103 million) as of December 31, 1994 and an
increase of $679 million and $71 million as of December 31, 1995 and 1996,
respectively.
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<PAGE> 54
Based on the Company's historic cash flow and current financial results,
management believes that the cash flow from the Company's operating activities
over the next year will provide sufficient liquidity for the operations of the
Company, as well as provide sufficient funds to enable the Company to make
dividend payments, as described in "Dividend Policy", satisfy debt service
obligations and pay other operating expenses. Management also believes that
completion of the Equity Offerings and the continued execution of its business
strategy for the Company will strengthen the financial position of the Company.
Although the Company currently anticipates that it will be able to make dividend
payments, as described in "Dividend Policy", satisfy debt service obligations
and pay other operating and capital expenses for the foreseeable future, the
Company can give no assurances as to whether the net cash provided primarily by
dividends from Hartford Life and Accident and its other subsidiaries will
provide sufficient funds for the Company to do so.
OPERATING SUBSIDIARIES
The principal sources of funds for the Company's operating subsidiaries are
premiums, net investment income and other considerations, as well as maturities
and sales of invested assets. These funds are used primarily to pay policy
benefits, dividends to policyholders, claims, operating expenses, interest,
commissions and dividends to stockholders, as well as to purchase new
investments. The Company's life insurance and group disability products involve
long-term liabilities that in general have reasonably predictable payout
patterns. However, the Company's annuity products involve liabilities that are
less certain as to payout timing and may be subject to unexpected increases in
surrenders, which would result in increased liquidity needs. Accordingly,
asset/liability management is important to maintaining appropriate liquidity for
the Company's operations. The Company's investment strategies are designed to
reasonably match the yields and estimated durations of its investments with the
contractual obligations of its policies. The Company acquires investments that
management believes will provide a predictable spread between investment
earnings and amounts credited to policyholders and contractholders and will
allow the Company to maintain sufficient liquidity in its investment portfolio
in order to adequately satisfy policy and contract commitments under a broad
range of adverse economic circumstances. In addition, the Company closely
monitors market and other economic conditions that might affect the value and
duration of its assets and the persistency of its liabilities. For a discussion
of the Company's investment operations, see "Business -- Investment Operations".
The Company maintained cash and short-term investments totaling $895
million, $1.2 billion, $837 million and $960 million as of December 31, 1994,
1995 and 1996 and March 31, 1997, respectively, and believes that its investment
policies combined with the terms of its life insurance and annuity contracts are
adequate to support its liquidity needs. Investment grade, public fixed maturity
securities (including securities sold pursuant to Rule 144A of the Securities
Act ("Rule 144A")) represented 99.5% of the Company's general account and
guaranteed separate account investment portfolios at December 31, 1996. For a
discussion of the Company's investment operations, see "Business -- Investment
Operations".
Interest rate fluctuations can affect the duration of contractual
obligations as well as the value and duration of the assets supporting these
obligations and expose the Company to disintermediation risk. See "Risk
Factors -- Interest Rate Risk". The Company can respond to interest rate
fluctuations in a number of ways, including changing investment strategies for
new cash flows, adjusting interest crediting rates (subject to policy
limitations in some instances) and adjusting the price on any new products.
In addition, the Company closely evaluates and monitors the risk of early
policyholder and contractholder surrender. Management believes that it has
minimized the potential impact of surrenders, particularly with respect to its
annuity business, by protecting approximately 99% of its insurance liabilities
as of December 31, 1996 against early surrender through the use of non-
54
<PAGE> 55
guaranteed separate accounts, MVA features, policy loans, surrender charges and
non-surrenderability provisions as detailed in the following table.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
-------------------------------------------------
AMOUNT OF PERCENTAGE OF TOTAL
INSURANCE LIABILITIES INSURANCE LIABILITIES
--------------------- ---------------------
(IN BILLIONS)
<S> <C> <C>
Non-guaranteed separate accounts..................... $38.1 56%
MVA feature.......................................... 17.1 25
Policy loans(1)...................................... 4.0 6
Non-surrenderability................................. 3.9 6
----- ---
Subtotal........................................ 63.1 93
Surrender charges on remaining liabilities........... 4.2 6
----- ---
Total........................................... $67.3 99%
===== ===
</TABLE>
- ---------------
(1) Policy loans primarily relate to the Company's leveraged COLI business in
which the Company earns a stated spread on assets that are loaned to the
related policyholder.
In particular, the Company uses surrender charges to limit the ability of
individual and group annuity policyholders to withdraw from such contracts. The
following table summarizes the Company's annuity policy reserves as of December
31, 1996 and 1995 based on such policyholders' ability to withdraw funds.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------
1995 1996
---------------------- ----------------------
PERCENTAGE PERCENTAGE
POLICY OF TOTAL POLICY OF TOTAL
RESERVES RESERVES RESERVES RESERVES
------- ---------- ------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Not subject to discretionary withdrawal..... $ 1,363 3% $ 1,807 3%
Subject to discretionary withdrawal with
adjustment:
With MVA.................................. 37,445 86 48,160 89
At contract value, less surrender charge
of 5% or more.......................... 1,743 4 1,592 3
Subject to discretionary withdrawal at
contract value with no surrender charge or
surrender charge of less than 5%.......... 2,863 7 2,628 5
------- ---- ------- ----
Total annuity policy reserves.......... $43,414 100% $54,187 100%
======= ==== ======= ====
</TABLE>
Life insurance policies also are subject to surrender; however, they are
less susceptible to surrender than annuity contracts because policyholders must
generally undergo a new underwriting process and incur new policy acquisition
costs in order to obtain new life insurance policies.
Surrenders and other fund withdrawals on all insurance liabilities,
including liabilities related to Closed Book GRC, totaled $3.0 billion, $5.2
billion and $5.8 billion, and benefits totaled $1.1 billion, $1.2 billion and
$1.2 billion, in each of 1994, 1995 and 1996, respectively. Surrenders and other
fund withdrawals totaled $1.4 billion and $1.5 billion, and benefits totaled
approximately $400 million and $500 million, during the three months ended March
31, 1996 and 1997, respectively. Such surrenders and other fund withdrawals and
benefits were met with cash from operations and required no significant sale of
fixed maturity assets.
The Company's asset for DPAC reflects those portions of acquisition costs,
including commissions and certain underwriting expenses associated with
acquiring insurance products, which are deferred and amortized over the lesser
of the estimated or actual contract life. As of December 31,
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<PAGE> 56
1996, DPAC was $2.8 billion, having grown from $836 million as of December 31,
1992, principally owing to the growth in sales of the Company's annuity
products. As of March 31, 1997, DPAC was $2.9 billion. In determining its DPAC
deferral and amortization, the Company believes it sets its amortization and
lapse assumptions and other key variables at reasonable and conservative levels,
deferring only those acquisition expenses that are within pricing allowables
(which is a measure of the amount of expenses permissible for deferral
consistent with the Company's target returns over the expected life of a
product). In contrast, GAAP generally allows companies to defer recoverable
acquisition expenses independent of expected return. These assumptions and the
recoverability of the asset are periodically monitored by the Company's internal
actuarial and accounting professionals, with adjustments made, where
appropriate, in accordance with SFAS No. 60 and SFAS No. 97. Approximately 70%
of the Company's DPAC asset relates to the Company's individual annuity block of
business. The DPAC asset in respect of the individual variable and fixed MVA
annuity products has a weighted average life of less than nine years and
approximately six years, respectively, at the time of sale. By comparison, the
Company imposes surrender charges, on a declining basis, for seven years,
although its fixed MVA annuities sold with a five or six year rate guarantee may
be surrendered without penalty at the end of the guarantee period.
To date, the Company's experience has been favorable, in the aggregate,
compared with the assumptions used in its internal DPAC amortization models. The
Company believes that its product design, its relationships with its wholesalers
and retail distributors and the quality of its customer service have been
contributing factors to this positive variance. However, if lapse levels were to
substantially rise due to certain factors discussed under "Risk Factors -- Risks
Associated with Certain Economic and Market Factors" or "Risk
Factors -- Interest Rate Risk" or otherwise, the Company could determine that
accelerated DPAC amortization would be necessary.
For a discussion of potential material adverse effects to the Company's
business, financial condition and results of operations in connection with any
further downgrade in the ratings of the Company's insurance subsidiaries, see
"Risk Factors -- Importance of Company Ratings".
RECENT ACCOUNTING PRONOUNCEMENTS
For a discussion of certain enacted changes and recently proposed
accounting principles, see notes to consolidated financial statements included
elsewhere in this Prospectus and "Risk Factors -- Potential New Accounting
Policy for Derivatives".
56
<PAGE> 57
BUSINESS
GENERAL
The Company is a leading insurance and financial services company with
operations that provide (i) annuity products such as individual variable
annuities and fixed MVA annuities, deferred compensation and retirement plan
services and mutual funds for savings and retirement needs to over 1 million
customers, (ii) life insurance for income protection and estate planning to
approximately 500,000 customers and (iii) employee benefits products such as
group life and group disability insurance for the benefit of over 15 million
individuals. According to the latest publicly available data, with respect to
the United States, the Company is the largest writer of both total individual
annuities and individual variable annuities based on new sales for the year
ended December 31, 1996 (according to information compiled by LIMRA and VARDS,
respectively), the eighth largest consolidated life insurance company based on
statutory assets as of December 31, 1995, and the largest writer of group
short-term disability benefit plans and the second largest writer of group
long-term disability insurance based on full-year 1995 new premiums and premium
equivalents (according to information reported to EBPR).
The Company's assets have grown at a compound annual growth rate of 36%,
from $23 billion in 1992 to $80 billion in 1996. The Company has achieved rapid
growth of assets by pursuing a strategy of selling diverse and innovative
products through multiple 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 Stag Logo, one of the most recognized
symbols in the financial services industry. During this period, the Company has
attained strong market positions for its principal product
offerings -- annuities, individual life insurance and employee benefits. In
particular, the Company holds the leading market position in the individual
variable annuity industry based on sales for the year ended December 31, 1996.
The Company's sales of individual variable annuities grew from $1.8 billion in
1992 to $9.3 billion in 1996, and, for the year ended December 31, 1996, the
Company had a 13% market share (according to information compiled by VARDS).
During this period of growth, the Company's separate account assets, which are
generated principally by the sale of annuities, grew from 36% of total assets at
December 31, 1992 to 62% of total assets at December 31, 1996. The Company
believes that such asset growth stems from various factors including the variety
and quality of its product offerings, the performance of its products, the
effectiveness of its multiple channel distribution network, the quality of its
customer service and the overall growth of the variable annuity industry and the
stock and bond markets. However, there is no assurance that the Company's
historical growth rate will continue. See "Risk Factors -- Risks Associated with
Certain Economic and Market Factors".
Management believes the Company's substantial growth in assets, together
with management's effort to control expenses, has made the Company one of the
most efficient competitors in the insurance industry. In 1995, the Company had
the ninth lowest ratio of general insurance expenses to statutory assets, an
industry measure of operating efficiency, of the fifty largest U.S. life
insurers, based on statutory assets. The Company's ratio improved to .64% in
1996, from .72% in 1995 and 1.38% in 1992, as compared with the average ratio of
1.50% for the fifty largest U.S. life insurers for the year ended December 31,
1995, based on information compiled by A.M. Best.
The Company is a newly-organized holding company formed in December 1996,
which holds virtually all the annuity, individual life insurance and employee
benefits operations of The Hartford. In addition, The Hartford owns certain life
insurance operations internationally (through wholly owned subsidiaries in
Spain, the United Kingdom and The Netherlands) acquired in connection with the
acquisition of companies primarily engaged in property-casualty insurance. The
Company is a direct subsidiary of Hartford Accident and Indemnity and an
indirect subsidiary of Hartford Fire. Hartford Fire is a direct wholly owned
subsidiary of Nutmeg Insurance Company, which is a direct wholly owned
subsidiary of The Hartford. The Hartford is among the largest domestic and
international providers of commercial property-casualty insurance,
property-casualty reinsurance and personal lines (including homeowners and auto)
coverages. On December 19, 1995, ITT distributed all the outstanding shares of
capital stock of The Hartford to ITT stockholders of record on such date in
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<PAGE> 58
connection with the ITT Spin-Off. As a result of the ITT Spin-Off, The Hartford
became an independent, publicly traded company.
INDUSTRY OVERVIEW
The life insurance and annuity industries recently have been influenced by
certain savings trends and demographic factors. The United States Census Bureau
reports that the number of individuals aged 45 to 64, which represents the
Company's primary market, will grow from 55.7 million in 1996 to 71.1 million in
2005, making this age group the fastest growing segment of the U.S. population.
In addition, the Bureau of Labor Statistics forecasts that individuals in the
United States will live approximately 18.6 years beyond the age of their
retirement. These emerging demographic trends have significantly influenced the
growth of the Company as, in management's view, the "baby boomer" segment of the
population has become increasingly concerned about retirement and the public's
confidence in the ability of government-provided retirement benefits to meet
retirement needs diminishes. The Company also has benefited as employer-provided
defined benefit plans and other non-cash compensation have become used
increasingly as a means to facilitate savings for retirement. Moreover, as the
overall population ages, the Company believes that individuals will focus their
attention on efficiently transferring wealth between generations. As a result,
management believes that an increasing number of individuals will be attracted
to the Company's variety of savings-oriented insurance products, with
tax-advantaged status, in order to both fund their retirement years and protect
accumulated savings.
In addition, management believes that group life and group disability
insurance will continue to be an important employee benefit due to the growing
emphasis in recent years on the non-cash component of employee compensation. The
Company also believes that the continued growth of small businesses may result
in the overall growth of in force group insurance for the insurance industry.
Management expects that an increased demand for high-quality services in the
group insurance industry will result in continued growth in the Company's sales,
particularly if the Company successfully expands the range of services offered
in connection with its group disability products.
BUSINESS STRATEGY
Management believes that its corporate strategies will maintain and enhance
its position as a market leader within the financial services industry and will
maximize stockholder value. In addition, the Company's strong positions in each
of its businesses, coupled with the growth potential management believes exists
in its markets, provide opportunities to increase sales of its 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. Management has
established the following strategic priorities for the Company:
LEVERAGE THE COMPANY'S MULTIPLE CHANNEL DISTRIBUTION NETWORK. Management
believes that the Company's multiple channel distribution network provides a
distinct competitive advantage in selling its products and services to a broad
cross-section of customers throughout varying economic and market cycles. The
Company has access to a variety of distribution outlets through which it sells
its products and services, including approximately 1,350 national and regional
broker-dealers, approximately 450 banks (including 21 of the 25 largest banks in
the United States), 137,000 licensed life insurance agents, 2,900 insurance
brokers, 244 third-party administrators and 165 associations. In particular, the
Company believes that the bank and broker-dealer network employed by its Annuity
segment is among the largest in the insurance industry. Management believes that
this extensive distribution system generally provides the Company with greater
opportunities to access its customer base than its competitors and allows the
Company to introduce new products and services quickly through this established
distribution network as well as new channels of distribution. For example, the
Company sells fixed MVA annuities, variable annuities,
58
<PAGE> 59
mutual funds, single premium variable life insurance and Section 401(k) plan
services through its broker-dealer and bank distribution systems.
OFFER DIVERSE AND INNOVATIVE PRODUCTS. The Company provides its customers
a diverse mix of products and services aimed at serving their needs throughout
the different stages of their lives and during varying economic cycles. The
Company offers a variety of variable and fixed MVA annuity products with funds
managed both internally and by outside money managers such as Wellington, Putnam
and Dean Witter. The Company also regularly develops and brings to market
innovative products and services. For example, the Company was the first major
seller of individual annuities to successfully develop and market fixed
annuities with an MVA feature which protects the Company from losses due to
higher interest rates in the event of early surrender. The Company also was a
leader in introducing the "managed disability" approach to the group disability
insurance market. This approach focuses on early claimant intervention in an
effort to facilitate a claimant's return to work and to contain costs.
CAPITALIZE ON ECONOMIES OF SCALE, CUSTOMER SERVICE AND TECHNOLOGY. As a
result of its growth and attention to maintaining low expenses, the Company
believes it has achieved advantageous economies of scale and operating
efficiencies in its businesses which together enable the Company to
competitively price its products for its distribution network and policyholders.
For example, as noted above, the Company is the eighth largest consolidated life
insurance company based on statutory assets as of December 31, 1995, with a
ratio (as of such date) of general insurance expenses to statutory assets that
is less than half the average ratio for the fifty largest U.S. life insurers. In
addition, the Company has reduced its individual annuity expenses as a
percentage of total individual annuity account value to 28 basis points in 1996
from 43 basis points in 1992. In addition, the Company believes that it
maintains high-quality service for its customers and 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. In 1996, the Company received one of the
five Quality Tested Service Seals awarded by DALBAR, a recognized independent
research organization, for its achievement of the highest tier of customer
service in the variable annuity industry.
CONTINUE PRUDENT RISK MANAGEMENT. The Company's product designs, prudent
underwriting standards and risk management techniques protect it against
disintermediation risk and greater than expected mortality and morbidity. As of
December 31, 1996, 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, 1996. The Company also enforces disciplined claims
management to protect the Company against greater than expected mortality and
morbidity. The Company regularly monitors its underwriting, mortality and
morbidity assumptions to determine whether its experience remains consistent
with these assumptions and to ensure that the Company's product pricing remains
appropriate.
BUILD ON BRAND NAME AND FINANCIAL STRENGTH. Management believes that the
combined effect of the above-mentioned strengths, The Hartford's 187-year
history and customer recognition of the Stag Logo have produced a distinguished
brand name for the Company. The Company's financial strength, characterized by
sound ratings and a balance sheet of well-protected liabilities and highly rated
assets, also has enhanced the Company's brand name within the financial services
industry. Management believes that brand awareness, an established reputation
and financial strength will continue to be important factors in maintaining
distribution relationships, enhancing investment advisory alliances and
generating new sales with customers.
59
<PAGE> 60
Annuity
GENERAL
The Annuity segment focuses on the savings and retirement needs of the
growing number of individuals who are preparing for retirement or have already
retired. The Company offers fixed and variable annuities, certain deferred
compensation and retirement plan services, mutual funds, investment management
services and certain other financial products. Growth in the Company's assets
has been driven by its sale of variable annuities. Sales of individual annuities
were approximately $9.8 billion in 1996, bringing individual annuity total
account value to $41.7 billion as of December 31, 1996. Of the total individual
annuity account value, $32.4 billion relates to variable annuities and $9.0
billion relates to fixed MVA annuities held in guaranteed separate accounts. Of
the Company's $32.4 billion variable annuities in force, $29.9 billion, or 92%,
is held in non-guaranteed separate accounts, as of December 31, 1996. In
contrast, the next nine largest writers in the United States of variable
annuities held an average of 70% of their variable annuities in force in
non-guaranteed separate accounts, as of December 31, 1996, based on the
Company's analysis of information compiled by VARDS. The following table sets
forth the total account value by product and annual sales for the principal
product offerings in the Annuity segment.
Annuity Segment Account Value and Annual Sales
<TABLE>
<CAPTION>
As of or for the Year Ended December 31,
---------------------------------------------------
1992 1993 1994 1995 1996
------- -------- -------- -------- --------
(in millions)
<S> <C> <C> <C> <C> <C>
Account Value
Individual annuities
General account............................. $ 614 $ 1,255 $ 1,714 $ 2,439 $ 2,783
Guaranteed separate account(1).............. 2,663 3,989 7,026 8,996 8,960
Non-guaranteed separate account(2).......... 3,578 8,670 11,594 18,466 29,907
------ ------- ------- ------- -------
Total account value...................... $ 6,855 $ 13,914 $ 20,334 $ 29,901 $ 41,650
====== ======= ======= ======= =======
Group annuities
General account............................. $ 3,165 $ 3,512 $ 3,785 $ 4,453 $ 4,628
Guaranteed separate account(1).............. -- -- -- -- 170
Non-guaranteed separate account(2).......... 1,873 2,333 2,688 3,504 4,312
------ ------- ------- ------- -------
Total account value...................... $ 5,038 $ 5,845 $ 6,473 $ 7,957 $ 9,110
====== ======= ======= ======= =======
ANNUAL SALES BY PRODUCT(3)
Individual variable annuities................. $ 1,838 $ 4,055 $ 4,097 $ 4,868 $ 9,327
Fixed MVA/Other individual annuities.......... 374 177 2,908 2,079 514
Mutual funds.................................. -- -- -- -- 21
Group annuities............................... 326 370 366 495 634
</TABLE>
- ---------------
(1) Guaranteed separate accounts represent policyholder funds that are
segregated from the general account of the Company and on which the Company
contractually guarantees a minimum return, subject, in most cases, to an MVA
feature if the relevant product is surrendered prior to the end of the
applicable guarantee period. The assets are carried at fair value.
Investment income and net realized capital gains and losses are not included
in the Company's Consolidated Statements of Income. Revenues to the Company
from the guaranteed separate accounts consist of investment earnings in
excess of guaranteed amounts.
(2) Non-guaranteed separate accounts represent policyholder funds that are
segregated from the general account of the Company and as to which the
Company does not guarantee a minimum return. The assets are carried at fair
value. Investment income and net realized capital gains and losses accrue
directly to the policyholders and are therefore not included in the
Company's Consolidated Statements of Income. Revenues to the Company from
the separate accounts consist of mortality and expense charges and other
investment fees.
(3) Annual sales data excludes asset transfers between different products sold
by the Company.
60
<PAGE> 61
INDIVIDUAL ANNUITIES
The Company is the market leader in the annuity industry and sells both
variable and fixed products, with single and flexible premium payment options,
through a wide distribution network of broker-dealers and other financial
institutions. Of the Company's total sales of individual annuities in 1996, 95%
were variable annuities and 5% were fixed MVA and other individual annuities.
The Company believes that its variable annuities have been particularly well
received due to the Company's product offerings, fund performance, successful
utilization of external wholesaling organizations, relationships with
broker-dealers and banks and quality of customer service, as well as the
relatively low level of interest rates and strong stock and bond market
appreciation. VARDS ranked the Company the number one writer of individual
variable annuities for the year ended December 31, 1996 with a 13% market share
based on sales. At present, the Company has approximately 950,000 individual
annuity contracts in force. The Company earns fees for managing annuity assets
(based on its total account value) and maintaining policyholders' accounts.
Each policyholder has a variety of equity and fixed income fund options
within the Company's different products. Deposits of varying amounts may be made
at regular or irregular intervals. The assets underlying the Company's variable
annuities are principally managed by Wellington, Putnam, Dean Witter and the
investment staff of The Hartford. For a discussion of the Investment Management
Agreements that the Company will enter into with The Hartford, see "Certain
Relationships and Transactions -- Intercompany Arrangements -- Investment
Management Agreements". 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 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. The Company's individual annuity products,
principally consisting of variable and fixed MVA annuities, generally are priced
to earn an after-tax margin of approximately 35 to 40 basis points on average
total account value and, in each of the past five years, the Company has
achieved such earnings.
Variable annuity products have advantages for the Annuity segment in
comparison with traditional fixed annuity products. For variable annuities, 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. Management believes that the
investment performance of its separate accounts in recent years has created a
competitive advantage in the sale of its separate account products which makes
these products attractive to potential customers.
The growth of the Company's individual variable annuity account value has
been considerable for the past several years due to strong sales, acquisitions,
market appreciation and low levels of surrenders. The following table
illustrates the growth in individual variable annuity account value from the
beginning to the end of each calendar year listed below and the principal
factors that caused the increase in account value for each such year.
INDIVIDUAL VARIABLE ANNUITY TOTAL ACCOUNT VALUE
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1992 1993 1994 1995 1996
------- ------- -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Beginning Total Account Value........ $ 2,169 $ 4,096 $ 9,742 $ 13,078 $ 20,691
Sales and Other Deposits........... 1,876 4,444 4,186 5,024 9,647
Acquisitions....................... -- 827 -- -- --
Market Appreciation................ 209 724 (131) 3,440 3,406
Surrenders......................... (158) (349) (719) (851) (1,347)
------ ------ ------- ------- -------
Ending Total Account Value........... $ 4,096 $ 9,742 $ 13,078 $ 20,691 $ 32,397
====== ====== ======= ======= =======
</TABLE>
61
<PAGE> 62
The Company has made a strategic decision to align itself with a select
group of high-quality independent money managers which have an interest in the
continued growth in sales of the Company's products. Two of the four largest
variable annuities (Putnam Capital Manager Variable Annuity and The Director) in
the annuity industry, for the year ended December 31, 1996, are managed in part
by Putnam and Wellington, respectively, each of which was selected by management
as part of this strategy. The Company believes these relationships, and the name
recognition of Wellington, Putnam and the Company's other independent money
managers, greatly enhance the marketability of its annuities and strength of its
product offerings.
The following table illustrates the performance of certain of the funds
available in respect of the Putnam Capital Manager Variable Annuity and The
Director. The historical performance of these funds is not an indication of
future performance.
SEPARATE ACCOUNT PERFORMANCE(1)
<TABLE>
<CAPTION>
ONE-YEAR FIVE-YEAR
ANNUALIZED ANNUALIZED
FUND TYPE OF FUND ASSETS RETURN RETURN
- ------------------------------------ ----------------- ------------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Putnam Capital Manager Variable
Annuity
Putnam VT Growth & Income......... Growth & Income $ 5,551 21.92% 15.97%
Putnam VT Voyager................. Aggressive Growth 3,161 12.94 16.03
Putnam VT New Opportunities....... Aggressive Growth 1,486 10.17 N/A
International
Putnam VT Global Growth........... Stock 1,322 17.18 12.11
Putnam VT High Yield.............. High Yield 761 12.81 13.48
All other Putnam Capital Manager
Variable Annuity non-guaranteed
separate accounts.............. 3,143
------
Total Putnam Capital Manager
Variable Annuity non-
guaranteed separate
accounts..................... 15,424
------
The Director
Advisers.......................... Balanced 5,126 16.59% 12.09%
Capital Appreciation.............. Growth 2,773 20.70 17.89
Stock............................. Growth 2,339 24.37 15.54
International
International Opportunities....... Stock 886 12.93 10.03
Dividend and Growth............... Growth & Income 816 22.91 N/A
All other Director non-guaranteed
separate accounts.............. 1,636
------
Total Director non-guaranteed
separate accounts............ 13,576
------
All other non-guaranteed separate
account assets.................... 907
------
Total variable annuity general
account assets............... 2,490
------
Total individual variable
annuity assets............... $32,397
======
</TABLE>
- ---------------
(1) The information included herein has been compiled by the Company, as of
December 31, 1996, for the five largest mutual funds available within the
Putnam Capital Manager Variable Annuity and The Director products (the two
most popular variable annuity contracts sold by the Company).
62
<PAGE> 63
Fixed MVA annuities are fixed rate annuity contracts that guarantee that a
specific sum of money will be paid in the future, either as a lump sum or as
monthly income, to an ANNUITANT. In the event that a policyholder surrenders a
policy prior to the end of a 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 (provided that the
Company has appropriately matched its portfolio of assets supporting its fixed
MVA annuities). The amount of such payments will not fluctuate due to adverse
changes in the Company's investment return, mortality experience or expenses.
The Company's primary fixed MVA annuities are CRC(R) and The Hartford Saver(R)
and The Hartford Saver Plus(R) annuities (together, the "Saver Annuities"),
which have terms of one, three, five, six, seven, eight, nine or ten years and
an average term of approximately seven years. As of December 31, 1996, interest
rates on these contracts ranged from 3.4% to 9.3% and averaged 6.53%. CRC is a
yield-to-maturity product with guaranteed principal and interest payments and an
MVA feature (and, in general, surrender charges) triggered in the event of the
early surrender of the policy. The assets related to CRC are held in a separate
account by the Company but the guaranteed rate is supported by the general
account of the Company. The Saver Annuities are yield-to-maturity products
similar to CRC that cap the MVA feature, thereby guaranteeing a minimum rate of
return minus any surrender charge. As a result of the design of its fixed MVA
annuities, the Company allocates less capital in respect of fixed MVA annuities
than would be required for other fixed annuity products. The Company offers its
fixed MVA annuities with terms designed to provide for a spread sufficient to
meet its internal return-on-equity goals. As a result, the Company achieves a
net investment spread on its fixed MVA annuities that is generally lower than
the net investment spreads now earned by its peers for fixed annuities without
MVA features. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- General".
In 1995, the Company, in conjunction with Pacific Mutual Life Insurance
Company, formed American Maturity Life Insurance Company ("AML") (of which the
Company owns 60%) in order to enter into a ten-year exclusive arrangement with
the American Association of Retired Persons ("AARP") to sell annuities to its 33
million members through direct mail and advertising. The Company believes this
relationship improves the Company's access to the growing market of senior
Americans. The Company initially offered a fixed MVA annuity to AARP members,
but there have been only limited sales of such product by AML due to the present
interest rate environment. However, in 1997, the Company has begun to offer AARP
members a variable annuity product in an effort to better realize the benefits
of this relationship.
DEFERRED COMPENSATION AND RETIREMENT PLAN SERVICES
The Company believes that it is among the leading providers of retirement
products and services, including asset management and plan administration, to
municipalities pursuant to Section 457 of the Internal Revenue Code of 1986, as
amended (the "Internal Revenue Code"). At present, the Company administers
approximately 900 Section 457 plans for governmental entities, of which the
Company is the exclusive provider for 750 of such plans. These plans cover
approximately 200,000 individuals. Traditionally, Section 457 plan assets have
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 such Section 457 plans. Generally, the Company manages the fixed
income funds offered in Section 457 plans administered by the Company.
Wellington, Fidelity Distributors Corporation, Twentieth Century Investors
Research Corporation and certain other mutual fund companies act as advisors to
the equity funds offered in Section 457 plans administered by the Company. See
"Certain Relationships and Transactions -- Intercompany
Arrangements -- Investment Management Agreements". The Section 457 savings and
retirement plan market is a mature one in which, in the belief of management,
any future growth principally will be achieved through the
63
<PAGE> 64
acquisition of business from competing companies and through increased
contributions from existing participants and individuals eligible to be
participants.
The Company also provides products and services to plans created under
Section 401(k) and 403(b) of the Internal Revenue Code. Management believes that
opportunities exist to expand its operations by building on the Company's
distribution strength in the individual annuity and Section 457 markets. The
Company also sees opportunities to market these products and services to small
employers, which management expects to be the fastest growing area of the
market.
The deferred compensation and retirement plan services products form the
majority of the Company's group annuity account value. In 1996, the Company
earned approximately 20 basis points, after tax, on its average group annuity
account value.
MUTUAL FUNDS AND OTHER INVESTMENT MANAGEMENT SERVICES
In September 1996, the Company launched eight retail mutual funds. Six of
these funds are managed by Wellington and closely resemble the Company's
Director variable annuity equity funds managed by Wellington. The other two
funds are fixed income funds managed by the Company. See "Certain Relationships
and Transactions -- Intercompany Arrangements -- Investment Management
Agreements". The Company has entered into agreements with over 150 financial
services firms to distribute these mutual funds. However, because the Company is
a recent entrant into the mutual fund business, there can be no assurance as to
the Company's success in this business. Also, the Company manages institutional
funds and provides certain other investment management services.
STRUCTURED SETTLEMENT CONTRACTS AND OTHER SPECIAL PURPOSE ANNUITY CONTRACTS
The Company also sells structured settlement contracts. These contracts
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. Approximately 40% of the
Company's structured settlement contract sales relate to claims in respect of
policies sold by agents of The Hartford's property-casualty insurance operations
(who are paid an expense allowance). The remaining structured settlement
contract sales are made through specialty brokers. The Company also markets
other annuity contracts for special purposes such as the funding of terminated
defined benefit pension plans.
The Company reported revenues of $43.7 million, $69.2 million and $74.8
million from structured settlement and other special purpose annuity contracts,
representing 1.2%, 1.7% and 1.7% of its total revenues, in 1994, 1995 and 1996,
respectively.
MARKETING AND DISTRIBUTION
The Company's individual annuity distribution network has been developed
based on management's strategy of utilizing multiple and competing distribution
channels with variable costs in an effort to achieve the broadest distribution
possible in the geographic areas in which the Company operates. The success of
the Company's marketing and distribution system depends on its product
offerings, fund performance, successful utilization of external wholesaling
organizations, relationship with broker-dealers and banks (through which the
sale of the Company's individual annuities to customers is consummated) and
quality of customer service. See "-- Information Systems; Customer Service;
Research and Development".
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<PAGE> 65
In general, the Company sells approximately 70% of its individual annuities
through broker-dealers and 30% of its individual annuities through banks.
Management is engaged in continuous efforts to maintain and develop strong
relationships with the broker-dealers and banks that sell the Company's
products. The following table sets forth the Company's individual annuity sales
by distribution channel for the five years ended December 31, 1996.
INDIVIDUAL ANNUITY SALES BY DISTRIBUTION CHANNEL
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
1992 1993 1994 1995 1996
------ ------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Broker-dealers..................................... $1,548 $3,124 $5,433 $5,125 $6,637
Banks(1)........................................... 664 1,108 1,572 1,822 3,204
------ ------ ------ ------ ------
Total......................................... $2,212 $4,232 $7,005 $6,947 $9,841
====== ====== ====== ====== ======
</TABLE>
- ---------------
(1) Includes sales by banks which are made through their affiliated
broker-dealers.
The Company maintains a network of approximately 1,350 broker-dealers and
approximately 450 banks (including 21 of the 25 largest banks in the United
States) through the use of wholesaling organizations, principally Planco
Financial Services, Inc. ("Planco") and Essex National Securities, Inc.
("Essex"), and strategic alliances with Putnam and Dean Witter to sell its
individual annuity products. The number of broker-dealers and banks in this
network has more than doubled since 1992. Planco, Essex, Putnam and Dean Witter
generated approximately 40%, 7%, 48% and 5%, respectively, of the Company's
total individual annuity sales in 1996. The agreements governing these
relationships have varying renewal and termination provisions but generally
provide for ongoing continuation unless one of the parties elects otherwise or
fails to reaffirm continuation on a periodic basis. The Company periodically
negotiates renewal terms for these relationships and there can be no assurance
that such renewal terms will remain acceptable to the Company or such parties.
Should one or more of these relationships terminate, on a short-term basis or
otherwise, there could be a material disruption in sales. See "Risk
Factors -- Dependence on Certain Third-Party Relationships".
The Putnam relationship commenced in 1988, Planco in 1986, Essex in 1990
and Dean Witter in 1994. Putnam is an investment management firm that sells the
Company's individual variable annuity products, which are based on
Putnam-managed funds, through broker-dealers and banks. Planco, a privately held
independent wholesaling organization, distributes certain of the Company's
products to broker-dealers and banks. Essex, a registered broker-dealer,
wholesales a number of the Company's products to banks and other financial
institutions. Dean Witter sells a proprietary variable annuity created by the
Company based on Dean Witter-managed funds through its own network of
broker-dealers, as well as the Company's CRC product.
The Company also uses this distribution network to sell products other than
individual annuities. Putnam and Planco sell single premium variable life
products through broker-dealers and Planco sells Section 401(k) plan services
and is the exclusive broker-dealer wholesaler for the Company's family of mutual
funds. In addition to Planco, the Annuity segment 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. Structured settlements are sold through The
Hartford's property-casualty insurance operations and certain specialty brokers
using a small group of internal personnel. Special purpose annuity contracts are
sold through different organizations and distribution mechanisms depending on
the ultimate use of the annuity contract.
65
<PAGE> 66
INDIVIDUAL LIFE INSURANCE
GENERAL
The Individual Life Insurance segment sells a variety of individual life
insurance products. The Company's in force life insurance consists of a variety
of variable life, universal life, interest-sensitive whole life and term life
insurance policies. The Company's business also includes traditional whole life,
which was sold in prior years, and modified guaranteed life, which was acquired
in the Fidelity Bankers and Pacific Standard acquisitions. The Company presently
has policies in force for approximately 500,000 customers. The Company focuses
in this segment particularly on the high-end estate and business planning
markets and believes it is one of the leading competitors in these markets based
on its relatively high average face value per policy. NEW ANNUALIZED WEIGHTED
PREMIUMS of individual insurance life policies reached $130 million in 1996, $75
million of which was variable life, $46 million of which was universal life,
traditional or interest-sensitive whole life and $7 million of which was term
life. The Company also has recently begun to develop its single premium variable
life business, which accounted for $20 million of the $75 million of variable
life sales in 1996. In addition, through this segment the Company sells
individual disability coverage for loss of income for professionals, corporate
executives, business owners and administrative support personnel in the event of
a disabling accident or illness. The Company has only recently entered the
individual disability market and its current business in this area is
immaterial.
The following table illustrates, for the five years ended December 31,
1996, sales of individual life insurance and changes in individual life
insurance account value and aggregate life insurance in force, with internal
growth and acquisitions separately identified.
INDIVIDUAL LIFE INSURANCE SEGMENT ANNUAL SALES, ACCOUNT VALUE AND IN FORCE
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
ANNUAL SALES(1)
Variable life.............................. $ -- $ 1 $ 10 $ 27 $ 75
Universal life/Interest-sensitive whole 77 80 72 71 46
life....................................
Term life.................................. 11 13 10 7 7
Other...................................... 2 2 2 2 2
---- ---- ------ ------ ------
Total................................. $ 90 $ 96 $ 94 $ 107 $ 130
==== ==== ====== ====== ======
ACCOUNT VALUE
Internal
Variable life.............................. $ -- $ 4 $ 20 $ 158 $ 604
Universal life/Interest-sensitive whole 708 872 1,066 1,265 1,534
life....................................
Other...................................... 108 115 119 117 109
---- ---- ------ ------ ------
Total................................. $ 816 $ 991 $ 1,205 $ 1,540 $ 2,247
==== ==== ====== ====== ======
Acquisitions(2)
Universal life/Interest-sensitive whole $ -- $ 136 $ 251 $ 197 $ 208
life....................................
Modified guaranteed life................... -- 736 836 821 781
---- ---- ------ ------ ------
Total................................. $ -- $ 872 $ 1,087 $ 1,018 $ 989
==== ==== ====== ====== ======
</TABLE>
66
<PAGE> 67
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
IN FORCE
Internal
Variable life.............................. $ -- $ 158 $ 700 $ 1,645 $ 4,946
Universal life/Interest-sensitive whole 21,208 25,243 27,751 30,416 31,012
life....................................
Term life.................................. 8,098 10,705 11,711 11,507 11,623
Other...................................... 114 125 131 144 155
---- ---- ------ ------ ------
Total................................. $29,420 $36,231 $40,293 $43,712 $47,736
==== ==== ====== ====== ======
Acquisitions(2)
Universal life/Interest-sensitive whole $ -- $ 1,583 $ 2,784 $ 2,578 $ 2,560
life....................................
Term life.................................. -- 96 428 365 369
MODIFIED GUARANTEED LIFE................... -- 1,416 1,715 1,624 1,478
---- ---- ------ ------ ------
Total................................. $ -- $ 3,095 $ 4,927 $ 4,567 $ 4,407
==== ==== ====== ====== ======
</TABLE>
- ---------------
(1) Individual life insurance sales are recorded as new annualized weighted
premiums, except that, prior to 1994, some of the related data is recorded
on a paid weighted premium basis, which only records premium collected, and
thus is not directly comparable.
(2) This data reflects the individual life insurance portion of the Fidelity
Bankers, Pacific Standard and Investors Equity blocks of business
assumptions.
PRODUCTS
VARIABLE LIFE. Variable life insurance provides a return linked to an
underlying portfolio. The Company allows policyholders to determine their
desired asset mix among a variety of mutual funds. As the total 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. Variable life policies
represented 58% of new annualized weighted premiums for individual life
insurance products for the year ended December 31, 1996. The Company's variable
life insurance portfolio also includes products with a second-to-die feature.
These products are distinguished from other variable life insuance 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 used in
individual estate planning, often to fund estate taxes for a married couple.
UNIVERSAL 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. These policies provide policyholders
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 insurance policies represented 35% of new
annualized weighted premiums for individual life insurance products for the year
ended December 31, 1996. The Company also sells universal life insurance
policies with a second-to-die feature similar to that of the variable life
insurance product described above.
OTHER. The Company also offers individual term life and individual
disability insurance, although the Company has a limited presence in these
markets. However, management believes there may be opportunities to successfully
sell term insurance through banks and broker-dealers and is currently developing
term insurance products to sell through these distribution channels. Also, the
Company's individual disability insurance product is offered in a guaranteed
renewable contract, designed to minimize the Company's risk by allowing for
future premium increases in the event of greater than expected morbidity.
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MARKETING AND DISTRIBUTION
The Individual Life Insurance distribution system is segregated into two
product types: those products designed for high-end estate and business planning
and those products designed for protection against lost income from death to
cover basic needs such as mortgage payments (referred to as "middle income"
sales). The high-end estate and business planning organization is managed
through a sales office system of qualified life insurance professionals with
specialized training in sophisticated life insurance sales. These employees have
access to approximately 137,000 licensed life insurance agents. High-end sales
also occur in certain regions of the United States through the ELAR partners
("ELAR"), a group of independent life insurance marketing organizations, each of
which maintains a separate marketing agreement with the Company. The middle
income sales force is led by a group of internal employees who use lead
generation techniques to sell insurance through a collection of independent
sales organizations. The success of the Company's marketing efforts in its
Individual Life Insurance segment primarily depends on the breadth and quality
of its life insurance products, the competitiveness of its pricing, its
relationships with its third-party distributors and the quality of its customer
service. See "-- Information Systems; Customer Service; Research and
Development". Approximately 74% of the Company's new sales of individual life
insurance policies (measured by new annualized weighted premiums) in 1996 were
consummated through the Company's internal estate and business planning sales
force and ELAR in conjunction with life insurance professionals, The Hartford's
property-casualty agents and broker-dealers, 11% were sold to the middle income
market through licensed life insurance agents and 15% were single premium
variable life insurance contracts sold through the bank and broker-dealer
distribution network of the Annuity segment. Approximately $12 million, or 9%,
of the Company's 1996 sales in the Individual Life Insurance segment were
consummated through The Hartford's property-casualty agents.
EMPLOYEE BENEFITS
GENERAL
The Employee Benefits segment consists of two areas of operation: Group
Insurance and Specialty Insurance Operations. The Company markets group
insurance products, including group life insurance , group short- and long-term
managed disability, stop loss and supplementary medical coverage to employers
and employer-sponsored plans and accidental death and dismemberment, travel and
special risk coverage to employers and associations. The Company also offers
disability underwriting, administration, claims processing services and
reinsurance to other insurers and self-funded employer plans. The Specialty
Insurance Operations unit consists of the Company's COLI business, life/health
reinsurance operations and international operations.
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The following table sets forth, for the five years ended December 31, 1996,
net earned premiums for group insurance products, reserves for group insurance
products and the COLI account value held in the Company's general account and
separate accounts.
EMPLOYEE BENEFITS SEGMENT PREMIUMS, RESERVES AND ACCOUNT VALUE
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------
1992 1993 1994 1995 1996
------ ------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
GROUP INSURANCE PREMIUMS
Group Disability...................... $ 252 $ 285 $ 352 $ 419 $ 551
Group Life............................ 274 291 308 361 432
Other................................. 315 280 314 323 346
------ ------ ------ ------ ------
Total............................ $ 841 $ 856 $ 974 $1,103 $1,329
====== ====== ====== ====== ======
GROUP INSURANCE RESERVES
Group Disability...................... $ 549 $ 691 $ 857 $1,030 $1,268
Group Life............................ 220 270 294 325 389
Other................................. 287 263 261 278 277
------ ------ ------ ------ ------
Total............................ $1,056 $1,224 $1,412 $1,633 $1,934
====== ====== ====== ====== ======
COLI ACCOUNT VALUE
General Account....................... $ 864 $1,549 $2,308 $3,566 $4,028
Separate Account...................... -- -- 897 3,484 4,441
------ ------ ------ ------ ------
Total............................ $ 864 $1,549 $3,205 $7,050 $8,469
====== ====== ====== ====== ======
</TABLE>
GROUP INSURANCE
The Company provides life, disability and other group insurance coverage to
large and small employers across the United States. The Company estimates that
this aggregate coverage is maintained for the benefit of over 15 million
individuals. The Company had approximately $1.3 billion of premiums for group
insurance in 1996, of which $432 million is attributable to group life insurance
coverage and $551 million is attributable to group disability coverage (and of
which $23 million of such group life insurance premiums and $78 million of such
disability premiums related to the acquisition of a block of business from North
American Life Assurance Company of Toronto ("NAL")). The Company sells its
product line to employers through brokers and consultants and to multiple
employer groups through its relationships with trade associations. Management
believes that the comparative quality of its underwriting and claims management
provides a competitive advantage in the group disability insurance business. In
addition, all group life insurance policies sold by the Company are term
insurance, generally with one- to two-year rate guarantees. This allows the
Company to make adjustments in rates or terms of its policies in order to
minimize the adverse effect of various market trends.
The Company 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. As of December 31, 1996, the Company had
approximately 530 group disability contracts in force in the large case market,
covering an estimated 3 million employees. Management believes that further
opportunities exist in the "small" and "medium case" group markets due to the
Company's name recognition and reputation and managed disability and claims
administration capabilities. The Company intends to continue to expand its
operations in both the small and medium case markets. As of December 31, 1996,
the Company had sold approximately 22,500 and 585 group disability contracts in
the small and medium case markets, respectively, covering an estimated 600,000
and 335,000 employees, respectively. The Company's efforts in the group
disability area focus on early intervention, return-to-work programs, reduction
of long-term disability claims and successful rehabilitation. The
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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).
Managed disability coverage is the flagship product for the Company's group
disability insurance operations. The Company emphasizes early claimant
intervention in this coverage in an effort to facilitate a disabled claimant's
return to work and to contain costs. The Company's newest generation of managed
disability is the Ability Assurance(R) program in which the Company offers an
expanded set of services to disabled employees of the Company's group disability
customers. Management believes its individualized approach to claim servicing,
as well as its incentive to control costs, leads to an overall reduction in the
cost of group disability coverage for employers and thus provides an important
competitive advantage.
GROUP SHORT-TERM DISABILITY. Short-term disability benefit plans provide a
weekly benefit amount (typically 60% to 70% of the employees earned income up to
a specified maximum benefit) to insured employees when they are unable to work
due to an accident or an illness. Most of these benefit plans begin providing
benefits immediately for accidents, or typically following a one-week waiting
period for sickness, and continue providing benefits for a limited term,
generally 52 weeks or less. Short-term disability, excluding the NAL block of
business, accounted for $104 million, or 8%, of net earned premiums from group
insurance products for the year ended December 31, 1996.
GROUP LONG-TERM DISABILITY. 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 begin providing benefits following 90- or 180-day waiting periods 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.
Premiums for long-term disability coverage are based upon expected claim
incidence rates and duration of claims of the insured group, as well as
assumptions concerning operating expenses and future interest rates. Long-term
disability, excluding the NAL block of business, accounted for $369 million, or
28%, of net earned premiums from group insurance products for the year ended
December 31, 1996.
GROUP TERM 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 works to distinguish itself from its competitors by
offering 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.
Premiums for group life insurance coverage are based upon the expected mortality
of the insured group, as well as operating expense and interest rate
assumptions. Group term life insurance, excluding the NAL block of business,
accounted for $409 million, or 31%, of net earned premiums from group insurance
products for the year ended December 31, 1996.
OTHER. The Company also provides term life insurance, accidental death and
dismemberment, 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.
SPECIALTY INSURANCE OPERATIONS
The Specialty Insurance Operations unit consists of a collection of niche
businesses, including International Corporate Marketing Group ("ICMG"), which
contains the Company's COLI operations, ITT Hartford International Life
Reassurance Corporation ("HLRe"), a specialty reinsurer, and the Company's
international operations.
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The Company is a leader in the COLI market and provides coverage for
approximately 400,000 individuals. COLI is life insurance purchased by a company
on the life of its employees, with the company named as the beneficiary under
the policy. Through the purchase of COLI, corporations have been able to use the
favorable tax treatment of life insurance to fund a variety of employee benefit
liabilities such as post-retirement health care and non-qualified benefit
programs. In 1992, the Company acquired the $5.6 billion COLI business of Mutual
Benefit, an insurance company presently in insolvency proceedings. Under two
coinsurance agreements between the Company and Mutual Benefit whereby Mutual
Benefit reinsured the Company for $3.5 billion of the purchased business and
certain newly written business, Mutual Benefit was required to secure the
coinsured liabilities by depositing assets at least equal to 100% of the
coinsured liabilities in certain trust accounts held for the benefit of the
Company. These trust accounts were established in 1992 in an amount equal to
$3.5 billion. The assets held in the two trust accounts comprise cash, Mutual
Benefit's interest in policy loans on the coinsured business, certain
investment-grade bonds and other securities that the trustee is permitted to
hold under the terms of the trust agreements. The terms of these coinsurance
agreements were approved by the New Jersey state court overseeing the insolvency
of Mutual Benefit. Mutual Benefit subsequently assigned its rights and
obligations under such coinsurance agreements, as well as the bulk of its
business, to MBL Life Assurance Corporation ("MBL"). Mutual Benefit is currently
subject to a final order of liquidation and, pending the disposition of certain
assets unrelated to the Company, is expected to be dissolved. In addition, the
rehabilitation plan under which MBL is operating the business assumed from
Mutual Benefit, including the coinsurance arrangements, has been approved by the
court. As a result of the security provided by these court-approved trusts,
management believes that the Company is not affected by the outcome of Mutual
Benefit's insolvency proceedings.
The Company retained the Mutual Benefit dedicated COLI staff and formed
ICMG, 60% of which is owned by the Company and 40% of which is owned by MBL. The
Company has the right to acquire the remaining 40% of ICMG in November 1997 by
transferring to MBL 40% of the net worth of ICMG and paying MBL 40% of ICMG's
earnings (which are substantially the same as its cash flow) over the following
five years. In addition, MBL has the right to put, and the Company has the
obligation to purchase, MBL's 40% interest in ICMG until November 2002 at the
formula price described above. The Company does not believe that such purchase
price would be a material amount.
Until the passage of the HIPA Act of 1996, the Company sold two principal
types of COLI, leveraged and variable. The HIPA Act of 1996 phases out the
deductibility of interest on policy loans under COLI by 1998, thus eliminating
all future sales of leveraged COLI. Leveraged COLI is a fixed premium life
insurance policy owned by a company or a trust sponsored by a company. The
proceeds from such a policy help to fund general corporate liabilities such as
deferred compensation plans or post-retirement obligations. This general account
policy provides cash flow flexibility and optimizes certain tax advantages for a
company or trust by allowing it to borrow the policy cash value and receive
certain interest deductions on such policy loans. The Company's leveraged COLI
product has been an important contributor to its profitability in recent years
and will continue to contribute to the profitability of the Company although
such contribution will be reduced in the future due to the effects of this
legislation. VARIABLE COLI continues to be a product used by employers to fund
non-qualified benefits or offset other post-employment benefits liabilities, but
does not provide the same cash flow or tax advantages generated by leveraged
COLI. See "Risk Factors -- Adverse Effect of Legislation and Regulatory
Actions".
In 1993, the Company also purchased HLRe (formerly known as American
Skandia Life Reinsurance Corporation), a specialty insurance subsidiary that
focuses on life/health reinsurance markets, especially the COLI market, from
American Skandia Life Assurance Corporation. The leveraged COLI business of HLRe
has been adversely affected by the HIPA Act of 1996 in a manner similar to the
Company's ICMG COLI business. The Company recently signed an agreement to sell
its conventional block of reinsurance to Cologne Life Reinsurance Company. This
transaction, which
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the Company expects to close during 1997, will not have a material effect on the
Company's results of operations.
The Company recently initiated an international expansion strategy to
diversify its risk exposure and expand its business opportunities in
international markets. In June 1994, the Company consummated its initial
international investment outside North America by forming ITT Hartford
Sudamericana Holding, S.A. ("HSH"), a joint venture with a group of Argentine
insurance executives, of which the Company owns 60%. Through this joint venture,
the Company operates several subsidiaries devoted to life insurance, retirement
annuities, life insurance brokerage and pensions. In 1995, the Company expanded
its activities in Argentina by initiating reinsurance coverage for Argentina's
developing life insurance market. In 1996, HSH and Banco de Galicia y Buenos
Aires, S.A. formed a joint venture to operate an insurance business in a number
of countries throughout South America. The Company also recently has formed two
Brazilian joint ventures, Icatu Hartford Capitalizacao, S.A. and Icatu Hartford
Seguros, S.A., each with Itaborai Participacoes S.A. (known as Grupo Icatu), a
broad-based financial services company in Brazil, to sell life insurance,
savings products, specialty health insurance and pensions. Management views each
of these international joint ventures as a long-term project. As of December 31,
1996, the Company had invested less than $100 million of start-up capital in all
its existing international operations. The Company plans to pursue other
international opportunities in Latin America from time to time as it deems
appropriate.
MARKETING AND DISTRIBUTION
The Company uses an experienced group of Company employees to distribute
its group insurance products and services through a variety of distribution
outlets. These channels include insurance agents, brokers, associations and
third-party administrators. The Company sells its COLI products through Company
employees working with brokers and consultants specializing in the COLI market.
The success of the Company's distribution efforts in the group insurance and
specialty insurance markets primarily depends on the variety and quality of its
product offerings, the Company's relationships with its third-party distributors
and the quality of its customer service, particularly in the case of its
disability products. See "-- Information Systems; Customer Service; Research and
Development". In addition, the Company benefits from its historical and ongoing
public relations and advertising campaign. In particular, the Company's recent
Break Away(SM) campaign, designed to showcase the achievements of disabled
athletes, has received favorable reviews in the market.
GUARANTEED INVESTMENT CONTRACTS
GENERAL
The Guaranteed Investment Contracts segment consists of GRC supported by
either the Company's general account or a guaranteed separate account.
Historically, a significant majority of these contracts was sold as general
account contracts with fixed rates and fixed maturities. The Company decided in
1995, after a thorough review of the guaranteed investment contract market, to
significantly de-emphasize general account GRC, choosing instead to focus its
distribution efforts on products sold by its other segments and selling general
account GRC primarily as an accommodation to customers. As a result, the Company
substantially withdrew from the general account GRC business in 1995 and, since
1994, sales of these products have declined dramatically. From 1992 to 1994, the
Company sold over $5 billion of GRC. In contrast, the Company sold only $169
million of GRC in 1996, $108 million of which was general account GRC. In the
first quarter of 1997, the Company wrote $13 million of general account GRC
(most of which were renewals to existing customers).
The Company internally segregates its Guaranteed Investment Contracts
segment into two distinct blocks of business which are separately managed. The
Company's GRC business sold prior to December 31, 1994 (including amounts sold
prior to this date where the cash was not received by
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the Company, and thus recorded as a sale, until early in 1995) is referred to as
Closed Book GRC. Closed Book GRC contains a segregated portfolio of assets
monitored and managed on a liquidating basis; however, such designation as a
"segregated" portfolio is only for internal management purposes and has no legal
or regulatory effect. Management expects that the net income or loss from Closed
Book GRC in the years subsequent to 1996 will be immaterial. For a further
discussion of Closed Book GRC, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Results of Operations for the
Years Ended December 31, 1994, 1995 and 1996 -- Comparison of Guaranteed
Investment Contracts Segment Results -- Closed Book GRC".
The following table illustrates, for the five years ended December 31,
1996, new sales and account value for the Guaranteed Investment Contracts
segment.
NEW SALES AND ACCOUNT VALUE
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
1992 1993 1994 1995 1996
------ ------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Guaranteed investment contract sales................... $1,608 $1,730 $1,732 $ 893 $ 169
Account value
General account................................... 5,673 6,216 7,257 5,722 4,124
Guaranteed separate account....................... 182 193 124 346 408
------ ------ ------ ------ ------
Total account value.......................... $5,855 $6,409 $7,381 $6,068 $4,532
====== ====== ====== ====== ======
</TABLE>
PRODUCTS
GENERAL ACCOUNT PRODUCTS. General account GRC provides a guaranteed rate
of return on investment (generally for a fixed period of time) on funds
deposited with the Company. Deposits can be made in a lump sum or in periodic
payments. The customer may choose between a fixed rate of interest or a floating
rate of interest tied to an index.
SEPARATE ACCOUNT PRODUCTS. Separate account GRC either provides a limited
guarantee of a certain rate of return on investment, with further upside
potential if performance of the assets supporting the contract dictates, or a
guaranteed rate of return tied to an index such as LIBOR. The assets supporting
these products are held in a guaranteed separate account.
MARKETING AND DISTRIBUTION
Sales of GRC products are generated by an internal sales force of the
Company. Historically, these individuals primarily sold GRC. Given that the
Company has substantially withdrawn from the general account GRC business, these
individuals now focus on other products sold by the Company and generally sell
general account GRC primarily as an accommodation to customers.
INFORMATION SYSTEMS; CUSTOMER SERVICE; RESEARCH AND DEVELOPMENT
The Company has significantly enhanced its systems capabilities in recent
years. Over the last three years, the Company has spent over $20 million for
systems technology and is projected to spend approximately $30 million over the
next two years. The Company currently maintains a decentralized network of
systems designed to meet the specific business needs of each of its units and is
in the process of fully integrating this system throughout the Company.
Management believes that such technology will improve workflow and document
management, develop processing economies of scale and facilitate communications
with customers. The Company also is on-line with many of its bank and
broker-dealer distributors to facilitate the marketing, sales and servicing
process.
The Company focuses on the maintenance and expansion of its distribution
system and customer base through quality customer service and efficient policy
administration. In that regard,
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management continuously focuses attention on productivity improvements and
process reassessments. As part of these efforts, the Company creates quality
service standards based upon industry studies which are used to evaluate the
Company's overall performance. Management believes its service performance
compares favorably with other life insurance companies. The Company received one
of the five Quality Tested Service Seals awarded in 1996 in the variable annuity
industry by DALBAR, which recognized the Company's achievement of the highest
tier of service in that industry. The Company's implementation of a new
state-of-the-art administration and customer service system has further improved
its ability to process new business applications, apply policyholder funds, pay
commissions, respond to customer inquiries and provide valuable management
information.
The Company's product development process is largely market and customer
driven, with each of the Company's units attempting to respond to and anticipate
the needs of its customers. Employees from the Company's sales, actuarial,
underwriting, accounting and administration operations are included in this
process at an early stage to ensure that pricing and underwriting are
coordinated and that administrative support is efficient and developed on a
cost-effective basis. After the initiation of a product, the Company monitors
sales and pricing assumptions to identify any adjustments necessary to maintain
sufficient profitability. Also, the Company maintains close contact with the
distributors to ensure that its new and established products and/or services
satisfy the targeted customer needs.
UNDERWRITING AND PRICING
The Company follows detailed and uniform underwriting practices and
procedures for its Individual Life Insurance segment designed to properly assess
and quantify risks before issuing coverage to qualified applicants. The Company
has underwriters who evaluate policy applications on the basis of the
information provided by the applicant and others. If the policy amount exceeds
certain prescribed dollar limits, a prospective policyholder must submit to a
variety of underwriting tests, such as medical examinations, electrocardiograms,
blood tests, urine tests, treadmill tests, chest X-rays and inspection reports.
Underwriting requirement limits are scrutinized against industry standards to
prevent anti-selection and to stay abreast of industry trends. Acquired Immune
Deficiency Syndrome ("AIDS") is expected to continue to adversely affect
mortality for the life insurance industry. Where permitted by law, the Company
has responded by considering AIDS information in underwriting and pricing
decisions. At the present time, comprehensive blood test screening, including
tests for the AIDS antibody, is performed on approximately 90% of all business
written.
The Company employs prudent underwriting standards to protect the quality
of its group life and group disability insurance business. The Company has
developed standard rating systems for each product line based on its past
disability experience and relevant industry experience. The Company updates its
manual rates on an ongoing basis and periodically reviews the quality of its
group life and group disability underwriting. Company underwriters evaluate the
risk characteristics of each prospective insured group. The premium rate quoted
to a prospective insured group is based on a standard rate and, for larger
groups, the group's past claims experience rate. Of the Company's group life and
group disability insurance business, over 80% is renewal business from which the
Company seeks annual rate increases where appropriate. The Company maintains a
persistency rate of approximately 85% to 90% with respect to its group life and
group disability insurance business.
The Company is not obligated to accept any policy or group of policies from
any distributor. Policies are underwritten on their merits and are not issued
without having been examined and underwritten individually. In addition, the
Company's policies generally afford it the flexibility to adjust dividend scales
and to increase rates charged to its policyholders (subject to specified maximum
charges) in order to provide for increased mortality and/or morbidity
experience. Management believes that its underwriting standards produce
mortality and morbidity results
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consistent with the assumptions used in product pricing, while also allowing
competitive risk selection.
Management believes that a competitive strength of the Company is its
ability to coordinate underwriting and product pricing. Product pricing on group
and individual insurance products is based on the expected pay-out of benefits
calculated through the use of assumptions for mortality, morbidity, expenses,
persistency and investment returns, as well as certain macroeconomic factors
such as inflation. Investment-oriented products are priced based on various
factors, including investment return, expenses and persistency, depending on the
specific product features. Product specifications are designed to prevent
greater than expected mortality and the Company periodically monitors mortality
and morbidity assumptions. Ongoing internal underwriting audits, conducted at
multiple levels, also monitor consistency of underwriting requirements and
philosophy. The Company's underwriters have extensive experience in the field
and the Company is committed to periodic retraining in order to keep its
underwriters familiar with the latest industry trends.
RESERVES
In accordance with applicable insurance regulations, the Company
establishes and carries as liabilities actuarially determined reserves which are
calculated to meet the Company's future obligations. The reserves are based on
actuarially recognized methods using prescribed morbidity and mortality tables
in general use in the United States, which are modified to reflect the Company's
actual experience when appropriate. These reserves are computed at amounts that,
with additions from 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
reported but not yet paid, claims incurred but not reported and claims in the
process of settlement. The Company's reserves for assumed reinsurance are
computed on bases essentially comparable to direct insurance reserves.
For the Company's individual life policies, universal life and
interest-sensitive whole life reserves are set according to premiums collected,
plus interest credited, less charges. Other fixed death benefit 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 stability of the Company's annuity and other interest-sensitive life
insurance reserves is enhanced by policy restrictions on withdrawal of funds.
Withdrawals in excess of allowable penalty-free amounts are assessed a surrender
charge during a penalty period of approximately 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. In addition, the Company's fixed MVA annuities
discourage surrender by policyholders. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources -- Operating Subsidiaries". The Company'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 GAAP, which may vary from
statutory accounting practices.
REINSURANCE
The Company follows the standard industry practice of reinsuring ("CEDING")
portions of its insurance risks with other insurance companies under traditional
indemnity reinsurance agree-
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ments. This practice permits the Company to write policies in amounts larger
than the risk it is willing to retain. Each of the Company's lines of business
enters into reinsurance arrangements with different insurance carriers as it
deems appropriate. In general, the Company has entered into yearly renewable
term insurance contracts. The Company's method for allocating reinsurance
obligations among such reinsurers varies by product line. As of December 31,
1994, 1995 and 1996, the amount of premiums ceded to third-party reinsurers
totaled $184 million, $313 million and $413 million, respectively. The Company's
principal unaffiliated reinsurers of individual life insurance policies at
December 31, 1996 (and their corresponding A.M. Best rating as of June 30, 1996)
were: Lincoln National Life Insurance Company ("A+"), Manulife Reassurance
Corporation("A++"), Sun Life Assurance Company of Canada ("A++") and TMG Life
Insurance Company ("A++"). As of December 31, 1996, the life insurance in force
ceded to each of these reinsurers was $1.7 billion, $3.6 billion, $2.0 billion
and $1.7 billion, respectively, which, in the aggregate, constituted
approximately 21% of the Company's total ceded life insurance in force, other
than amounts ceded in respect of COLI. As of December 31, 1996, the Company also
ceded approximately $24 billion of
individual and group life insurance in force to companies affiliated with The
Hartford and assumed approximately $122 million of premiums relating to stop
loss and short-term disability insurance sold by the Company but written by a
number of The Hartford's property-casualty subsidiaries.
Reinsurance does not discharge the Company's obligations to pay policy
claims on the reinsured business. The Company remains responsible for policy
claims to the extent the reinsurer fails to pay such claims. The Company
therefore seeks to enter into reinsurance treaties with highly rated reinsurers
that have passed an internal due diligence review. At December 31, 1996,
excluding any reinsurance with its affiliates, of the $347 billion of gross
insurance in force, the Company had ceded to reinsurers approximately $89
billion of insurance in force.
The Company uses reinsurance to manage the net exposure in its individual
life and group life insurance lines of business. The risks that are reinsured
vary by product line. The Company does not currently reinsure any of the risks
associated with group short-term disability insurance. As of January 1, 1997,
the Company increased the level at which it retains the risk on any one
individual life insurance policy to $2.5 million from $1.25 million. The Company
reinsures mortality risk in excess of $1,000,000 on any single life covered by a
group life insurance policy and retains no more than $8,000 of monthly benefits
per insured life on group long-term disability policies. In addition, the
Company reinsures its accidental death and dismemberment and group travel
businesses for coverage exposure in excess of $250,000 per life and maintains
catastrophic coverage of up to $200 million for exposure in excess of $500,000
where more than two policyholders are involved in a catastrophe. The Company's
COLI business, which was acquired from Mutual Benefit, is 84% reinsured,
primarily through Mutual Benefit and its successor, MBL Life Assurance
Corporation, and assets have been placed in a security trust to support the
reinsurance recoverable asset which was $3.5 billion in 1992 and $3.8 billion as
of December 31, 1996.
INVESTMENT OPERATIONS
GENERAL
The Company's investment operations are managed by its investment strategy
group which reports directly to senior management of the Company and consists of
a risk management unit and portfolio management unit. 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 general asset allocation, duration, CONVEXITY and
other characteristics of the Company's general account and guaranteed separate
account investment portfolios. The investment staff of The Hartford executes the
strategic investment decisions of the portfolio management unit, including the
identification and purchase of securities that fulfill the objectives of the
investment strategy group.
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<PAGE> 77
The primary investment objective of the Company 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). The Company
is exposed to two primary sources of investment risk: credit risk, relating to
the uncertainty associated with the continued ability of a given obligor to make
timely payments of principal and interest, and interest rate risk, relating to
the market price and/or cash flow variability associated with changes in market
YIELD CURVES. The Company manages credit risk through industry and issuer
diversification and asset allocation. The Company manages interest rate risk as
part of its asset/liability management strategies, including the use of certain
hedging techniques (which may include the use of certain financial derivatives),
product design, such as the use of MVA features and surrender charges, and
proactive monitoring and management of certain non-guaranteed elements of the
Company's products (such as the resetting of credited interest rates for
policies that permit such adjustments). For a further discussion of hedging
strategies, including derivatives utilization, see "-- Asset/Liability
Management Strategies", as well as notes to consolidated financial statements
included elsewhere in this Prospectus.
The Company's separate accounts reflect two categories of risk assumption:
non-guaranteed separate accounts totaling $39.4 billion as of December 31, 1996,
wherein the policyholder assumes substantially all of the risk and reward, and
guaranteed separate accounts totaling $10.4 billion as of December 31, 1996,
wherein the Company contractually guarantees either a minimum return or account
value to the policyholder. The investment strategy followed varies by fund
choice, as outlined in the applicable fund prospectus or separate account plan
of operations. Non-guaranteed products include variable annuities and variable
life insurance contracts. The funds underlying such contracts are managed by the
investment staff of The Hartford and a variety of independent money managers,
including Wellington, Putnam and Dean Witter. Guaranteed separate account
products primarily consist of modified guaranteed individual annuities and
modified guaranteed life insurance, and generally include MVA features to
mitigate the disintermediation risk in the event of surrenders. Virtually all
the assets in the guaranteed separate accounts are fixed maturity securities
and, as of December 31, 1996, $10.2 billion, or approximately 99%, of the fixed
maturity securities portfolio within the guaranteed separate accounts was
investment grade or better. See "-- Asset/Liability Management Strategies".
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 investment strategy group works closely with the
business lines to develop 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 such
product line's individual risk and return objectives. For example, fixed
maturities are managed according to duration and return guidelines based
generally on the duration, cash payment and other characteristics of the
underlying liabilities. Fixed maturities in the Company's general account are
identified as available for sale and are carried at fair value with the net
unrealized investment gains and losses reflected as a component of stockholder's
equity. Equity securities are stated at fair value.
EFFECTS OF INTEREST RATES ON INVESTMENT OPERATIONS
From June 1991 to September 1993, interest rates fell more than 300 basis
points. This dramatic decline in rates, combined with an unprecedented push by
financial intermediaries to refinance mortgages, resulted in prepayment levels
substantially above the expectations and historical experience for the entire
investment community, including the Company.
In particular, the duration of the Company's CMO holdings in the Closed
Book GRC investment portfolio significantly shortened. Hedging performed to
mitigate prepayment acceleration in this portfolio was insufficient to cover
actual prepayment experience. As interest rates rose in 1994,
77
<PAGE> 78
prepayment activity declined as fast as it had accelerated during the falling
interest rate environment, causing the duration of the CMO holdings in the
Closed Book GRC investment portfolio to extend relative to expectations. Thus,
the effect of actions taken by the Company to increase asset duration (to offset
fast prepayments) in the Closed Book GRC investment portfolio in 1992 and 1993
was intensified by extension of the mortgage collateral for such portfolio in
1994. This produced a portfolio with assets having a longer duration than the
related GRC liabilities.
In response to the corresponding losses associated with the Closed Book GRC
investment portfolio, the Company instituted an improved risk management process
during 1995 and 1996, including the division of the Company's investment
strategy group into two independently managed units -- a risk management unit
and a portfolio management unit. The Company also reduced its exposure to MBSs
and CMOs and recently enhanced its computerized analytical systems to allow for
more effective management of its portfolio positions and potential exposures to
identify potential asset/liability mismatches earlier. As a result, all material
portfolios, including Closed Book GRC, are now reviewed on a monthly basis to
determine if the net economic sensitivity of the assets and the related
liabilities to interest changes is within a pre-determined range. The Company
believes that the establishment of a separate risk management unit and more
frequent review of all its material portfolios adds an important oversight
mechanism to the Company's investment management operation.
The assets and liabilities of the Company's material portfolios also are
now stressed against parallel and non-parallel interest rate shifts of up to
plus or minus 300 basis points along the yield curve. Based on recent interest
rate volatility, a 300 basis point shift represents a shift of approximately
three standard deviations occurring over the course of a full year and
implicitly assumes that the affected portfolio is not managed. Since such a
shift generally will occur over more than one day and the Company's portfolios
are modeled and managed at least monthly, management believes that its
monitoring process will minimize the effects of a dramatic interest rate shift.
In the event of an interest rate shift of 100 basis points or more, the Company
would immediately test all material portfolios for any potential asset/liability
mismatches and would adjust any of its portfolios that failed to comply with its
written guidelines. Thus, management believes that the quantification of the
impact of interest rate shifts of greater than plus or minus 300 basis points is
of limited value.
The Company's analysis of non-parallel interest rate shifts is based upon a
comparison of the "key rate" or "partial" durations of its assets and
liabilities. At a minimum, the assets and liabilities are tested at the one,
two, five, seven, ten and twenty-year points on the yield curve. When coupled
with its analysis of parallel interest rate shifts, the Company is able to
assess the risk of various interest rate shifts within 300 basis points,
including parallel shifts along the yield curve as well as a flattening,
steepening and other such non-parallel shifts on the yield curve. The results of
such analyses demonstrate a very close matching of the Company's assets and
liabilities, consistent with written portfolio guidelines maintained by the
Company. By testing monthly, the Company believes that it can detect
asset/liability mismatches earlier and take action to reduce the potential
impact of interest rate fluctuations on the portfolio.
In addition, the Company annually performs asset adequacy analysis for all
of its life insurance subsidiaries. This includes cash flow testing for all
material product lines. These analyses are accomplished by projecting, under a
number of possible future interest rate scenarios, the anticipated cash flows
from such business and the assets required to support such business. The first
seven of these scenarios are required by state insurance laws. Projections also
are made using several additional scenarios which involve more extreme
fluctuations in future interest rates. The results of these tests demonstrate
that the projected cash flows for the assets are sufficient to provide the cash
flows needed for the liabilities under the scenarios tested.
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<PAGE> 79
DESCRIPTION OF INVESTMENT ASSETS IN GENERAL ACCOUNT
The following table sets forth by category the invested assets in the
Company's general account as of December 31, 1996.
INVESTED ASSETS BY CATEGORY
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
--------------------------------
PERCENT OF
TOTAL
INVESTED AND
SEPARATE
AMOUNT ACCOUNT ASSETS
------------- --------------
(IN MILLIONS)
<S> <C> <C>
Fixed maturity securities, available-for-sale, at fair value.... $15,711 22.6%
Equity securities, available-for-sale, at fair value............ 119 0.2
Policy loans, at outstanding balance(1)......................... 3,839 5.5
Other investments at cost(2).................................... 161 0.2
------- -----
Total general account invested assets...................... 19,830 28.5
Total separate account assets.............................. 49,770 71.5
------- -----
Total invested assets.................................... $69,600 100.0%
======= =====
</TABLE>
- ---------------
(1) Policy loans, which have a current weighted average interest rate of 11.9%,
are secured by the cash value of the related life insurance policy. These
loans do not mature in the conventional sense but expire in conjunction with
the related policy liabilities.
(2) The Company has approximately $2 million in commercial mortgages in its
general account.
The following table sets forth by category the fixed maturity securities,
including CMOs, MBSs and other asset-backed securities ("ABSS"), held in the
Company's general account as of December 31, 1996.
FIXED MATURITY SECURITIES BY CATEGORY
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
-----------------------------------------
WEIGHTED
AVERAGE
AMOUNT YIELD(1) PERCENTAGE
------------- -------- ----------
(IN MILLIONS)
<S> <C> <C> <C>
Fixed maturity securities:
Corporates............................................ $ 7,587 6.80% 48.3%
CMOs.................................................. 2,150 6.58 13.7
Gov't/gov't agencies -- U.S. (including municipals)... 621 5.85 3.9
MBSs-Agency........................................... 402 7.36 2.6
ABSs.................................................. 2,693 6.31 17.1
Gov't/gov't agencies -- Foreign....................... 395 7.24 2.5
Commercial mortgage-backed securities................. 1,098 7.68 7.0
Short-terms........................................... 765 5.97 4.9
------- ---- -----
Total............................................ $15,711 6.69% 100.0%
======= ==== =====
</TABLE>
- ---------------
(1) For the year ended December 31, 1996, the calculated yield on average fixed
maturities excluding derivatives was 6.69%, while the calculated yield
including derivative hedge income was 6.48%. The calculated yield represents
earnings on fixed maturities, excluding net realized capital gains and
losses (and excluding or including derivative hedge income, as applicable),
divided by average fixed maturities.
As of December 31, 1996, the Company had approximately 16.3% of its fixed
maturity securities portfolio invested in MBSs and CMOs. MBSs and CMOs are
subject to significant prepayment and payment extension risk, since underlying
mortgages may be repaid more or less rapidly than scheduled. See "Risk
Factors -- Interest Rate Risk". As a result, holders of MBSs and CMOs may
receive prepayments which cannot be reinvested at yields comparable to the rates
on such securities or may be forced to liquidate securities at a loss to meet
liquidity obligations. The Company measures and manages prepayment and payment
extension risk through option-adjusted
79
<PAGE> 80
modeling of the market price sensitivity (duration and convexity) of all of its
assets, including MBSs and CMOs. For most MBSs and CMOs, prepayment risk causes
"negative convexity". Convexity can be increased for a portfolio by adding
securities or derivatives that have significant "positive convexity". In
particular, the Company uses interest rate caps and floors to increase portfolio
convexity and reduce the market price sensitivity of its MBSs and CMOs. At
December 31, 1996, the net weighted average coupon and weighted average life for
the Company's MBS portfolio was 7.74% and 5.2 years, respectively. At December
31, 1996, the net weighted average coupon of the mortgage collateral supporting
the Company's CMO portfolio was 6.75%, and the weighted average life of the CMO
portfolio was 4.6 years. The Company has reduced its exposure to CMOs and MBSs,
from 24% of the total fixed maturity securities as of December 31, 1995 to 16.3%
as of December 31, 1996.
The following table sets forth, by category, the CMOs in the Company's
general account as of December 31, 1996.
COLLATERALIZED MORTGAGE OBLIGATIONS(1)
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
--------------------------
PERCENTAGE
CARRYING OF
VALUE INVESTED
(AT MARKET) CMO ASSETS
----------- ----------
(IN
MILLIONS)
<S> <C> <C>
PAC........................................................ $ 786 36.6%
INVERSE FLOATERS........................................... 323 15.0
PRINCIPAL-ONLY SECURITIES.................................. 167 7.8
INTEREST-ONLY SECURITIES................................... 126 5.9
ACCRUAL SECURITIES......................................... 321 14.9
SEQUENTIAL-PAY SECURITIES.................................. 89 4.1
FLOATERS................................................... 252 11.7
Other...................................................... 86 4.0
------ -----
Total................................................. $ 2,150 100.0%
====== =====
</TABLE>
- ---------------
(1) As of December 31, 1996, approximately 56% of CMO holdings had implicit or
explicit protection against prepayment.
As of December 31, 1996, $15.66 billion or approximately 99.7% of the fixed
maturity securities portfolio was investment-grade securities or better, and
only $49 million or .3% of the fixed maturity securities portfolio was invested
in below investment-grade securities (less than "BBB"). The following table sets
forth the ratings of the fixed maturity securities in the Company's general
account as of December 31, 1996.
QUALITY DISTRIBUTION OF FIXED MATURITY SECURITIES(1)
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
----------------------------------------
PERCENTAGE OF TOTAL
AMOUNT GENERAL ACCOUNT ASSETS
------------- ----------------------
(IN MILLIONS)
<S> <C> <C>
U.S. Government/agency............................ $ 353 2.2%
Short-term........................................ 765 4.9
AAA............................................... 4,695 29.9
AA................................................ 1,902 12.1
A................................................. 5,366 34.2
BBB............................................... 2,581 16.4
BB and below...................................... 49 0.3
------- -----
Total fixed maturity securities.............. $15,711 100.0%
======= =====
</TABLE>
- ---------------
(1) The ratings referenced in this section are based on the S&P system or the
equivalent rating of another nationally recognized rating organization or,
if not rated, are internal ratings assigned by the Company based on the
Company's internal analysis of such securities. The Company holds
approximately 3.6% of non-rated securities.
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<PAGE> 81
At December 31, 1996, approximately 10.3% of the Company's fixed maturity
portfolio was invested in private placement securities (including Rule 144A
offerings). These securities are not registered with the Commission and
generally only can be purchased by certain institutional investors. Private
placement securities are thus generally less liquid than public securities.
However, covenants for private placements are generally designed to mitigate the
impact of such increased liquidity risk. Most of the private placement
securities in the Company's portfolio are rated by nationally recognized rating
organizations. If such securities are not so rated, the Company assigns ratings
for internal monitoring purposes based on the Company's general understanding of
methodologies employed by the nationally recognized rating organizations.
The estimated maturities of the Company's fixed and variable rate
investments in its general account, along with their respective yields at
December 31, 1996, are reflected in the table below. ABSs, MBSs and CMOs are
distributed to maturity year based on the Company's estimate of the rate of
future prepayments of principal over the remaining life of the securities. These
estimates are developed using prepayment speeds reported in broker consensus
data. Such estimates are derived from prepayment speeds experienced at the
interest rate levels projected for the applicable underlying mortgages and can
be expected to vary from actual experience. Expected maturities differ from
contractual maturities due to call or prepayment provisions.
FIXED MATURITY INVESTMENTS MATURITY SCHEDULE
<TABLE>
<CAPTION>
ESTIMATED MATURITY
-----------------------------------------------------------------------
1997 1998 1999 2000 2001 THEREAFTER TOTAL
------ ------ ------ ------ ------ ---------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
ABSS, MBSS AND CMOS(1)
Variable rate(2)
Amortized cost....... $ 185 $ 111 $ 80 $ 233 $ 157 $ 891 $ 1,657
Market value......... 183 131 171 226 148 851 1,710
Pre-tax yield(3)..... 5.97% 6.87% 6.60% 6.51% 6.63% 7.21% 7.09%
Fixed rate
Amortized cost....... $ 879 $ 630 $ 782 $ 709 $ 473 $1,188 $ 4,661
Market value......... 880 626 773 706 468 1,180 4,633
Pre-tax yield(3)..... 6.38% 6.76% 6.49% 6.74% 6.76% 6.96% 6.69%
BONDS AND NOTES
Variable rate(2)
Amortized cost....... $ 183 $ 72 $ 113 $ 90 $ 16 $ 248 $ 722
Market value......... 181 76 90 94 17 248 706
Pre-tax yield(3)..... 4.91% 5.74% 3.03% 5.97% 5.99% 6.72% 5.54%
Fixed rate
Amortized cost....... $1,673 $ 692 $ 919 $ 817 $ 752 $3,766 $ 8,619
Market value......... 1,692 689 918 821 751 3,791 8,662
Pre-tax yield(3)..... 6.35% 6.47% 6.43% 6.72% 6.84% 7.16% 6.80%
TOTAL FIXED MATURITIES
Amortized cost.......... $2,920 $1,505 $1,894 $1,849 $1,398 $6,093 $15,659
Market value............ 2,936 1,522 1,952 1,847 1,384 6,070 15,711
Pre-tax yield(3)........ 6.25% 6.59% 6.26% 6.66% 6.78% 7.11% 6.74%
</TABLE>
- ---------------
(1) With respect to the ABS, MBS and CMO portfolio of the Company, a 100 basis
point increase in interest rates would be expected to decrease the duration
of such portfolio from approximately 3.6 to 3.4 years; a 100 basis point
decrease in interest rates would be expected to increase the duration of
such portfolio from approximately 3.6 to 3.7 years. The maturities noted in
this table would be significantly impacted if interest rates were to
decrease by 100 basis points or increase by 300 basis points from December
31, 1996 levels.
(2) Variable rate securities are instruments for which the coupon rates move
directly with or based upon an index rate. These securities include
interest-only securities and inverse floaters, which represent less than 1%
and 2.48%, respectively, of the Company's invested assets. Interest-only
securities, for which cost approximates market, have an average life of 5.1
years and earn an average yield of 14.7%. Inverse floaters, for which cost
approximates market, have an average life of 4.8 years and earn an average
yield of 6.42%. Average yields are based upon estimated cash flows using
prepayment speeds reported in broker consensus data.
(3) Pre-tax yields do not reflect yields on derivative instruments though
derivative adjustments are included in fixed maturity amortized cost and
market value.
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<PAGE> 82
ASSET/LIABILITY MANAGEMENT STRATEGIES
Derivatives play an important role in facilitating the management of
interest rate risk, creating opportunities to efficiently fund obligations to
policyholders and contractholders, hedge against risks that affect the value of
certain liabilities and adjust broad investment risk characteristics as a result
of any significant changes in market risks. As an end user of derivatives, the
Company employs a variety of derivative financial instruments, including swaps,
caps, floors, forwards and exchange-traded financial futures and options, in
order to hedge exposure to price, foreign currency and/or interest rate risk on
anticipated investment purchases or existing assets and liabilities. The
notional amounts of derivatives contracts represent the basis upon which pay and
receive amounts are calculated and are not reflective of credit risk for
derivatives contracts. Credit risk for derivatives contracts is limited to the
amounts calculated to be due to the Company on such contracts. The Company
believes it maintains prudent policies regarding the financial stability and
credit standing of its major counterparties and typically requires credit
enhancement provisions to further limit its credit risk. Many of these
derivatives contracts are bilateral agreements that are not assignable without
the consent of the relevant counterparty. Notional amounts pertaining to
derivative financial instruments of the Company totaled $10.9 billion at
December 31, 1996 ($8.3 billion of which related to life insurance investments
and $2.6 billion of which related to life insurance liabilities). Management
believes that the use of derivatives allows the Company to sell more innovative
products, capitalize on market opportunities and execute a more flexible
investment strategy for its general account portfolio. The strategies described
below are used by the Company to manage the aforementioned risks associated with
its obligations.
ANTICIPATORY HEDGING. For certain liabilities, the Company commits to the
price of the product prior to receipt of the associated premium or deposit. The
Company routinely executes anticipatory hedges to offset the impact of any
changes in asset prices arising from interest rate changes pending the receipt
of the premium or deposit payment and the resulting purchase of the assets.
These hedges involve taking a long position in an interest rate futures position
or entering into an interest rate swap with duration characteristics equivalent
to the associated liabilities or anticipated investments. The notional amount of
derivatives used for anticipatory hedges totaled $392 million and $718 million
at December 31, 1996 and 1995, respectively.
LIABILITY HEDGING. Several products obligate the Company to credit a
return to the contractholder which is indexed to a market rate. In order to
hedge risks associated with these products, the Company typically enters into
interest rate swaps to convert the contract rate into a rate that trades in a
more liquid and efficient market. This hedging strategy enables the Company to
customize contract terms and conditions to customer objectives and satisfies the
Company's asset/liability matching policy. Additionally, interest rate swaps are
used to convert certain fixed contract rates into floating rates, thereby
allowing them to be appropriately matched against floating rate assets. The
notional amount of derivatives used for liability hedging totaled $2.6 billion
and $1.7 billion at December 31, 1996 and 1995, respectively.
ASSET HEDGING. To meet the various policyholder obligations and to provide
investment risk diversification, the Company may combine two or more derivative
financial instruments to achieve the investment characteristics that match the
associated liability. The use of derivatives in this regard effectively
transfers unwanted investment risks or attributes to others. The selection of
the appropriate derivatives depends on the investment risk, the liquidity and
efficiency of the market and the asset and liability characteristics. The
notional amount of asset hedges totaled $2.4 billion and $3.0 billion at
December 31, 1996 and 1995, respectively.
PORTFOLIO HEDGING. The Company periodically compares the duration and
convexity of its portfolios of assets to their corresponding liabilities and
enters into portfolio hedges to reduce certain differences to acceptable levels.
Portfolio hedges reduce the mismatch between assets and liabilities and offset
the potential cash flow impact caused by interest rate changes. The notional
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<PAGE> 83
amount of portfolio hedges totaled $5.5 billion and $4.2 billion at December 31,
1996 and 1995, respectively.
The Company is committed to maintaining effective risk management
discipline. Derivatives used by the Company must support at least one of the
following objectives: to manage the risk arising from price, interest rate and
foreign currency volatility, to manage liquidity or to control transaction
costs. The Company has established credit limits, diversification standards and
review procedures for all credit risk, whether borrower, issuer or counterparty.
Each of the Company's segments utilizes the aforementioned derivatives
strategies. In particular, the Annuity and Employee Benefits segments use
anticipatory hedges to protect against adverse investment results from new
business sales due to interim interest rate movements and the Annuity segment
also uses a number of liability hedges in order to convert certain fixed rate
liabilities into floating rate liabilities. In contrast, the Individual Life
Insurance segment uses derivatives infrequently, other than utilizing certain
liability hedges (such as the purchase of interest rate floors) to hedge against
a dramatic decline in interest rates for products with long-term minimum
credited rate guarantees. In June 1996, FASB issued an exposure draft of an
accounting standard which, if adopted in the form in which it was issued, would
require companies to report derivatives on the balance sheet at fair value with
changes in fair value recorded in income or equity. Under SFAS No. 115,
derivatives linked to assets are currently reflected in the fair value of such
assets reported on the Company's balance sheet. This exposure draft also would
change the accounting for derivatives used in hedging strategies from
traditional deferral accounting to a current recognition approach which could
impact a company's income statement and balance sheet and expand the definition
of a derivative instrument to include certain structured securities currently
accounted for as fixed maturities. This exposure draft has drawn widespread
criticism primarily because the required accounting treatment would not match
the perceived economic effect of such hedging strategies. As a result of, among
other things, the concerns and criticisms in comment letters and at public
hearings held on this exposure draft, the Company is unable to predict the form
that the final accounting standard, if adopted, may take and believes it would
be inappropriate to speculate on the effects of any such adoption at this time.
See "Risk Factors -- Potential New Accounting Policy for Derivatives".
For a discussion of (i) the investments of the Company segregated by major
category, (ii) the types of derivatives related to the type of investment and
their respective notional amounts and the accounting policies utilized by the
Company for derivative financial instruments, see notes to consolidated
financial statements included elsewhere in this Prospectus.
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<PAGE> 84
INSURANCE LIABILITY CHARACTERISTICS
Insurance liabilities, other than non-guaranteed separate accounts, which
were backed by $40.6 billion in total assets (including investments of $30.2
billion), totaled $30.8 billion (net of ceded reinsurance) at December 31, 1996.
These insurance liabilities consisted of future policy benefits of $4 billion,
other policyholder funds of $22.2 billion, guaranteed separate accounts of $10.4
billion and reinsurance recoverables of $(5.8) billion. Matching of the duration
of the investments with respective policyholder obligations is an explicit
objective of the Company's management strategy. The Company's insurance policy
liabilities, along with estimated duration periods based on the Company's
internal actuarial assumptions, can be summarized based on investment needs in
the five categories described below at December 31, 1996.
ESTIMATED DURATION YEARS(1)
<TABLE>
<CAPTION>
BALANCE AT LESS
DECEMBER 31, THAN 1-5 6-10 OVER 10
DESCRIPTION 1996 1 YEAR YEARS YEARS YEARS
- ------------------------------------------- ------------ ------ ----- ----- -------
(IN BILLIONS)
<S> <C> <C> <C> <C> <C>
Fixed rate asset accumulation vehicles..... $ 13.8 $1.9 $ 8.2 $3.7 $ --
Indexed asset accumulation vehicles........ 0.2 0.2 -- -- --
Interest credited asset accumulation
vehicles................................. 13.6 4.2 5.1 3.7 0.6
Long-term payout liabilities............... 2.7 0.1 0.6 0.8 1.2
Short-term payout liabilities.............. 0.5 0.5 -- -- --
----- ---- ----- ---- ----
Total................................. $ 30.8 $6.9 $13.9 $8.2 $ 1.8
===== ==== ===== ==== ====
</TABLE>
- ---------------
(1) The duration of liabilities reflects management's assessment of the market
price sensitivity of the liabilities to changes in market interest rates,
and is not necessarily reflective of the projected liabilities' cash flows
under any specific scenario.
FIXED RATE ASSET ACCUMULATION VEHICLES. Products in this category require
the Company to pay a fixed rate of interest for a specified period of time. The
cash flows are not interest rate sensitive because the products include an MVA
feature and the liabilities have protection against the early withdrawal of
funds through surrender charges. The primary risk associated with these products
is that the spread between investment return and credited rate is not sufficient
to earn the Company's targeted return. Product examples include fixed rate
annuities with an MVA feature and fixed rate GRC. Contract duration is reflected
above and is dependent on the policyholder's choice of guarantee period. The
weighted average credited policyholder rate for these policyholder liabilities
was 6.71% at December 31, 1996.
INDEXED ASSET ACCUMULATION VEHICLES. Products in this category are similar
to the fixed rate asset accumulation vehicles, but require the Company to pay a
rate that is determined by an external index. The amount and/or timing of cash
flows will therefore vary based on the level of the particular index. The
primary risks inherent in these products are similar to the fixed rate asset
accumulation vehicles, with an additional risk of changes in the index adversely
affecting profitability. Product examples include indexed GRC with an estimated
duration of up to two years. The weighted average credited rate was 5.78% at
December 31, 1996.
INTEREST CREDITED ASSET ACCUMULATION VEHICLES. Products in this category
credit interest to policyholders, subject to market conditions and minimum
guarantees. Policyholders may surrender at book value but are subject to
surrender charges for an initial period. The primary risks vary depending on the
degree of insurance element contained in the product. Product examples include
universal life insurance contracts and the general account portion of the
Company's variable annuity products. Liability duration is short- to
intermediate-term and is reflected in the table above. The average credited rate
for these liabilities was 5.52% at December 31, 1996, excluding policy loans.
LONG-TERM PAYOUT LIABILITIES. Products in this category are long-term in
nature and may contain significant actuarial (including mortality and morbidity)
pricing risks. The cash flows are not
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interest sensitive, but do vary based on the timing and amount of benefit
payments. The primary risks associated with these products are that the benefits
will exceed expected actuarial pricing and/or the investment return will be
lower than assumed in pricing. Product examples include structured settlement
contracts, on-benefit annuities (i.e., the annuitant is currently receiving
benefits thereon) and long-term disability contracts. Contract duration is
generally six to ten years but, at times, exceeds 30 years. Policy liabilities
under these contracts are not interest-sensitive.
SHORT-TERM PAYOUT LIABILITIES. These liabilities are short-term in nature
with a duration of less than one year. The primary risks associated with these
products are determined by the non-investment contingencies such as mortality or
morbidity. Liquidity is of greater concern than for the long-term payout
liabilities. Products include individual and group-term life insurance contracts
and short-term disability contracts.
COMPETITION
The Company competes with the over 2,000 life insurance companies in the
United States, as well as certain banks, securities brokerage firms, investment
advisors and other financial intermediaries marketing insurance products,
annuities, mutual funds and other retirement-oriented investments. Some of these
companies have greater financial resources and currently have higher financial
strength and claims-paying ability ratings from major rating agencies than the
Company. National banks, in particular, may become more significant competitors
in the future for insurers who sell annuities, including the Company, as a
result of recent court decisions and regulatory actions discussed under
"-- Insurance Regulation -- Regulation at Federal Level". Although the effect of
these recent developments on the Company and its competitors is uncertain, both
the persistency of the Company's existing products and the Company's ability to
sell products could be materially impacted in the future. Also, several
proposals to repeal or modify the Glass-Steagall Act and the Bank Holding
Company Act have been made by members of Congress and the Executive Branch.
Certain of these proposals would repeal or modify the current restrictions that
prevent banks from being affiliated with insurance companies. None of these
proposals has yet been enacted, and it is not possible to predict whether any of
these proposals will be enacted or, if enacted, their potential effect on the
Company or its competitors.
The fundamental competitive factors affecting the sale of the Company's
products are price, the levels of commissions, charges and other expenses,
financial strength and claims-paying ability ratings, distribution capabilities,
reputation, quality of service, visibility in the marketplace and range of
products. For variable life insurance and annuity products, additional
competitive factors include mutual fund options, product design and investment
performance ratings. The Company's ability to compete is affected in part by its
ability to provide competitive products and quality service to the consumer,
wholesalers, general agents, licensed insurance agents and broker-dealers.
Management believes that its alternative and competing distribution systems
provide the Company with a competitive advantage in penetrating and
communicating with its growing target markets.
The Company also competes for distributors of its products such as banks,
broker-dealers and wholesalers. Management believes the principal bases upon
which insurance and financial services companies compete for distribution
channels are the services provided to, and the relationships developed with,
broker-dealers, wholesalers and other distributors, as well as compensation and
the variety and quality of products. Since the Company does not have a career
agency force, it must compete with other insurers and financial services
providers to attract and maintain productive independent distributors to sell
its products. Moreover, the Company does not have exclusive agency agreements
with many of its distributors and believes that certain of them sell products
similar to those marketed by the Company for other insurance companies.
In addition, the investment performance of investment managers chosen by
the Company to manage the assets related to its products may vary and
non-competitive investment performance could adversely affect the Company's
ability to market its products.
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RATINGS
Ratings are an important factor in establishing the competitive position of
insurance companies. The Company's principal insurance subsidiaries currently
are rated "A+ (superior)" by A.M. Best and have claims-paying ability ratings of
"AA" from S&P and "AA+" from Duff & Phelps, and one such insurance subsidiary,
Hartford Life, has an insurance financial strength rating of "Aa3" from Moody's.
A ratings downgrade (or the potential for such a downgrade) of the Company
could, among other things, materially increase surrender levels, adversely
affect relationships with broker-dealers, banks, agents, wholesalers and other
distributors of the Company's products and services, negatively impact
persistency, adversely affect the Company's ability to compete and thereby
materially and adversely affect the Company's business, financial condition and
results of operations. For more information on the ratings of the Company, see
"Risk Factors -- Importance of Company Ratings".
A.M. Best's financial condition ratings for insurance companies currently
range from "A++ (superior)" to "F (in liquidation)". These ratings reflect A.M.
Best's opinion of an insurance company's financial strength, operating
performance and ability to meet its obligations to policyholders. Moody's
insurance financial strength ratings currently range from "Aaa (exceptional)" to
"C (lowest rated)". Such ratings are an opinion of the ability of an insurance
company to repay senior policyholder claims and obligations. S&P's insurance
claims-paying ability ratings currently range from "AAA (superior)" to "CCC
(extremely vulnerable)". Such a rating is an opinion of an operating insurance
company's financial capacity to meet the obligations of its insurance policies
in accordance with their terms. Duff & Phelps' claims-paying ability ratings
currently range from "AAA (negligible risk factors)" to "DD (liquidation)". Such
a claims-paying ability rating relates to the likelihood of timely payment of
policyholder and contractholder obligations.
The foregoing ratings reflect each rating agency's opinion of the Company's
principal life insurance subsidiaries' financial strength, operating performance
and ability to meet its obligations to policyholders and are not evaluations
directed toward the protection of investors.
INSURANCE REGULATION
GENERAL REGULATION AT STATE LEVEL
The insurance business of the Company is subject to comprehensive state and
federal regulation and supervision throughout the United States. The laws of the
various jurisdictions establish supervisory agencies with broad administrative
powers with respect to, among other things, licensing to transact business,
licensing agents, admittance of assets, regulating premium rates, approving
policy forms, regulating unfair trade and claims practices, establishing reserve
requirements and solvency standards, fixing maximum interest rates on life
insurance policy loans and minimum rates for accumulation of surrender values,
restricting certain transactions between affiliates and regulating the type,
amounts and valuations of investments permitted.
Several states, including the State of Connecticut, regulate affiliated
groups of insurers, such as the Company, under insurance holding company
legislation. As a holding company with no significant business operations of its
own, the Company relies on dividends from its subsidiaries, which are primarily
domiciled in the State of Connecticut, as the principal source of cash to meet
its obligations, including the payment of principal and interest on debt
obligations of the Company and the payment of dividends to holders of its
capital stock. The payment of dividends by Connecticut-domiciled life insurers
is limited under the insurance holding company laws of Connecticut which require
notice to and approval by the Connecticut Insurance Commissioner for the
declaration or payment of any dividend that, together with the other dividends
or distributions made within the preceding twelve months, exceeds the greater of
(i) 10% of the insurer's policyholder surplus as of December 31 of the preceding
year or (ii) net gain from operations for the twelve-month period ending on
December 31 last preceding, in each case determined under statutory insurance
accounting practices. In addition, if any dividend of a Connecticut-domiciled
insurer exceeds the
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insurer's earned surplus, it requires the approval of the Connecticut Insurance
Commissioner. Based on these limitations and statutory results as of December
31, 1996, the Company would have been able to receive $132 million in dividends
in 1997 from Hartford Life and Accident, the Company's direct subsidiary,
without obtaining the approval of the Connecticut Insurance Commissioner.
Life insurance companies are required to establish an AVR consisting of two
components: (i) a "default component" which provides for future credit-related
losses on fixed maturity investments and (ii) an "equity component" which
provides for losses on all types of equity investments, including real estate.
Insurers also are required to establish an IMR for fixed maturity net realized
capital gains and losses, net of tax, related to changes in interest rates. The
IMR is required to be amortized into statutory earnings on a basis reflecting
the remaining period to maturity of the fixed maturity securities sold. These
reserves are required by state insurance regulatory authorities to be
established as a liability on a life insurer's statutory financial statements,
but do not affect financial statements of the Company prepared in accordance
with GAAP. Although future additions to AVR will reduce the future statutory
surplus of the Company's insurance subsidiaries, the Company does not believe
that the impact under current regulations of such reserve requirements will
materially affect the ability of its insurance subsidiaries to grow its
statutory surplus and pay dividends to the Company in the future.
In addition, the Company is a holding company which owns directly or
indirectly all the outstanding shares of capital stock of certain insurance
company subsidiaries domiciled in Connecticut and New Jersey. Insurance laws of
such states applicable to the Company generally provide that no person may
acquire control of the Company, and thus indirect control of these insurance
company subsidiaries, without the prior approval of the appropriate insurance
regulators. In general, any person who acquires beneficial ownership of 10% or
more of the voting securities of the Company would be presumed to have acquired
such control, although the appropriate insurance regulators, upon application,
may determine otherwise. See "Description of Capital Stock -- Restrictions on
Ownership Under Insurance Laws".
Each insurance company is required to file detailed annual reports with
supervisory departments in each of the jurisdictions in which it does business
and its operations and accounts are subject to examination by such departments
at regular intervals. Each of the Company's life insurance subsidiaries prepare
statutory financial statements in accordance with accounting practices
prescribed or permitted by the insurance departments of their respective states
of domicile. Prescribed statutory accounting practices include publications of
the NAIC, as well as state laws, regulations and general administrative rules.
In addition, as part of their routine regulatory oversight process, state
insurance departments conduct detailed examinations periodically (generally once
every three to five years) of the books, records, accounts and market conduct of
insurance companies domiciled in their states. Such examinations are generally
conducted in cooperation with the departments of two or three other states under
guidelines promulgated by the NAIC. In 1996, a State of Connecticut association
examination report of the Company's operations for the four years ended December
31, 1993 found no material discrepancies. The Company anticipates that its next
examination will occur in 1998. In addition, in 1995, a State of New York
Insurance Department examination of the Company's market conduct for the three
years ended December 31, 1994 found no material deficiencies. The Company is
currently undergoing separate periodic market conduct examinations conducted by
the State of Connecticut (covering the period from July 1, 1995 through June 30,
1996), the State of Maryland (covering the period from January 1, 1992 through
December 31, 1995) and the State of California (covering the period from January
1, 1995 through June 30, 1996). Management does not expect any finding from any
of these examinations that would have a material adverse effect on the Company.
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REGULATORY INITIATIVES
State insurance regulators and the NAIC are continually re-examining
existing laws and regulations, specifically focusing on insurance company
investments and solvency issues, risk-adjusted capital guidelines,
interpretations of existing laws, the development of new laws, the
implementation of non-statutory guidelines and the circumstances under which
dividends may be paid. These initiatives may be adopted by the various states in
which the Company's insurance subsidiaries are licensed, but the ultimate
content and timing of any statutes and regulations adopted by the states cannot
be determined at this time. It is impossible to predict the future impact of
changing state and federal regulations on the Company's operations, and there
can be no assurance that existing or future insurance-related laws and
regulations will not become more restrictive.
In the 1970s, the NAIC developed a set of financial relationships or
"tests" known as the Insurance Regulatory Information System ("IRIS") that was
designed for early identification of companies that may require special
attention by insurance regulatory authorities. Insurance companies submit data
annually to the NAIC, which in turn analyzes the data using ratios covering
twelve categories of financial data with defined "usual ranges" for each such
category. An insurance company may fall out of the usual range for one or more
ratios because of specific transactions or events that are in and of themselves
immaterial or eliminated at the consolidated level. Generally, an insurance
company will become subject to regulatory scrutiny if it falls outside the usual
ranges of four or more of the ratios, and regulators may then act, if such
company has insufficient capital, to constrain the company's underwriting
capacity. The Company has determined that, for 1996, one IRIS ratio for Hartford
Life and two IRIS ratios for Hartford Life and Accident fall outside the usual
range due to normal business operations such as the ownership by Hartford Life
and Accident of Hartford Life.
The NAIC also has approved risk-based capital ("RBC") standards, which are
used to determine the amount of total adjusted capital (STATUTORY CAPITAL AND
SURPLUS plus AVR and other adjustments) that a life insurance company must have,
taking into account the risk characteristics of such company's investments and
liabilities. The formula establishes a standard of capital adequacy that is
related to risk. The RBC formula establishes capital requirements for four
categories of risk: asset risk, insurance risk, interest rate risk and business
risk. For each category, the capital requirements are determined by applying
specified factors to various asset, premium, reserve and other items, with the
factor being higher for items with greater underlying risk and lower for items
with less risk. The formula is used by insurance regulators as an early warning
tool to identify deteriorating or weakly capitalized companies for the purpose
of initiating regulatory action.
The NAIC's RBC requirements provide for four levels of regulatory attention
depending on the ratio of a company's total adjusted capital to its RBC. If a
company's total adjusted capital is less than 100% but greater than or equal to
75% of its RBC, or if a negative trend has occurred (as defined in the
regulations) and total adjusted capital is less than 125% of its RBC, the
company must submit a comprehensive plan to the regulatory authority which
discusses proposed corrective actions to improve its capital position. If a
company's total adjusted capital is less than 75% but greater than or equal to
50% of its RBC, the regulatory authority will perform a special examination of
the company and issue an order specifying corrective actions that must be
followed. If a company's total adjusted capital is less than 50% but greater
than or equal to 35% of its RBC, the regulatory authority may take any action it
deems necessary, including placing the company under its control. If a company's
total adjusted capital is less than 35% of its RBC, the regulatory authority is
mandated to place the company under its control. The RBC ratios for each of
Hartford Life, Hartford Life and Accident and ITT Hartford Life and Annuity
Insurance Company have been in excess of 200% of their respective RBC from 1993
through 1996.
In addition, state regulatory authorities, industry groups and rating
agencies have developed several initiatives regarding market conduct. For
example, the NAIC has adopted the NAIC Model Illustration Regulation, which
applies to group and individual life insurance policies and certificates,
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and the Market Conduct Handbook. State regulators have imposed significant fines
on various insurers for improper market conduct. The American Council on Life
Insurance established the Insurance Market Place Standards Association, a
self-regulatory organization, to implement its Principles and Code of Ethical
Life Insurance Market Conduct, which includes a third-party assessment
procedure. Market conduct also has become one of the criteria used to establish
the ratings of an insurance company. For example, A.M. Best's ratings analysis
now includes a review of the insurer's compliance program. Management does not
believe that these market conduct initiatives will have a material adverse
effect on its business, financial condition or results of operations.
In addition, the NAIC has adopted a model regulation called "Valuation of
Life Insurance Policies Model Regulation", which would establish new minimum
STATUTORY RESERVE requirements for individual life insurance policies written in
the future. Before the new reserve standards can become effective, individual
states must enact the model regulation. If these reserve standards were adopted
in their current form, companies selling certain individual life insurance
products such as term life insurance products with guaranteed premium periods
and universal life insurance products with no-lapse guarantees would be required
to adjust reserves to be consistent with the new minimum standards. It is
impossible at this time to predict if the model regulation will be enacted and,
if enacted, when it will become applicable. However, the Company anticipates no
material impact as a result of the enactment of this legislation.
ASSESSMENTS AGAINST INSURERS
Under the INSURANCE GUARANTY FUND laws existing in each state, the District
of Columbia and Puerto Rico, insurers licensed to do business can be assessed by
state insurance guaranty associations for certain obligations of insolvent
insurance companies to policyholders and claimants. Recent regulatory actions
against certain large life insurers encountering financial difficulty have
prompted various state insurance guaranty associations to begin assessing life
insurance companies for the deemed losses. Most of these laws do provide,
however, that an assessment may be excused or deferred if it would threaten an
insurer's solvency and further provide for annual limits on such assessments. A
large part of the assessments paid by the Company's insurance subsidiaries
pursuant to these laws may be used as credits for a portion of the Company's
insurance subsidiaries' premium taxes. The Company's insurance subsidiaries were
assessed $11 million, $13 million and $12 million in 1994, 1995 and 1996,
respectively. Since such assessments are typically not made for several years
after an insurer fails and depend upon the final outcome of liquidation or
rehabilitation proceedings, the Company cannot accurately determine the amount
or timing of any future assessment on the Company's insurance subsidiaries.
However, based on the best information presently available, management believes
the Company's total future assessments will not be material to its operating
results or financial position.
REGULATION AT FEDERAL LEVEL
Although the federal government does not directly regulate the business of
insurance, federal legislation and administrative policies in several areas,
including pension regulation, financial services regulation and federal
taxation, can significantly and adversely affect the insurance industry and thus
the Company. For example, Congress has from time to time considered legislation
relating to the deferral of taxation on the accretion of value within certain
annuities and life insurance products, the removal of barriers preventing banks
from engaging in the insurance business, changes in ERISA regulations, the
alteration of the federal income tax structure and the availability of Section
401(k) or individual retirement accounts. In particular, Congress has reviewed
various proposals to repeal or modify the McCarran-Ferguson Act (which exempts
the insurance industry from certain federal laws), the Glass-Steagall Act (which
restricts banks from engaging in a securities-related business) and the Bank
Holding Company Act (which prohibits banks from being affiliated with insurance
companies). In addition, Congress is currently considering enacting legislation
that would reduce the tax rate applicable to long-term capital gains. This may
result in alternative financial products becoming less tax disadvantaged versus
variable annuities.
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Moreover, the United States Supreme Court held on January 18, 1995 in
NationsBank of North Carolina v. Variable Annuity Life Insurance Company that
annuities are not insurance for purposes of the National Bank Act. In addition,
the Supreme Court also held on March 26, 1996 in Barnett Bank of Marion City v.
Nelson that state laws prohibiting national banks from selling insurance in
small-town locations are preempted by federal law. The Office of the Comptroller
of the Currency also adopted a ruling in November 1996 that permits national
banks, under certain circumstances, to expand into other financial services,
thereby increasing competition for the Company. At present, the extent to which
banks can sell insurance and annuities without regulation by state insurance
departments is being litigated in various courts in the United States. Although
the effect of these recent developments on the Company and its competitors is
uncertain, both the persistency of the Company's existing products and the
Company's ability to sell products may be materially impacted in the future.
In addition, the HIPA Act of 1996 phases out the deductibility of interest
on policy loans under COLI by 1998, thus eliminating all future sales of
leveraged COLI. The Company's leveraged COLI product has been an important
contributor to its profitability in recent years and will continue to contribute
to the profitability of the Company (although such contribution will be reduced
in the future due to the effects of this legislation). As a result, net income
contributed by COLI may be lower in the future (particularly during 1999 and
later years) as a result of the elimination of leveraged COLI sales.
SECURITIES LAWS
Certain of the Company's subsidiaries, and certain policies and contracts
offered by them, are subject to regulation under the federal securities laws
administered by the Commission and certain state securities laws. Certain
separate accounts of the Company's insurance subsidiaries are registered as
investment companies under the Investment Company Act of 1940, as amended (the
"Investment Company Act"). Separate accounts through which certain variable
annuity contracts and variable insurance policies issued by the Company's
insurance subsidiaries are made available are also registered under the
Securities Act. Certain other subsidiaries of the Company are registered as
broker-dealers under the Exchange Act and are members of, and subject to
regulation by, the National Association of Securities Dealers, Inc.
Certain of the Company's subsidiaries are investment advisors registered
under the Investment Advisers Act of 1940, as amended. The investment companies
managed by such subsidiaries are registered with the Commission under the
Investment Company Act and the shares of certain of these entities are qualified
for sale in certain states in the United States and the District of Columbia.
Certain subsidiaries of the Company are also subject to the Commission's net
capital rules.
In October 1996, the National Securities Markets Improvements Act of 1996
was enacted into law. Of particular interest to the variable products industry
are the provisions establishing a new "reasonableness standard" for all fees and
charges in variable annuity and variable life insurance policies. Because
insurers no longer will have to explain each and every component of their fees
and charges to the Commission, and instead will be subject to an overall
reasonableness standard for aggregate fees and charges, the Company believes the
legislative changes will provide the industry with greater flexibility in
product design. However, given the significant barriers to market entry, such as
entering into relationships with broker-dealers and systems constraints, the
Company believes that the legislation overall will have a minimal competitive
impact.
All aspects of the Company's investment advisory activities are subject to
various federal and state laws and regulations. These laws and regulations are
primarily intended to benefit investment advisory clients and investment company
stockholders and generally grant supervisory agencies broad administrative
powers, including the power to limit or restrict the carrying on of business for
failure to comply with such laws and regulations. In such event, the possible
sanctions which may be imposed include the suspension of individual employees,
limitations on the activities in which the investment advisor may engage,
suspension or revocation of the investment advisor's registration as an advisor,
censure and fines.
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ERISA CONSIDERATIONS
Enacted into law on August 20, 1996, the Small Business Protection Act (the
"SBPA") offered insurers protection from potential litigation exposure prompted
by the 1993 U.S. Supreme Court decision in John Hancock Mutual Life Insurance
Company v. Harris Trust & Savings Bank (the "Harris Trust Decision") in which
the Court held that, with respect to a portion of the funds held under certain
general account group annuity contracts, an insurer is subject to the fiduciary
requirements of ERISA. The pertinent SBPA provisions provide that insurers are
protected from lawsuits claiming breaches of fiduciary duties under ERISA for
past actions. However, insurers remain subject to federal criminal law and
liable for actions brought by the U.S. Secretary of Labor alleging breaches of
fiduciary duties that also constitute a violation of federal or state criminal
law. The SBPA also provides that contracts issued from an insurer's general
account on or before December 31, 1998, that are not guaranteed benefit
policies, will be permanently grandfathered if they meet the requirements of
regulations the United States Department of Labor is required to issue by
December 31, 1997. The SBPA further provides that contracts issued from an
insurer's general account after December 31, 1998, that are not guaranteed
benefit policies, will be subject to ERISA. Although the Company does not
believe that the Harris Trust Decision had a material adverse effect on its
business, financial condition or results of operations, the Company supported
and welcomed the enactment of the aforementioned provisions of the SBPA as a
means to remove an area of potential exposure for the insurance industry
generally.
With respect to employee welfare benefit plans subject to ERISA, the United
States Congress periodically has considered amendments to the law's federal
preemption provision, which would expose the Company, and the insurance industry
generally, to state law causes of action, and accompanying extra-contractual
(e.g., punitive) damages in lawsuits involving, for example, group life and
group disability claims. To date, all such amendments to ERISA have been
defeated.
PROPERTIES
The Company's headquarters, located in Simsbury, Connecticut, is currently
leased from a third party by Hartford Fire pursuant to a sale-leaseback
arrangement. After the Equity Offerings, the Company or one of its subsidiaries
will sublease from Hartford Fire the right to use the headquarters building. For
a further discussion of this sublease arrangement, see "Certain Relationships
and Transactions--Intercompany Arrangements--Simsbury Sublease". The remainder
of the material facilities of the Company are either leased or subleased from
The Hartford or its subsidiaries or leased from third parties. The Company
believes its existing properties are adequate for its present operations.
LEGAL PROCEEDINGS
The Company is a defendant in various lawsuits arising in the ordinary
course of business. In the opinion of management, the resolution of these
matters is not expected to have a material adverse effect on the Company's
business, financial condition or results of operations. In addition, companies
in the life insurance industry historically have been subject to substantial
litigation resulting from claims disputes and other matters. Most recently, such
companies have faced extensive claims, including class-action lawsuits, alleging
improper sales practices relating to sales of certain life insurance products.
Negotiated settlements of such class-action lawsuits have had a material adverse
effect on the business, financial condition and results of operations of certain
of these companies. The Company is not and has not been a defendant in any such
class-action lawsuit alleging improper sales practices. No assurance can be
given that such class-action lawsuits or other litigation would not materially
and adversely affect the Company's business, financial condition or results of
operations.
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EMPLOYEES
As of May 13, 1997, the Company had 3,782 direct employees, 2,209 of whom
are employed at the home office in Simsbury, Connecticut, and 1,573 of whom are
employed at various branch offices throughout the United States, Canada and
elsewhere. Management believes that its employee relations are good. None of the
Company's employees is subject to a collective bargaining agreement and the
Company is not aware of any current efforts to implement such an agreement.
MANAGEMENT
DIRECTORS
The names, ages and a description of the business experience, principal
occupation and employment during at least the last five years of each of the
directors of the Company that will have been elected prior to the completion of
the Equity Offerings are set forth below:
<TABLE>
<CAPTION>
NAME AGE
---
<S> <C>
Ramani Ayer......................... 49
Donald R. Frahm..................... 65
Paul G. Kirk, Jr.................... 59
Lowndes A. Smith.................... 57
H. Patrick Swygert.................. 54
DeRoy C. Thomas..................... 71
Gordon I. Ulmer..................... 64
David K. Zwiener.................... 42
</TABLE>
Mr. Ayer has been Chairman and Chief Executive Officer of The Hartford
since February 1, 1997 and a director since 1991. Prior to that, Mr. Ayer served
as an Executive Vice President of The Hartford since the ITT Spin-Off in
December 1995. He has been President and Chief Operating Officer of Hartford
Fire since 1991 and previously served as Executive Vice President of Hartford
Fire from 1990 to April 1991 and Senior Vice President from 1989 to 1990. Mr.
Ayer joined The Hartford in 1973 as a member of the Operations Research
Department. In 1981 he was appointed Secretary and Director of Corporate
Reinsurance. In 1983 he was named Vice President of Hartford Re Company, The
Hartford's reinsurance subsidiary, and, in 1984, he joined the Hartford
Specialty Company, of which he was appointed President in 1986.
Mr. Frahm served as Chairman and Chief Executive Officer of The Hartford
from April 1988 until his retirement on January 31, 1997. He has served on The
Hartford's Board of Directors since 1985. Mr. Frahm is a member of the Board of
Directors of the Insurance Information Institute and the American Insurance
Association. He also is a director of the Hartford Hospital, Junior Achievement
North Central Connecticut Inc. and the Greater Hartford Chamber of Commerce. He
also is a corporator of Connecticut Children's Medical Center.
Mr. Kirk became a partner in the law firm of Sullivan & Worcester in 1977
and is presently of counsel to the firm. He served as Chairman of the Democratic
Party of the United States from 1985 to 1989 and as its Treasurer from 1983 to
1985. Following his resignation in 1989 as Chairman of the Democratic Party, he
returned to Sullivan & Worcester as a partner in general corporate practice at
the firm's Boston and Washington offices. Mr. Kirk has served on The Hartford's
Board of Directors since 1995. He is a director of Kirk-Sheppard & Co., Inc., of
which he also is Chairman and Treasurer. Mr. Kirk also is a director of ITT
Corporation (formerly ITT Destinations, Inc.) ("New ITT"), the Bradley Real
Estate Corporation and Rayonier Inc. He is Co-Chairman of the Commission on
Presidential Debates, Chairman of the Board of Directors of the John F. Kennedy
Library Foundation, Chairman of the Board of Directors of the National
Democratic Institute for International
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Affairs and a trustee of Stonehill College and St. Sebastian's School. He is a
graduate of Harvard College and Harvard Law School.
Mr. Smith has been Vice-Chairman of The Hartford since February 1, 1997 and
is President and Chief Executive Officer of the Company. He served as an
Executive Vice President of The Hartford from December 1995 until his
appointment as Vice-Chairman and has been a director of The Hartford since 1991.
Mr. Smith has been President and Chief Operating Officer of The Hartford's life
insurance subsidiaries since 1989. Prior to that time, he served as Senior Vice
President and Group Controller for all companies owned or operated by The
Hartford. Mr. Smith joined The Hartford in 1968 as a member of the Corporate
Accounting Department and in 1972 he was appointed the Secretary and Director of
Corporate Accounting. He was elected Assistant Vice President in 1974, and he
was named Controller in 1977. Mr. Smith is a director of the Connecticut
Children's Medical Center and the American Council of Life Insurance.
Mr. Swygert has been President of Howard University, Washington, D.C.,
since August 1995. Prior to that, he was President of the University at Albany,
State University of New York, since 1990. Mr. Swygert received his undergraduate
and law degrees from Howard University, has been a visiting professor and
lecturer abroad and is the author of numerous articles and publications on
higher education and the law. He has been a director of The Hartford since 1996
and is a member of the Board of Directors of The Victory Funds, Cleveland, Ohio.
Mr. Swygert also is Chairman of the Washington, D.C. Area Consortium of Colleges
and Universities, a trustee of the Institute of Public Administration and a
member of the Commission on Women in Higher Education and the Capital District
Martin Luther King, Jr. Commission.
Mr. Thomas is a retired partner of LeBoeuf, Lamb, Greene & MacRae, a law
firm in New York, New York, having practiced there from 1991 through December
31, 1994. He was President, Chief Operating Officer and a director of ITT from
1988 to 1991, and from 1983 to 1988 he was Vice-Chairman and Chief Operating
Officer of ITT Diversified Services and Chairman and Chief Executive Officer of
The Hartford. He has been a director of The Hartford since 1995 and also is a
director of Houghton-Mifflin, Connecticut Health Services and MedSpan, Inc. He
also is a former trustee of Fordham University, Wheelock College, University of
Hartford, Hartford Hospital and CT Health System. Mr. Thomas is President of
Goodspeed Opera House and the Chairman of the Old State House Association.
Mr. Ulmer is former Chairman and Chief Executive Officer of the former
Connecticut Bank and Trust Company ("CBT") and retired President of the former
Bank of New England Corporation, the former holding company of CBT ("BNEC"). He
joined CBT in 1957 and held numerous positions before being elected President
and a director in 1980 and Chairman and Chief Executive Officer in 1985. In
1988, he was elected President of BNEC, and he retired as President in December
1990. Mr. Ulmer has been a director of The Hartford since 1995 and also serves
as a director of Rayonier Inc. and the Old State House Association. He is a
graduate of Middlebury College, the American Institute of Banking and the
Harvard Business School Advanced Management Program and attended New York
University's Graduate School of Engineering.
Mr. Zwiener has been Executive Vice President and Chief Financial Officer
of The Hartford since August 1995. From March 1993 until August 1995, he served
as Executive Vice President and Chief Financial Officer of ITT Financial
Corporation. From 1987 to February 1993, Mr. Zwiener served as Senior Vice
President and Treasurer, as well as Executive Vice President -- Capital Markets
Division, of Heller International Corporation.
Promptly following the completion of the Equity Offerings, The Hartford and
the Company expect to elect two additional directors of the Company who will be
persons not associated currently or formerly with The Hartford or the Company.
The Board of Directors will then consist of ten members, including eight who are
directors and/or officers of The Hartford. The Hartford will have the ability to
change the size and composition of the Board of Directors.
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<PAGE> 94
Members of the Board of Directors will be divided into three classes with
staggered three-year terms and each class as equal in number as possible. Of the
directors that will have been elected to the Board of Directors prior to the
completion of the Equity Offerings, the terms of Messrs. Zwiener, Kirk and Ulmer
will expire at the next annual meeting of stockholders (expected to occur in the
second quarter of 1998), the terms of Messrs. Smith and Thomas and one of the
two individuals to be elected to the Board of Directors who is not currently or
formerly associated with The Hartford or the Company will expire at the annual
meeting of stockholders to be held in 1999 and the terms of Messrs. Ayer, Frahm
and Swygert and the other individual to be elected to the Board of Directors who
is not currently or formerly associated with The Hartford or the Company will
expire at the annual meeting of stockholders to be held in 2000.
The Board of Directors will have an audit committee which will review the
results and scope of the audit and other services provided by the Company's
independent auditors as well as review the Company's internal accounting and
control procedures and policies. The Board of Directors also will have a
compensation and personnel committee (the "Compensation and Personnel
Committee") which will oversee the compensation and benefits of the management
and employees of the Company and will consist entirely of directors who are
disinterested persons within the meaning of Rule 16b-3 under the Exchange Act.
The Board of Directors may, from time to time, establish certain other
committees to facilitate the management of the Company.
COMPENSATION OF DIRECTORS
Members of the Board of Directors who are employees of the Company or The
Hartford or their respective subsidiaries will not be compensated for service on
the Board of Directors or any committee thereof. Other directors of the Company
will receive an annual retainer fee of $20,000 payable solely in restricted
shares of Class A Common Stock, $1,000 in cash for each board meeting attended
and $1,000 in cash for each committee meeting attended. See "-- Restricted Stock
Plan for Non-Employee Directors". All directors will be reimbursed for travel
expenses incurred on behalf of the Company.
RESTRICTED STOCK PLAN FOR NON-EMPLOYEE DIRECTORS
Prior to the completion of the Equity Offerings, the Company is expected to
adopt (and the sole stockholder of the Company prior to the Equity Offerings is
expected to approve) the 1997 Hartford Life, Inc. Restricted Stock Plan for
Non-Employee Directors (the "1997 Restricted Stock Plan"). The 1997 Restricted
Stock Plan is designed to further the Company's objectives of attracting and
retaining individuals of ability as directors and aligning the directors'
interests more closely with the interests of its stockholders.
Under the proposed 1997 Restricted Stock Plan, directors of the Company who
are not employees of the Company, The Hartford or any of their respective
subsidiaries will automatically participate in the 1997 Restricted Stock Plan.
There will be seven directors of the Company eligible to participate in the 1997
Restricted Stock Plan.
The 1997 Restricted Stock Plan will be administered by the Compensation and
Personnel Committee. The Compensation and Personnel Committee will have the
responsibility of interpreting and establishing the rules appropriate for the
administration of the 1997 Restricted Stock Plan.
Grants of restricted Class A Common Stock will be made automatically on the
date of each annual meeting of stockholders to each non-employee director
elected at the meeting or continuing in office following the meeting. The amount
of the award will equal (and be in lieu of) the annual retainer (currently set
at $20,000 and not including meeting attendance fees) in effect for the
twelve-month period beginning on the date of the annual meeting divided by the
fair market value of one share of the Company's Class A Common Stock. Fair
market value is the average of the high and low sales price per share of Class A
Common Stock on the date of the annual meeting, as reported on the NYSE
Composite Tape. No awards will be made prior to completion of the Equity
Offerings. For periods of service on the Board of Directors preceding the
Company's first annual
94
<PAGE> 95
meeting, each non-employee director is expected to be granted a prorated number
of restricted shares of Class A Common Stock. Non-employee directors elected to
the Board of Directors between annual meetings also will be awarded a prorated
number of restricted shares based on the duration of their service. A total of
100,000 shares of Class A Common Stock may be issued under the 1997 Restricted
Stock Plan. However, the 1997 Restricted Stock Plan is expected to provide that
no award will be made thereunder, and the Company will have no obligation to
make any award thereunder, if such award would cause the percentage of The
Hartford's beneficial ownership of the combined voting power or the value of the
capital stock of the Company to fall below 80%. The shares to be issued may be
treasury shares, reacquired shares, authorized but unissued shares or shares
purchased on the open market. The shares of Class A Common Stock that are
granted under the 1997 Restricted Stock Plan will be registered in the name of
the director and held in escrow by the Company and will be subject to a
restriction period (after which restrictions will lapse) which shall mean a
period commencing on the grant date and ending on the earliest of (i) the fifth
anniversary of the grant date, (ii) upon retirement at age 72, (iii) upon a
"change of control" (as defined in the 1997 Restricted Stock Plan) of the
Company, (iv) death, (v) the onset of total disability, as defined in the
Hartford Investment and Savings Plan, or (vi) resignation under certain
circumstances. Except as provided above, any resignation from board service
within the restriction period will result in forfeiture of the shares. Shares
may not be sold, assigned, transferred, pledged or otherwise disposed of during
the restriction period. However, during the restriction period, a director will
have the right to vote and to receive dividends on the shares granted under the
1997 Restricted Stock Plan.
The Board of Directors may amend, suspend or discontinue the 1997
Restricted Stock Plan at any time, except that the Board of Directors may not,
without stockholder approval, take any action that would cause grants of
restricted stock under the 1997 Restricted Stock Plan to no longer be exempt
from Section 16(b) of the Exchange Act, pursuant to Rule 16b-3 thereunder, or
any other regulatory requirement. No amendment, suspension or discontinuance of
the 1997 Restricted Stock Plan may impair a director's right under a restricted
stock award previously granted without his or her consent.
The 1997 Restricted Stock Plan will become effective as of the date of
consummation of the Equity Offerings and terminate on December 31, 2007;
provided, however, that grants of Restricted Stock made prior to the termination
of the 1997 Restricted Stock Plan may vest following such termination in
accordance with their terms.
NON-EMPLOYEE DIRECTORS' BENEFITS
Prior to the completion of the Equity Offerings, the Company is expected to
adopt the 1997 Hartford Life, Inc. Insurance Program for non-employee directors.
Under the program, the Company will provide non-employee directors with $100,000
of group life insurance coverage and $750,000 of accidental death and
dismemberment and permanent total disability coverage while they are serving on
the Board of Directors. Non-employee directors also may purchase additional
benefits under this program.
95
<PAGE> 96
OFFICERS
The names, ages and positions of each of the executive and other key
officers of the Company are set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ ---- --------------------------------------------------------
<S> <C> <C>
Lowndes A. Smith.............. 57 Chief Executive Officer and President
John P. Ginnetti.............. 51 Executive Vice President, Asset Management
Thomas M. Marra............... 38 Executive Vice President, Individual Life and Annuities
Leonard E. Odell, Jr.......... 51 Senior Vice President, Specialty Insurance Operations
Raymond P. Welnicki........... 48 Senior Vice President, Employee Benefits
Gregory A. Boyko.............. 45 Senior Vice President, Chief Financial Officer and
Treasurer
Lynda Godkin.................. 43 Vice President and General Counsel
Craig R. Raymond.............. 36 Vice President and Chief Actuary
Ann M. de Raismes............. 46 Vice President, Human Resources
David M. Znamierowski......... 36 Vice President, Investment Strategy
Lizabeth H. Zlatkus........... 38 Vice President, Group Life and Disability
William A. Godfrey............ 39 Vice President, Information Technology
Robert F. Nolan............... 42 Vice President, Corporate Relations
Walter C. Welsh............... 50 Vice President, Government Affairs
</TABLE>
Set forth below is a description of the business experience, principal
occupation and employment, during at least the last five years, of the executive
and other key officers of the Company.
For Mr. Smith's business experience, principal occupation and employment
history, see information under "-- Directors".
Mr. Ginnetti has been Executive Vice President and Director of Asset
Management Services since 1994. From 1988 to 1994, he served as Senior Vice
President and Director of Individual Life and Annuities. Mr. Ginnetti joined
Hartford Life in 1982 as General Counsel. Previously, he was Assistant General
Counsel with the Life Insurance Company of North America.
Mr. Marra has been Executive Vice President and Director of Individual Life
and Annuities since 1996. Mr. Marra also oversees the Individual Life Insurance
segment. Mr. Marra joined Hartford Life in 1980 as an associate actuary. He held
positions of increasing responsibility and in 1991 was named Vice President and
Director of Individual Annuities. He was elected Senior Vice President in 1994.
He is the current Chairman of the National Association of Variable Annuities. He
also is a Fellow of the Society of Actuaries.
Mr. Odell has been Senior Vice President and Director of Specialty
Insurance Operations since 1994. Prior to that, he was Vice President, Chief
Actuary and Director of Business Development for Hartford Life. Mr. Odell joined
Hartford Life in 1973 as Actuary and has held positions of increasing
responsibility, including Vice President and Director of Individual Life
Actuarial, Marketing and Underwriting and Vice President and Director of Group
Actuarial, Marketing and Underwriting. He is a Fellow of the Society of
Actuaries.
Mr. Welnicki has been Senior Vice President and Director of Employee
Benefits since 1994. 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. 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.
Mr. Boyko is Senior Vice President, Chief Financial Officer and Treasurer.
He joined Hartford Life in 1995 as Controller and was elected Vice President in
1996. 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
96
<PAGE> 97
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.
Ms. Godkin is 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.
Mr. Raymond is Vice President and Chief Actuary. Since joining Hartford
Life in 1985, Mr. Raymond has held actuarial leadership positions of increased
responsibility throughout the Company. In 1992, he was named Assistant Vice
President and Director of Individual Life and Annuities, Actuarial and became
Vice President in 1994. Prior to joining Hartford Life, Mr. Raymond held
positions at Integon Corporation and The National Life and Accident Insurance
Company. He is a Fellow of the Society of Actuaries and Chairman of the American
Academy of Actuaries Committee on Life Insurance.
Ms. de Raismes is Vice President and Director of Human Resources. She
joined Hartford Life in 1984 as Manager of Staffing. She has been Director of
Human Resources since 1991 and was elected Vice President in 1994. Previously,
she held human resource management positions of increasing responsibility with
SCM Corporation. She is a member of The Hartford Foundation Board of Directors.
Mr. Znamierowski is 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.
Ms. Zlatkus is Vice President and Director of Group Life and Disability.
Ms. Zlatkus held positions of increasing responsibility since joining The
Hartford in 1983. She was named Vice President and Director of Risk Management
and Business Operations in 1994. Prior to joining The Hartford, she was a senior
accountant with Peat, Marwick, Mitchell & Company. She became a Certified Public
Accountant in 1982.
Mr. Godfrey is Vice President and Director of Information Technology. He
joined the senior management team at Hartford Life in 1996 to oversee technology
management. Previously, Mr. Godfrey held information technology positions at
Fleet Financial Group and systems development positions with CIGNA Corporation
and Electronic Data Systems.
Mr. Nolan is Vice President and Director of Corporate Relations. Mr. Nolan
joined Hartford Life in 1992 and was elected Vice President in 1995. Previously,
Mr. Nolan held positions of increasing responsibility at Aetna Life & Casualty
Company in public relations, marketing communications and corporate
communications.
Mr. Welsh is Vice President and Director of Government Affairs. Mr. Welsh
has worked at The Hartford since 1979. Since 1993, Mr. Welsh has served as
Director of Government Relations for Hartford Life. From 1979 to 1993, Mr. Welsh
held various tax management positions within the Law Department of The Hartford.
He was named Assistant General Counsel in 1984 and was named Assistant Director
of Taxes in 1986. He previously practiced law with the Internal Revenue Service
and is a member of the Connecticut and American Bar Associations.
97
<PAGE> 98
EMPLOYMENT AGREEMENT
Mr. Smith currently is the only employee of the Company who is a party to
an employment agreement with The Hartford. Mr. Smith's employment agreement is
effective as of December 19, 1995 and expires on December 19, 1999. Following
the Equity Offerings, the Company is expected to become a party to this
agreement. The agreement provides, or is expected to be amended following the
Equity Offerings to provide, among other things: (i) a base salary payable by
the Company in an amount not less than $525,000 per annum, (ii) participation in
the benefit plans described herein, (iii) Mr. Smith's employment as President
and Chief Executive Officer of the Company and The Hartford's life insurance
subsidiaries, and as Vice-Chairman of The Hartford, and (iv) certain payments
and benefits in the event of termination, without cause, by the Company or The
Hartford such that Mr. Smith will receive salary, on a monthly basis, equivalent
in the aggregate to the amounts of salary remaining unpaid until the expiration
of this agreement, or, at the discretion of the Company and The Hartford, the
balance remaining of such aggregate amount in a lump sum payment if Mr. Smith
accepts other full-time employment. In addition, as long as such salary
continues to be paid, he will be eligible for participation in certain benefit
plans of the Company and The Hartford and outstanding stock options issued by
the Company and The Hartford, or he will receive a termination allowance under
The Hartford's Severance Pay Program or other termination allowance plan if such
allowance exceeds the salary described above.
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<PAGE> 99
EXECUTIVE COMPENSATION
SUMMARY
Since the formation of the Company, none of the executive officers of the
Company has received any compensation from the Company. All compensation has
been paid by Hartford Fire, a certain percentage of which has been allocated to
the Company's life insurance subsidiaries which have reimbursed Hartford Fire
for such cost. Upon completion of the Equity Offerings, all compensation of the
executive officers of the Company is expected to be paid by a subsidiary of the
Company.
The following table reflects all compensation paid by Hartford Fire to the
Company's chief executive officer and the other four most highly compensated
executive officers of the Company (the "Named Executives") for services rendered
to the Company for the fiscal year ended December 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
----------------
ANNUAL COMPENSATION SECURITIES
--------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(1)(#) COMPENSATION(2)($)
- ------------------------------ ---- ------------ ------------ ---------------- ------------------
<S> <C> <C> <C> <C> <C>
Lowndes A. Smith.............. 1996 $525,000 $ 310,000 37,200 $ 21,260
Chief Executive Officer and
President
John P. Ginnetti.............. 1996 375,000 335,000 11,500 16,802
Executive Vice President,
Asset Management
Thomas M. Marra............... 1996 350,000 610,000 16,300 16,355
Executive Vice President,
Individual Life &
Annuities
Leonard E. Odell, Jr. ........ 1996 238,000 166,400 11,500 11,215
Senior Vice President,
Specialty & International
Raymond P. Welnicki........... 1996 238,000 169,500 11,500 11,911
Senior Vice President,
Employee Benefits
</TABLE>
- ---------------
(1) Represents options to purchase shares of The Hartford common stock.
(2) Amounts in this column consist of contributions by The Hartford under the
Hartford Investment and Savings Plan and the Hartford Excess Savings Plans
(each, a defined contribution plan, as defined below), vacation time sold
under The Hartford flexible benefit programs and imputed income from group
term life insurance. Under the Hartford Investment and Savings Plan and the
Hartford Excess Savings Plans, The Hartford makes a matching contribution in
an amount equal to 50% of an employee's contribution, such matching
contributions not to exceed 3% of such employee's salary. The Hartford also
makes a non-matching contribution equal to 1/2 of 1% of an employee's
salary. Contributions under these plans for 1996 were $18,375, $13,917,
$12,250, $8,330 and $8,330 for Messrs. Smith, Ginnetti, Marra, Odell and
Welnicki, respectively. The Hartford's flexible benefit programs allow for
the sale back to The Hartford of up to one week of vacation time, and the
amounts in this column include $2,885 for each of Messrs. Smith, Ginnetti,
Marra and Odell from the sale of vacation time. In addition, The Hartford
provides certain group term life insurance coverage to employees, and
employees may purchase additional amounts of coverage. For federal income
tax purposes, income will be imputed to an employee who purchases more than
$50,000 of coverage to the extent that the value of the coverage is greater
than the premium paid. For 1996, $1,220 and $3,581 of income was imputed to
Messrs. Marra and Welnicki, respectively, and such amounts are included in
this column.
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<PAGE> 100
OPTION GRANTS ON THE HARTFORD COMMON STOCK TO COMPANY EXECUTIVES IN LAST FISCAL
YEAR
The following table provides information on grants of options in fiscal
year 1996 to the Named Executives to purchase shares of The Hartford common
stock. No options to acquire Common Stock of the Company have been granted or
are outstanding.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZED
---------------------------------------------- VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PER PRICE APPRECIATION
UNDERLYING GRANTED TO SHARE FOR OPTION TERM(4)
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION ----------------------
NAME GRANTED(1) 1996(2) PRICE(3) DATE 5% 10%
- ------------------------------ ---------- ------------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Lowndes A. Smith.............. 37,200 2.60% $52.00 2/16/06 $1,216,440 $3,082,764
John P. Ginnetti.............. 11,500 0.80 52.00 2/16/06 376,050 953,005
Thomas M. Marra............... 16,300 1.14 52.00 2/16/06 533,010 1,350,761
Leonard E. Odell, Jr. ........ 11,500 0.80 52.00 2/16/06 376,050 953,005
Raymond P. Welnicki........... 11,500 0.80 52.00 2/16/06 376,050 953,005
</TABLE>
- ---------------
(1) Represents options to purchase shares of The Hartford common stock. The
options granted to Mr. Smith became fully exercisable on December 5, 1996,
when the closing price of The Hartford common stock was equal to or greater
than $65.00 for ten consecutive trading days. The options granted to Messrs.
Ginnetti, Marra, Odell and Welnicki are exercisable in three equal annual
installments commencing on the first anniversary date of the grant. The
exercisability, payment or vesting of options may be accelerated upon the
occurrence of a change of control (as defined in the 1995 Hartford Incentive
Stock Plan) of The Hartford.
(2) Percentages indicated are based on options to purchase a total of 1,431,217
shares of The Hartford common stock granted to 764 employees of The Hartford
during 1996.
(3) Options were granted at exercise prices that were 100% of the fair market
value of one share of common stock of The Hartford on the date of grant. The
exercise price may be paid in cash or in shares of The Hartford common stock
valued at their fair market value on the date of exercise.
(4) At the end of the three-year term of the options granted in 1996, the
projected price of a share of The Hartford common stock would be $84.70 and
$134.87 at assumed annual appreciation rates of 5% and 10%, respectively.
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table provides information on option exercises in 1996 by the
Named Executives and the value of each such Named Executive's unexercised
options to acquire common stock of The Hartford at December 31, 1996.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED,
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS HELD AT
SHARES FISCAL YEAR-END(#) FISCAL YEAR-END(2)
ACQUIRED VALUE -------------------------- -------------------------
NAME ON EXERCISE (#) REALIZED(1) UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------- --------------- ----------- ------------- ---------- -------------
EXERCISABLE
-----------
<S> <C> <C> <C> <C> <C> <C>
Lowndes A. Smith....... -- $ -- 241,216 -- $7,201,309 $ --
John P. Ginnetti....... -- -- 30,979 27,438 1,028,808 658,702
Thomas M. Marra........ -- -- 35,582 38,891 1,112,123 898,365
Leonard E. Odell,
Jr................... -- -- 13,721 19,134 444,726 392,493
Raymond P. Welnicki.... 5,333 93,114 6,591 19,350 200,034 386,331
</TABLE>
- ---------------
(1) The value realized reflects the difference between the fair market value of
a share of The Hartford common stock on the date of exercise of the option
and the per share exercise price of such option.
(2) Values are calculated for "in-the-money" options by subtracting the exercise
price per share from the per share market price of $67.50, as reported on
the NYSE Composite Tape, on December 31, 1996.
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<PAGE> 101
LONG-TERM INCENTIVE PLANS -- AWARDS IN FISCAL YEAR 1996
The following table provides information on long-term performance share
awards made to the Named Executives during 1996.
<TABLE>
<CAPTION>
AWARDS OF PERFORMANCE SHARES
RELATING TO THE HARTFORD COMMON ESTIMATED FUTURE PAYOUTS UNDER
STOCK IN LAST FISCAL YEAR NON-STOCK PRICE-BASED PLANS(#)(1)
------------------------------------ -------------------------------------
NAME # OF SHARES PERIOD UNTIL PAYOUT(1) THRESHOLD(#) TARGET(#) MAXIMUM(#)
- -------------------------- ----------- ---------------------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
Lowndes A. Smith.......... 8,250 12/31/98 4,125 8,250 16,500
John P. Ginnetti.......... 2,550 12/31/98 1,275 2,550 5,100
Thomas M. Marra........... 3,600 12/31/98 1,800 3,600 7,200
Leonard E. Odell, Jr. .... 2,550 12/31/98 1,275 2,550 5,100
Raymond P. Welnicki....... 2,550 12/31/98 1,275 2,550 5,100
</TABLE>
- ---------------
(1) Each of the Named Executives was granted the number of performance shares
relating to The Hartford common stock set forth above. The grants are
contingent upon The Hartford achieving two general performance objectives
over a three-year period ending on December 31, 1998. The performance
objectives and the extent to which a Named Executive may be entitled to a
future payout are described under "-- Hartford Stock Plan; Prior Awards".
The threshold, target and maximum number of shares that may be awarded as
set forth in the table above are based on The Hartford equally achieving
75%, 100% and 150% or more, respectively, of each of the two performance
objectives.
COMPENSATION, BENEFIT AND RETIREMENT PLANS
As described below, prior to the completion of the Equity Offerings, the
Company is expected to adopt (and the sole stockholder, prior to the completion
of the Equity Offerings, is expected to approve) the 1997 Hartford Life, Inc.
Incentive Stock Plan (the "1997 Stock Plan"), 1997 Hartford Life, Inc. Deferred
Restricted Stock Unit Plan (the "1997 Bonus Swap Plan") and 1997 Hartford Life,
Inc. Employee Stock Purchase Plan (the "1997 Stock Purchase Plan") in which the
officers of the Company are expected to participate after completion of the
Equity Offerings. In addition, prior to the completion of the Equity Offerings,
certain employees of the Company, including the Named Executives, were eligible
to participate in the following benefit plans and programs operated by The
Hartford: the 1995 ITT Hartford Incentive Stock Plan (the "Hartford Stock
Plan"), the 1996 ITT Hartford Deferred Restricted Stock Unit Plan (the "Hartford
Bonus Swap Plan"), the Annual Executive Bonus Program, the Hartford Fire
Insurance Company Retirement Plan for U.S. Employees (the "Hartford Retirement
Plan"), The Hartford Senior Executive Severance Pay Program (the "Hartford
Senior Executive Severance Pay Program"), The Hartford Investment and Savings
Plan (the "Hartford Investment and Savings Plan"), the 1996 ITT Hartford
Deferred Compensation Plan (the "Hartford Deferred Compensation Plan"), the ITT
Hartford Employee Stock Purchase Plan (the "Hartford Stock Purchase Plan") and
certain other plans offered as part of The Hartford's employee welfare benefits
program. After completion of the Equity Offerings, as described herein and to
the extent provided in the Hartford Stock Plan, certain employees of the
Company, including the Named Executives, will remain eligible for vesting of
restricted stock of The Hartford and receipt of any performance shares and
exercise of options previously awarded by The Hartford under the Hartford Stock
Plan. Further, after completion of the Equity Offerings, certain employees of
the Company, including the Named Executives, will continue to be eligible under
and participate in The Hartford's plans and programs described above with
respect to compensation paid by the Company and for services rendered to the
Company, except that none of the employees of the Company, other than Mr. Smith,
is expected to continue to be eligible to participate in the Hartford Bonus Swap
Plan or the Hartford Stock Plan. The Company will reimburse The Hartford for any
direct costs, distributions and other expenses associated with post-Equity
Offerings payments (and corresponding reserves of the Company) to Company
employees in respect of the Hartford Stock Plan and the other Hartford plans
referred to above pursuant to the terms of the Master Intercompany Agreement.
See "Certain Relationships and Transactions -- Intercompany
Arrangements -- Master Intercompany Agreement".
The following is a description of the compensation, benefit and retirement
plans for certain employees of the Company, including the Named Executives, that
are currently expected to be
101
<PAGE> 102
adopted by the Board of Directors, and that are maintained by The Hartford and
currently cover and are expected to continue to cover certain employees of the
Company, including the Named Executives, as described above.
1997 STOCK PLAN
GENERAL. One of the reasons for the Equity Offerings is to enable the
Company to provide meaningful long-term incentives for its key employees,
directly related to their individual and collective performance in enhancing
stockholder value. Once the Equity Offerings have been completed and a public
market has developed for the Class A Common Stock, market-based incentives based
on stock performance will allow the Company to provide significant incentives to
key employees of the Company. Awards of stock options and other market-based
incentives will permit key employees to profit as stockholder value is enhanced
(through increases in the market price for Class A Common Stock) and will also
give the Company an effective tool to encourage key employees to continue in the
employ of the Company.
The 1997 Stock Plan is expected to achieve these objectives and will be
administered by the Compensation and Personnel Committee. The 1997 Stock Plan
provides for the grant of incentive stock options (qualifying under Section 422
of the Internal Revenue Code), non-qualified stock options, stock appreciation
rights ("SARs"), performance shares and restricted stock, or any combination of
the foregoing, as the Compensation and Personnel Committee may determine, as
well as substitute stock options and restricted stock for award to key employees
who are permitted by the Compensation and Personnel Committee to surrender
previously awarded options or restricted stock of The Hartford as described
below. The 1997 Stock Plan will expire on December 31, 2007 but will continue in
effect for awards then outstanding for so long as such awards are outstanding.
No determination has yet been made as to the number of key employees of the
Company who will be eligible to participate in the 1997 Stock Plan.
The 1997 Stock Plan contains the following formula for establishing an
annual limit on the number of shares that may be awarded (or with respect to
which non-stock awards may be made) in any given calendar year (the "Annual
Limit"), the maximum number of which generally will be 1.5% of the total issued
and outstanding shares and treasury shares of Class A Common Stock as of the
December 31st immediately preceding the year of the awards (each, a "Plan
Year"). In addition, for the Plan Year that includes the Equity Offerings, the
number of shares that may be awarded will equal the Annual Limit plus the number
of substitute awards granted to key employees who are entitled to and do
surrender stock options and restricted stock previously awarded by The Hartford.
Any unused portion of the Annual Limit for any Plan Year shall be carried
forward and be made available for awards in succeeding Plan Years. In addition
to the foregoing, the 1997 Stock Plan is expected to provide that no award will
be made thereunder, and the Company will have no obligation to make any award
thereunder, if such award would cause the percentage of beneficial ownership by
The Hartford of the combined voting power or the value of the capital stock of
the Company to fall below 80%.
In addition to the foregoing, in no event shall more than five million
shares of Class A Common Stock be cumulatively available for awards of options
under the 1997 Stock Plan and no more than 20% of the total number of shares
available on a cumulative basis shall be available for awards of restricted
Class A Common Stock and awards of performance shares relating to Class A Common
Stock. For any Plan Year, no individual key employee may receive options to
acquire Class A Common Stock or SARs for more than the lesser of (i) 10% of the
Annual Limit applicable to that Plan Year or (ii) 500,000 shares; except that,
for the Plan Year that follows the date of consummation of the Equity Offerings,
each individual key employee may receive, in addition to the foregoing limit,
the number of substitute options to acquire Class A Common Stock required to
replace the surrendered options to acquire The Hartford common stock.
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Subject to the above limitations, shares of Class A Common Stock to be
issued under the 1997 Stock Plan may be made available from the authorized but
unissued Class A Common Stock, treasury stock or from shares purchased on the
open market or any combination of the foregoing. In the event of a
reorganization, merger, stock dividend or other change in the corporate
structure of the Company or any change in the Class A Common Stock described in
the 1997 Stock Plan, the number of shares subject to the 1997 Stock Plan, the
number of shares then subject to awards and the price per share payable on
exercise of options may be appropriately adjusted by the Compensation and
Personnel Committee.
For the purpose of computing the total number of shares of stock available
for awards under the 1997 Stock Plan, there shall be counted against the
foregoing limitations the number of shares of Class A Common Stock subject to
issuance upon exercise or settlement of awards and the number of shares of Class
A Common Stock that equal the value of awards of performance shares, in each
case determined as at the dates on which such awards are granted. If any awards
under the 1997 Stock Plan are forfeited, terminated, expire unexercised, are
settled in cash in lieu of Class A Common Stock or are exchanged for other
awards, the shares of stock which were theretofore subject to such awards shall
again be available for awards under the 1997 Stock Plan to the extent of such
forfeiture, termination, expiration, cash settlement or exchange of such awards.
Further, any shares that are exchanged (either actually or constructively) by
optionees as full or partial payment to the Company of the purchase price of
shares being acquired through the exercise of a stock option granted under the
1997 Stock Plan may be available for subsequent awards.
The Compensation and Personnel Committee, none of whose members may receive
any award under the 1997 Stock Plan, will administer the 1997 Stock Plan,
including, but not limited to, making determinations with respect to the
designation of those key employees who shall receive awards, the number of
shares to be covered by options, SARs and restricted stock awards, the exercise
price of options (which may not be less than 100% of the fair market value of
Class A Common Stock on the date of grant), other option terms and conditions
and the number of performance shares to be granted and the applicable
performance objectives. The Compensation and Personnel Committee may impose such
additional terms and conditions on an award as it deems advisable. The
Compensation and Personnel Committee's decisions in the administration of the
1997 Stock Plan shall be binding on all persons for all purposes.
The Compensation and Personnel Committee may, in its sole discretion,
delegate such administrative powers as it may deem appropriate to the chief
executive officer or other members of senior management of the Company, except
that awards to executive officers will be made solely by the Compensation and
Personnel Committee subject to compliance with Rule 16b-3 under the Exchange
Act.
STOCK OPTIONS AND RELATED SARS. Options and related SARs under the 1997
Stock Plan will expire within ten years after grant; non-qualified stock options
and related SARs will expire not more than ten years and two days after grant.
The exercise price for options must be at least equal to the closing market
price for the Class A Common Stock, as reported on the NYSE Composite Tape, on
the date of grant. The exercise price for options must be paid to the Company at
the time of exercise and, in the discretion of the Compensation and Personnel
Committee, may be paid in the form of cash or already-owned shares of Class A
Common Stock or a combination thereof. During the lifetime of a key employee, an
option or SAR must be exercised only by the key employee (or his or her estate
or designated beneficiary) but no later than three months after his or her
termination of employment (or for longer periods as determined by the
Compensation and Personnel Committee). If termination is caused by retirement,
total disability or death, an option or SAR may be exercised within five years
after such termination (or such other period determined by the Compensation and
Personnel Committee), but in no event later than the expiration of the original
term of the option. If a key employee voluntarily resigns or is terminated for
cause, the options and SARs are canceled immediately.
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PERFORMANCE SHARES. Performance shares under the 1997 Stock Plan are
contingent rights to receive future payments of Class A Common Stock, cash or a
combination thereof, based on the achievement of performance objectives as
prescribed by the Compensation and Personnel Committee. Such performance
objectives will be determined by the Compensation and Personnel Committee and
may vary by employee, for a measurement period of not less than two nor more
than five years, and related to at least one of the objective criteria
enumerated in the 1997 Stock Plan, which may be (i) determined solely by
reference to the performance of the Company, any subsidiary or affiliate of the
Company or any division or unit of any of the foregoing or (ii) based on
comparative performance of any one or more of the Company or any such
subsidiary, affiliate, division or unit, as applicable, relative to other
entities. The maximum number of performance shares that may be granted to any
individual key employee in any given year is 100,000. The ultimate payments are
determined by the number of shares awarded and the extent that performance
objectives are achieved during the period. In the event a key employee
terminates employment during such a performance period, the key employee will
forfeit any right to payment unless the Compensation and Personnel Committee
determines otherwise. However, in the case of retirement, total disability,
death or cases of special circumstances, the key employee may, in the discretion
of the Compensation and Personnel Committee, be entitled to an award prorated
for the portion of the performance period during which he or she was employed by
the Company.
RESTRICTED SHARES. Restricted shares of Class A Common Stock awarded under
the 1997 Stock Plan will be issued subject to a restriction period set by the
Compensation and Personnel Committee during which time the shares may not be
sold, transferred, assigned or pledged or otherwise disposed of. In the event a
key employee terminates employment during a restriction period, all such shares
still subject to restrictions will be forfeited by such employee and reacquired
by the Company, except when the Compensation and Personnel Committee determines
otherwise in special circumstances. The Compensation and Personnel Committee may
provide for the lapse of restrictions where deemed appropriate and it may also
require the achievement of pre-determined performance objectives in order for
such shares to vest. The recipient, as owner of the awarded shares, shall have
all other rights of a stockholder, including the right to vote the shares and
receive dividends and other distributions during the restriction period. The
restrictions may be waived, in the discretion of the Compensation and Personnel
Committee, in the event of the awardee's retirement, total disability, death or
in cases of special circumstances.
SUBSTITUTE AND EXPECTED NEW AWARDS. In order to provide meaningful
compensation in the form of options and related rights to acquire Class A Common
Stock of the Company and restricted shares of Class A Common Stock to the
Company's key employees who surrender, upon completion of the Equity Offerings,
options and related rights to acquire common stock of The Hartford and
restricted stock of The Hartford previously awarded pursuant to The Hartford
Stock Plan (see "-- Hartford Stock Plan; Prior Awards"), the Compensation and
Personnel Committee is authorized to award to such key employees of the Company
substitute non-qualified options to acquire Class A Common Stock and restricted
Class A Common Stock of the Company, not to exceed eight million shares of Class
A Common Stock in the aggregate. As indicated above, the substitute options
awarded to any one individual by the Compensation and Personnel Committee for
the Plan Year following the date of consummation of the Equity Offerings shall
not exceed the number of non-qualified options required to replace surrendered
options on The Hartford common stock as determined by application of the
formulas described below. Subject to this limitation, shares of Class A Common
Stock to be issued upon the exercise of substitute stock options and restricted
shares may be made available from authorized but unissued shares, treasury
shares, shares purchased on the open market, or any combination of the
foregoing.
The terms and conditions of each substitute award, including, without
limitation, the time or times when, and the manner in which, each substitute
award shall be exercisable, the duration of the exercise or restriction period,
the permitted method of exercise, settlement and payment, the rules that shall
apply in the event of the termination of employment of the key employee, the
events, if any,
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that may give rise to a key employee's right to accelerate the time of exercise
of an option and the vesting provisions of restricted stock, shall be equitably
determined to preserve the economic value of the surrendered award of The
Hartford.
The following describes the 1997 awards of restricted common stock of The
Hartford and options to acquire common stock of The Hartford previously made
pursuant to the Hartford Stock Plan (see "-- Hartford Stock Plan; Prior Awards")
and the expected substitution therefor, upon completion of the Equity Offerings,
of restricted Class A Common Stock and options to acquire Class A Common Stock.
Other than the foregoing, no substitutions of Company awards for awards made by
The Hartford are expected. The following also describes new awards of restricted
Class A Common Stock and performance shares of the Company that are expected to
be made upon completion of the Equity Offerings, such awards having been
approved by The Hartford compensation and personnel committee contingent upon
completion of the Equity Offerings.
SUBSTITUTE AND NEW RESTRICTED STOCK AWARDS. Effective January 24, 1997,
The Hartford compensation and personnel committee awarded Mr. Smith 20,000
shares of restricted common stock of The Hartford pursuant to the Hartford Stock
Plan, subject to a three-year restriction period. Upon completion of the Equity
Offerings, it is expected that 10,000 of these restricted shares will be
canceled upon surrender, and that the Company's Compensation and Personnel
Committee will issue to Mr. Smith, pursuant to the Company's 1997 Stock Plan, a
number of substitute restricted shares of Class A Common Stock (rounded to the
nearest whole number) calculated as follows: the number of surrendered shares of
restricted common stock of The Hartford shall be multiplied by the average of
the closing market prices of The Hartford's common stock, as reported on the
NYSE Composite Tape, for the ten trading days following the date of consummation
of the Equity Offerings (the "Hartford Average Fair Market Value"), and then
divided by the average of the closing market prices of the Company's Class A
Common Stock, as reported on the NYSE Composite Tape, for the ten trading days
following the date of consummation of the Equity Offerings (the "Company Average
Fair Market Value"). These substitute restricted shares will be subject to the
same restriction period and other terms and conditions as the surrendered
restricted shares of The Hartford.
After completion of the Equity Offerings, it is expected that the
Compensation and Personnel Committee will award to Mr. Marra, pursuant to the
1997 Stock Plan, the nearest whole number of shares equal to the greater of the
amounts resulting from the following calculations: (i) the amount resulting from
multiplying 15,000 by $72.25 (the closing market price for one share of The
Hartford common stock, as reported on the NYSE Composite Tape, on January 24,
1997), and then dividing the resulting amount by the Company Average Fair Market
Value, or (ii) the amount resulting from multiplying 15,000 by the Hartford
Average Fair Market Value, and then dividing the resulting amount by the Company
Average Fair Market Value. One-third of these restricted shares will be subject
to a three-year restriction period and two-thirds will be subject to a
seven-year restriction period, each restriction period to begin on the effective
date of award. This award was approved, contingent upon completion of the Equity
Offerings, by The Hartford compensation and personnel committee on December 11,
1996.
SUBSTITUTE OPTION AWARDS. On January 24, 1997, The Hartford compensation
and personnel committee approved pursuant to the Hartford Stock Plan the award
to certain key employees of the Company of non-qualified options to acquire
common stock of The Hartford. The exercise price for these options is $72.25,
the closing market price for one share of The Hartford common stock, as reported
on the NYSE Composite Tape, on January 24, 1997. The Hartford granted 47,170
options to Mr. Smith on such date. These options are to become exercisable on
the earlier of (i) the date the closing market price for The Hartford common
stock, as reported on the NYSE Composite Tape, reaches and remains at 125% of
the exercise price for such options for ten consecutive trading days (rounded to
the nearest whole number) or (ii) seven years from the date of grant. The
Hartford granted 7,862, 12,579, 7,862 and 7,862 options to Messrs. Ginnetti,
Marra, Odell and Welnicki,
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respectively, on such date. These options are to become exercisable in one-third
increments on the first, second and third anniversaries of the date of grant.
After completion of the Equity Offerings, it is expected that 28,302 of the
foregoing options on The Hartford common stock granted to Mr. Smith and all of
the options to the other Named Executives will be canceled (upon surrender
within a certain time period) and that the Company's Compensation and Personnel
Committee will issue to such key employees in substitution therefor a number of
non-qualified options to acquire Class A Common Stock pursuant to the Company's
1997 Stock Plan. The number of substitute options (rounded to the nearest whole
number) issued to the Named Executives will be calculated as follows: the number
of surrendered options on The Hartford common stock shall be multiplied by the
Hartford Average Fair Market Value, and then divided by the Company Average Fair
Market Value. The substitute options will have an exercise price determined as
follows: $72.25 shall be divided by the Hartford Average Fair Market Value, and
the resulting amount shall be multiplied by 100, resulting in a percentage
amount. This percentage amount shall be multiplied by the Company Average Fair
Market Value, resulting in the exercise price for the substitute options. Such
options will become exercisable on the earlier of (i) the date the closing
market price for the Class A Common Stock, as reported on the NYSE Composite
Tape, reaches and remains at 125% of the exercise price for the substitute
options for ten consecutive trading days or (ii) seven years from the date of
grant of the canceled options.
NEW PERFORMANCE SHARE AWARDS. After completion of the Equity Offerings, it
is expected that the Compensation and Personnel Committee will award to certain
key employees of the Company a number of performance shares contingent upon the
Company achieving certain performance objectives described below. To the extent
that the performance objectives are achieved, a combination of cash and shares
of Class A Common Stock will be paid to such key employees pursuant to the terms
of the 1997 Stock Plan. The number of performance shares (rounded to the nearest
whole number) to be awarded will be calculated as follows: the dollar value
approved by The Hartford compensation and personnel committee with respect to a
key employee, contingent upon completion of the Equity Offerings, shall be
divided by 75% of the Company Average Fair Market Value.
Under the terms of the expected performance share awards, there will be two
equally weighted performance objectives measured over the performance period
beginning on the date of consummation of the Equity Offerings and ending on
December 31, 1999: performance award core earnings per share of the Company
("Performance Core Earnings") and total stockholder return ("TSR"). Performance
Core Earnings will be defined as the Company's GAAP net income minus (i) net
realized capital gains and/or losses except for capital items related to Closed
Book GRC; (ii) income or losses associated with one-time accounting changes;
(iii) the entire amount of any individual non-catastrophe loss associated with
any significant, unusual and non-recurring charge that exceeds $100 million; and
(iv) the income or losses associated with the liabilities allocated pursuant to
the Spin-Off Distribution Agreement in connection with the ITT Spin-Off. TSR
will be measured by the difference between the price of the Company's Class A
Common Stock at the beginning of the performance period and the price at the end
of such period (assuming the reinvestment of dividends paid), compared with the
TSR of the stock of the companies in the Merrill Lynch Life Insurance Stock
Index, a recognized index of publicly traded life insurance companies. There
will be a minimum threshold, a target and a maximum cap for Performance Core
Earnings and TSR to be achieved in connection with the awards, such targets
having been approved, contingent upon completion of the Equity Offerings, by The
Hartford compensation and personnel committee. If the targets are achieved, the
key employees will receive 100% of the performance shares awarded (payable
one-third in cash and two-thirds in Class A Common Stock). If the minimum
thresholds are not achieved, the key employees will not receive any of the
performance shares awarded. If the Performance Core Earnings and TSR achieved
exceed the minimum thresholds but fall below the targets, key employees will
receive awards adjusted downward by interpolation to reflect falling
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short of the targets. If the targets are exceeded, the executives will receive
awards adjusted upward by interpolation subject to a maximum cap.
After completion of the Equity Offerings, the Company expects to make
performance share awards to Messrs. Smith, Ginnetti, Marra, Odell and Welnicki
equal to $360,000, $100,000, $160,000, $100,000 and $100,000, respectively.
COMPENSATION UPON CHANGE OF CONTROL. The 1997 Stock Plan provides for the
automatic protection of intended economic benefits for key employees in the
event of a change of control of the Company (i.e., upon the occurrence of an
"Acceleration Event" as defined below). Notwithstanding any other provisions of
the 1997 Stock Plan, upon the occurrence of an Acceleration Event (a) all
options and SARs will generally become immediately exercisable for a period of
60 calendar days; (b) all options and SARs will continue to be exercisable for a
period of seven months in the case of an employee whose employment is terminated
other than for "just cause" (as defined in the 1997 Stock Plan) or who
voluntarily terminates employment because of a good faith belief that such
employee will not be able to discharge his or her duties; (c) SARs exercised
during the 60-day period will be settled fully in cash based on a formula price
generally reflecting the highest price paid for a share of Class A Common Stock
during the 60-day period preceding the date such SARs are exercised; (d)
"limited stock appreciation rights" shall automatically be granted on all
outstanding options not otherwise covered by SARs, which shall generally be
immediately exercisable in full and which shall entitle the holders to the same
exercise period and formula price referred to in clauses (a), (b) and (c) above;
(e) outstanding performance share awards shall automatically vest, with the
valuation of such performance shares based on the formula price; and (f)
restrictions applicable to awards of restricted stock shall be automatically
waived.
"Acceleration Event" is generally defined in the 1997 Stock Plan as any of
the following events: (i) the filing of a report on Schedule 13D with the
Commission pursuant to Section 13(d) of the Exchange Act disclosing that any
person (within the meaning of Section 13(d) of the Exchange Act), other than the
Company, The Hartford, any of their respective subsidiaries or any employee
benefit plan sponsored by any of the foregoing, is the beneficial owner (as such
term is defined in Rule 13d-3 under the Exchange Act) directly or indirectly of
the greater of (A) the percentage of the outstanding capital stock owned at such
time by The Hartford or (B) 20% or more of the outstanding capital stock
(calculated as provided in paragraph (d) of Rule 13d-3 under the Exchange Act in
the case of rights to acquire Common Stock); (ii) the purchase by any person
(within the meaning of Section 13(d) of the Exchange Act), other than any of the
entities described in clause (i) above, of shares pursuant to a tender offer or
exchange offer to acquire any capital stock (or securities convertible into
capital stock) for cash, securities or any other consideration; provided that
after consummation of the offer, the person in question is the beneficial owner
(as such term is defined in Rule 13d-3 under the Exchange Act) directly or
indirectly of the greater of (A) the percentage of the outstanding capital stock
owned at such time by The Hartford or (B) 15% or more of the outstanding capital
stock (calculated as provided in paragraph (d) of Rule 13d-3 under the Exchange
Act in the case of rights to acquire capital stock); (iii) the approval by the
stockholders of the Company of (A) any consolidation or merger of the Company in
which the Company is not the continuing or surviving corporation or pursuant to
which shares of capital stock would be converted into cash, securities or other
property, other than a merger of the Company in which holders of capital stock
immediately prior to the merger have the same proportionate ownership of common
stock of the surviving corporation immediately after the merger as immediately
before, or (B) any sale, lease, exchange or other transfer (in one transaction
or a series of related transactions) of all or substantially all the assets of
the Company; (iv) a change in a majority of the members of the Board of
Directors within a twelve-month period unless the election or nomination for
election by the Company's stockholders of each new director during such
twelve-month period was approved by the vote of two-thirds of the directors then
still in office who were directors at the beginning of such twelve-month period;
or (v) the occurrence of an Acceleration Event (as defined in the Hartford Stock
Plan) with respect to The Hartford at a time
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when The Hartford beneficially owns more than 50% of the combined voting power
and value of the capital stock of the Company. The 1997 Stock Plan is expected
to provide that a sale of The Hartford's interest in the Company will not be
considered an Acceleration Event.
AMENDMENT AND TERMINATION OF THE 1997 STOCK PLAN. The Board of Directors
may amend or discontinue the 1997 Stock Plan at any time and, specifically, may
make such modifications to the 1997 Stock Plan as it deems necessary to avoid
the application of Section 162(m) of the Internal Revenue Code and the United
States Treasury regulations issued thereunder. However, stockholder approval is
required for certain amendments, including any amendment applicable to tax
qualified options which may (i) increase the number of shares reserved for
awards (except as provided in the 1997 Stock Plan with respect to stock splits
or other similar changes) or (ii) materially change the group of employees
eligible for awards.
1997 BONUS SWAP PLAN
Prior to the completion of the Equity Offerings, the Board of Directors is
expected to adopt the 1997 Bonus Swap Plan, a component of the 1997 Stock Plan.
Under the 1997 Bonus Swap Plan, key employees who elect to receive a portion of
their annual bonuses in the form of contractual rights to receive shares of
Class A Common Stock after the expiration of a three-year restriction period
(the "elective shares") are awarded contractual rights to receive additional
"premium" shares of restricted Class A Common Stock equal to 10% of the elective
shares. The premium shares are also subject to a three-year restriction period.
In the event a key employee terminates employment during the restriction period,
the premium shares are forfeited by such employee and reacquired by the Company
unless the Compensation and Personnel Committee provides otherwise where deemed
appropriate in accordance with the 1997 Stock Plan. The restrictions on the
premium shares may be waived, in the discretion of the Compensation and
Personnel Committee, in the event of the key employee's retirement, total
disability, death or in cases of special circumstances. The elective shares are
nonforfeitable. The key employee will have no stockholder rights by virtue of
participation in the 1997 Bonus Swap Plan, but will have the right to direct the
voting of actual Company shares (owned by a grantor trust) corresponding to the
number of elective and premium shares awarded to the executive. Additional
elective and premium shares are awarded to a key employee equal to any dividend
paid during the restriction period on the number of shares of Class A Common
Stock corresponding to the elective and premium shares previously awarded. Such
additional elective and premium shares are subject to the same conditions as the
elective and premium shares with respect to which they are awarded. The 1997
Bonus Swap Plan is expected to provide that no awards shall be made thereunder,
and the Company shall have no obligation to make any awards thereunder, if such
an award would cause the percentage of beneficial ownership of The Hartford of
the combined voting power or the value of the capital stock of the Company to
fall below 80%.
1997 STOCK PURCHASE PLAN
The 1997 Stock Purchase Plan is intended to meet the applicable
requirements of Section 423 of the Internal Revenue Code. Under the 1997 Stock
Purchase Plan, all full-time and certain part-time employees of the Company who
meet certain minimum service requirements will be eligible to purchase shares of
Class A Common Stock by means of payroll deductions. Eligible employees may
elect to participate in quarterly offering periods ("Purchase Periods") under
the 1997 Stock Purchase Plan by authorizing after-tax payroll deductions of up
to 10% (in whole percentages) of their salary for the purchase of shares of
Class A Common Stock under the Stock Purchase Plan. The 1997 Stock Purchase Plan
will have a term of five years and a maximum aggregate number of shares of Class
A Common Stock available thereunder of 2.7 million. The price at which shares of
Class A Common Stock will be purchased at the end of each Purchase Period will
be 85% of the closing market price, as reported on the NYSE Composite Tape, at
the beginning or end of the Purchase Period (or the nearest prior trading day),
whichever is less. No participating employee will be entitled in any calendar
year under the 1997 Stock Purchase Plan to purchase Class A Common
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Stock having an aggregate closing market price at the beginning of the
applicable Purchase Period, as reported on the NYSE Composite Tape (or the
nearest prior trading day), in excess of $25,000. Further, the 1997 Stock
Purchase Plan is expected to provide that no Class A Common Stock may be
purchased thereunder, and the Company will have no obligation to permit the
purchase of Class A Common Stock thereunder, if such purchase would cause the
percentage of beneficial ownership by The Hartford of the combined voting power
or the value of the capital stock of the Company to fall below 80%. Additional
restrictions may apply to employees deemed to be "insiders" under Section 16 of
the Exchange Act in order to comply with the exemption provided by Rule 16b-3
thereunder. Shares of Class A Common Stock available for issuance under the 1997
Stock Purchase Plan may be made available from treasury shares, authorized but
unissued shares, reacquired shares, shares purchased on the open market or any
combination of the foregoing.
HARTFORD STOCK PLAN; PRIOR AWARDS
The Hartford Stock Plan has been in place since December 1995. The terms
and provisions of the Hartford Stock Plan are identical in material part to
those of the Company's 1997 Stock Plan (see "-- 1997 Stock Plan"), except that
awards are made to key employees of The Hartford and its subsidiaries and
affiliates by and in the discretion of The Hartford compensation and personnel
committee in the form of tax-qualified incentive stock options and non-qualified
options and related rights to acquire common stock of The Hartford, SARs
relating to common stock of The Hartford, performance shares payable in cash and
common stock of The Hartford and restricted shares of common stock of The
Hartford. After completion of the Equity Offerings, the employees of the Company
will remain eligible for awards under the Hartford Stock Plan; however, The
Hartford compensation and personnel committee is not expected to make awards
pursuant to the Hartford Stock Plan to any employees of the Company except Mr.
Smith.
As indicated above, 10,000 of the restricted shares of common stock of The
Hartford awarded to Mr. Smith on January 24, 1997 pursuant to the Hartford Stock
Plan are expected, upon completion of the Equity Offerings, to be canceled upon
surrender thereof, and restricted shares of Class A Common Stock of the Company
are expected to be issued in substitution therefor pursuant to the 1997 Stock
Plan. See "-- 1997 Stock Plan -- Substitute and New Restricted Stock Awards".
The remaining 10,000 restricted shares awarded to Mr. Smith on such date will
not be subject to substitution.
Certain options to acquire common stock of The Hartford granted to key
employees of the Company on February 14, 1996 pursuant to the Hartford Stock
Plan will not be subject to cancelation and substitution. For Mr. Smith, such
options have an exercise price of $52 per share and are presently exercisable.
For Messrs. Ginneti, Marra, Odell and Welnicki, such options are to become
exercisable in one-third increments on the first, second and third anniversaries
of the grant date, and are subject to the general terms of the Hartford Stock
Plan.
As indicated above, on January 24, 1997, The Hartford compensation and
personnel committee awarded Mr. Smith options to acquire 47,170 shares of common
stock of The Hartford pursuant to the Hartford Stock Plan. Of these options,
18,868 will not be subject to substitution. These options have an exercise price
of $72.25 per share and will become exercisable on the earlier of (i) the date
the closing market price for The Hartford's common stock, as reported on the
NYSE Composite Tape, reaches and remains at 125% of the exercise price for such
options for ten consecutive trading days or (ii) seven years from the date of
grant.
On February 14, 1996, The Hartford compensation and personnel committee
made contingent awards of performance shares to certain key employees of the
Company, including the Named Executives. The awards are contingent upon The
Hartford achieving certain performance objectives described below. To the extent
that the performance objectives are achieved, cash and shares of The Hartford
common stock will be granted to such key employees pursuant to the performance
share provisions of the Hartford Stock Plan. These performance shares will not
be subject to
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cancelation and substitution, but rather will become payable after the
performance period to the extent described below.
Under the terms of the awards, there are two equally weighted performance
objectives measured over the 1996-1998 performance period: core earnings per
share of The Hartford ("Hartford Core Earnings") and TSR. Hartford Core Earnings
is defined as The Hartford's GAAP net income minus: (i) net realized capital
gains or losses; (ii) income or losses due to changes in methods of accounting;
(iii) the amount of losses from individual catastrophes in excess of 1% of
worldwide property-casualty earned premium for the year; (iv) the amount of any
individual non-catastrophe loss associated with any non-recurring charge that
exceeds $100 million; and (v) the income or loss associated with allocations
resulting from the liability sharing agreement entered into in connection with
the ITT Spin-Off. TSR is measured by the difference between the price of The
Hartford's common stock as of January 1, 1996 and the price as of December 31,
1998 (assuming the reinvestment of dividends paid), compared with the TSR of the
stock of a group of peer insurance companies.
The Hartford compensation and personnel committee established a minimum
threshold, a target and a maximum cap for Hartford Core Earnings and TSR to be
achieved in connection with the awards. If the targets are achieved, the key
employee will receive 100% of the performance shares awarded (payable one-third
in cash and two-thirds in common stock of The Hartford). If the minimum
thresholds are not achieved, the key employee will not receive any of the
performance shares awarded. If the Hartford Core Earnings and TSR achieved
exceed the minimum thresholds but fall below the targets, the key employee will
receive awards adjusted downward by interpolation to reflect falling short of
the targets. If the targets are exceeded, the key employee will receive awards
adjusted upward by interpolation subject to the maximum cap.
On January 24, 1997, the Hartford compensation and personnel committee
awarded Mr. Smith 4,444 performance shares relating to common stock of The
Hartford pursuant to the Hartford Stock Plan. This award will not be subject to
substitution. The terms of the award are substantially similar to those
described above with respect to awards of performance shares made on February
14, 1996, except that the performance period for the award runs from 1997 to
1999 and the "Performance Core Earnings" definition applies.
ANNUAL EXECUTIVE BONUS PROGRAM
Certain executives and key managers of the Company, including the Named
Executives, will be eligible to participate in an annual incentive bonus program
(the "Annual Bonus Program") administered by The Hartford. Under this program,
each executive and key manager is assigned a target bonus based on grade and
position, expressed as a percentage of the individual's year end base salary
rate. At year end, the aggregate amount of individual target bonuses is adjusted
in accordance with a pre-established formula to create a bonus pool for the
year.
For 1996, the Company measures net income and ROE against budgeted amounts
for the year and the measures are weighted 60% and 40%, respectively. Corporate
staff, including Mr. Smith, will be measured by a weighted average performance
factor for the Company. The maximum bonus pool is 200% of the aggregate target
bonus. Individual bonus amounts from the bonus pool are determined on a
discretionary basis taking into account specific personal contributions during
the year.
For 1996, incentive bonus programs were developed for Messrs. Ginnetti,
Marra, Welnicki and Odell. Financial measures and target bonuses are unique to
each such Named Executive. At year end, the individual target bonuses are
adjusted in accordance with the pre-established formula under each plan, with a
maximum bonus payout at 200% of target. The incentive formulas used to calculate
these individual target bonuses are based on various financial measures,
including ROE, net income and sales for the respective areas of responsibility
for such individuals, as well as the Company's net income and certain other
discretionary measures.
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During 1996, the target bonus adjustment factors pursuant to the above
formulas were 178.7% for Mr. Ginnetti, 290.5% for Mr. Marra, 142.4% for Mr.
Welnicki and 139.8% for Mr. Odell. In total, approximately $4,297,000 was
authorized for expenditure to approximately 100 executives and key managers of
the Company, including the amounts indicated in the Summary Compensation Table
for the Named Executives.
Bonus awards for certain Company executives that are payable in 1997 are
subject to approval by The Hartford compensation and personnel committee and
Company senior line of business management.
For 1997, the formula for the Company's bonus program, which includes Mr.
Smith, measures "core earnings" (as defined pursuant to the Annual Bonus
Program) and ROE against budgeted amounts for the year, weighted at 60% and 40%,
respectively.
For 1997, incentive bonus programs, similar to those described above for
1996, have been developed for Messrs. Ginnetti, Marra, Odell and Welnicki.
Financial measures, including a core earnings measure for bonus purposes, and
target bonuses are unique to each executive. At year end, the individual target
bonuses are adjusted in accordance with the pre-established formula under each
plan, with a maximum bonus payout at 200%. These individual target bonuses are
calculated in a manner substantially similar to the 1996 incentive bonus
programs.
HARTFORD RETIREMENT PLAN
The Hartford Retirement Plan covered substantially all eligible U.S.
salaried employees of the Company and its subsidiaries, including the Named
Executives, prior to the Equity Offerings and will continue to do so after the
completion thereof. An employee's annual pension will equal 2% of his or her
average final compensation up to thirty years of benefit service, reduced by
1 2/3% of the employee's primary Social Security benefit for each such year of
benefit service; provided that no more than one-half of an employee's primary
Social Security benefit is used for such reduction. An employee's average final
compensation is defined under the Hartford Retirement Plan as the total of (i)
an employee's average annual base salary earned in the 60 calendar months during
the last 120 consecutive calendar months of eligible service affording the
highest such average, plus (ii) a member's average annual compensation, not
including base salary, for the five calendar years of the member's last 120
consecutive calendar months of eligible service affording the highest such
average. The Hartford Retirement Plan also provides for undiscounted early
retirement pensions for employees who retire at or after age 60 following
completion of fifteen years of eligible service. An employee will be vested in
benefits accrued under the Hartford Retirement Plan upon completion of five
years of eligible service.
Applicable federal law limits the amount of benefits that can be paid and
compensation that may be recognized under a tax-qualified retirement plan.
Therefore, The Hartford has non-qualified unfunded retirement plans (the
"Hartford Excess Retirement Plans") for payment of those benefits at retirement
for eligible employees that cannot be paid from the qualified Hartford
Retirement Plan. After the completion of the Equity Offerings, certain employees
of the Company, including the Named Executives, also will remain eligible to
participate in the Hartford Excess Retirement Plans. The practical effect of the
Hartford Excess Retirement Plans is to continue calculation of retirement
benefits for all employees on a uniform basis. The Hartford also maintains an
excess plan trust under which excess benefits under the Hartford Excess
Retirement Plans for certain officers of The Hartford are funded. Any such
employee may indicate a preference, subject to certain conditions, to receive
any excess benefit in the form of a single discounted lump-sum payment. Any
"excess" benefit accrued to any such employee will be immediately payable in the
form of a single discounted lump sum payment upon the occurrence of a change in
corporate control (as defined in the Hartford Excess Retirement Plan). Upon the
completion of the Equity Offerings, such excess plan trust will continue to
provide such benefits to any eligible Company officers.
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Based on various assumptions as to remuneration and years of service,
before Social Security reductions, the following table illustrates the estimated
annual benefits payable from the Hartford Retirement Plan at retirement at age
65 that are paid for by the Company.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
AVERAGE YEARS OF SERVICE
FINAL ------------------------------------------------
COMPENSATION 15 20 25 30
------------------------------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C>
$ 50,000.......................... $ 15,000 $ 20,000 $ 25,000 $ 30,000
100,000.......................... 30,000 40,000 50,000 60,000
300,000.......................... 90,000 120,000 150,000 180,000
500,000.......................... 150,000 200,000 250,000 300,000
750,000.......................... 225,000 300,000 375,000 450,000
1,000,000.......................... 300,000 400,000 500,000 600,000
1,500,000.......................... 450,000 600,000 750,000 900,000
</TABLE>
The amounts shown under "Salary" and "Bonus" opposite the names of the
Named Executives in the Summary Compensation Table in "-- Executive
Compensation -- Summary" comprise the compensation that is used for purposes of
determining "average final compensation" under the plan. The years of service
with the Company of each of the Named Executives for eligibility and benefit
purposes as of December 31, 1996, are as follows: Mr. Smith, 28.75 years; Mr.
Ginnetti, 14.5 years; Mr. Marra, 16.58 years; Mr. Odell, 23.33 years; and Mr.
Welnicki, 4.17 years.
HARTFORD SENIOR EXECUTIVE SEVERANCE PAY PROGRAM
The Hartford Senior Executive Severance Pay Program applies to the
Company's senior executives, including, as of December 31, 1996, the Named
Executives. Under the Hartford Senior Executive Severance Pay Program, if a
participant's employment is terminated by the Company, other than for misconduct
or other disciplinary action or in other events specified in the program, the
participant is entitled to severance pay in an amount up to 24 months of base
salary from the Company depending upon his or her length of service, except that
Mr. Smith is entitled to severance pay for the greater of (i) the remaining term
of his employment contract (his current contract expires on December 19, 1999)
or (ii) 24 months. The Hartford Senior Executive Severance Pay Program provides,
however, that in no event will severance pay (for the Company's senior
executives, including the Named Executives, other than Mr. Smith) exceed the
amount of base salary from the Company for the number of months remaining
between the termination of employment and the participant's normal retirement
date, and that in no event will the total amount of severance pay exceed two
times the participant's total annual compensation during the year immediately
preceding such termination. The Hartford Senior Executive Severance Pay Program
includes offset provisions for other compensation from the Company and
requirements on the part of executives with respect to non-competition and
compliance with certain standards of conduct. Under the Hartford Senior
Executive Severance Pay Program, severance payments would ordinarily be made
periodically over the scheduled term of such payments. However the Company and
The Hartford have the option to make such payments in the form of a single
lump-sum payment discounted to present value.
The annual base salaries of Messrs. Smith, Ginnetti, Marra, Odell and
Welnicki as of December 31, 1996 were $525,000, $375,000, $350,000, $238,000 and
$238,000, respectively.
HARTFORD INVESTMENT AND SAVINGS PLAN
The salaried employees of the Company who, prior to the Equity Offerings,
have been participants in the Hartford Investment and Savings Plan, including
the Named Executives, will continue to be eligible to participate in the Plan
after the completion of the Equity Offerings. However, future employer
contributions to the Hartford Investment and Savings Plan, on behalf of
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Company employees, will be made in Class A Common Stock of the Company and a new
investment fund permitting employees of the Company and The Hartford to invest
their own prior and future contributions in the Company's stock will be added to
the Plan. Employees of the Company may also elect to transfer to the new
investment fund, within a certain time period, contributions previously made by
The Hartford on their behalf. The Hartford Investment and Savings Plan is a
defined contribution plan that is intended to be tax-qualified under Sections
401(a) and 401(k) of the Internal Revenue Code. The Hartford Investment and
Savings Plan is expected to provide that no contributions of Class A Common
Stock will be made thereunder, and the Company and The Hartford shall have no
obligation to make or permit any contribution thereunder, if such contribution
would cause the percentage of beneficial ownership by The Hartford of the
combined voting power or the value of the capital stock of the Company to fall
below 80%.
Federal legislation limits the annual contributions which an employee may
make to the Hartford Investment and Savings Plan. Accordingly, The Hartford has
adopted Excess Savings Plans (the "Hartford Excess Savings Plans") and, after
the completion of the Equity Offerings, the Company's employees will continue to
be eligible for the Hartford Excess Savings Plans, which will enable an employee
who is precluded by these limitations from contributing the entire 6% of his or
her salary to the Hartford Investment and Savings Plan to make up the shortfall
through salary deferrals to the Hartford Excess Savings Plan and thereby receive
an amount credited to a book reserve account maintained by The Hartford equal to
the 50% matching employer contribution and one-half of 1% non-matching employer
contribution otherwise allowable under the Hartford Investment and Savings Plan.
Salary deferrals, employer contributions and imputed earnings will be entered
into a book reserve account maintained by The Hartford for each participant in
the Hartford Excess Savings Plan.
HARTFORD DEFERRED COMPENSATION PLAN
Employees of The Hartford who meet certain salary level standards have been
participants in the Hartford Deferred Compensation Plan. It is intended that the
employees of the Company, including the Named Executives, who meet such
standards will continue to be eligible for the Hartford Deferred Compensation
Plan after the completion of the Equity Offerings. Under the Hartford Deferred
Compensation Plan, eligible employees with eligible compensation of $200,000 or
more may elect to defer receipt of up to 100% of their 1997 bonus. The Hartford
will credit participating employees a hypothetical return on the deferred
compensation based upon the performance of benchmark investment funds made
available under the plan and selected by the executive to measure such return.
EMPLOYEE WELFARE BENEFITS
After the completion of the Equity Offerings, salaried employees of the
Company and its participating subsidiaries, including the Named Executives, will
continue to participate in the broad-based employee welfare benefits program
which is currently sponsored by The Hartford. The Company's salaried employees
will participate in The Hartford's comprehensive benefits program, which will
include group medical and dental coverage, group life insurance and other
benefit plans, in addition to the pension program and investment and savings
plan available to salaried employees of The Hartford described previously.
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SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth at May 9, 1997, the beneficial ownership of
common stock, par value $.01 per share, of The Hartford by the Company's
directors, the Named Executives and all the directors and executive officers of
the Company as a group.
<TABLE>
<CAPTION>
AMOUNT
BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED(1)(2)
--------------------------------------------------------------- -----------
<S> <C>
Ramani Ayer.................................................... 265,468
Donald R. Frahm................................................ 311,245
Paul G. Kirk, Jr. ............................................. 2,278
Lowndes A. Smith............................................... 265,910
H. Patrick Swygert............................................. 1,011
DeRoy C. Thomas................................................ 27,029
Gordon I. Ulmer................................................ 3,268
David K. Zwiener............................................... 115,644
John P. Ginnetti............................................... 99,651
Thomas M. Marra................................................ 63,532
Leonard E. Odell, Jr. ......................................... 32,631
Raymond P. Welnicki............................................ 14,203
All directors and executive officers of the Company
as a group (15 persons)...................................... 1,211,654
</TABLE>
- ---------------
(1) All shares are owned directly except as otherwise indicated below. Pursuant
to regulations of the Commission, shares (i) that may be acquired by
directors and executive officers upon exercise of stock options exercisable
within sixty days after May 9, 1997, (ii) allocated to the accounts of
certain directors and executive officers under the Hartford Investment and
Savings Plan based on a valuation of plan accounts as of May 9, 1997, (iii)
acquired by directors and executive officers under the Hartford Dividend
Reinvestment and Cash Payment Plan through May 9, 1997, (iv) owned by a
director's or executive officer's spouse or minor child or (v) that have
been granted under the Hartford Incentive Stock Plan or the 1995 ITT
Hartford Group, Inc. Restricted Stock Plan for Non-Employee Directors and
are restricted, but as to which the directors or executive officers have the
right to vote, are deemed to be beneficially owned by such directors and
executive officers as of such date and are included in the number of shares
listed in the table above.
Of the number of shares shown above, the following represent shares that may
be acquired upon exercise of stock options that are exercisable within sixty
days after May 9, 1997 by: Mr. Smith, 241,216 shares; Mr. Ginnetti, 38,165
shares; Mr. Marra, 55,216 shares; Mr. Odell, 19,901 shares; Mr. Welnicki,
13,240 shares; and all directors and executive officers as a group, 951,798
shares.
(2) The shares of The Hartford's common stock beneficially owned by each person
named above do not exceed 1% of the issued and outstanding shares of common
stock of The Hartford. The shares beneficially owned by all the directors
and executive officers of the Company as a group are approximately 1% of
such issued and outstanding shares.
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CERTAIN RELATIONSHIPS AND TRANSACTIONS
GENERAL
The Hartford is currently the beneficial owner of all the capital stock of
the Company. Following the completion of the Equity Offerings, The Hartford will
continue to be the controlling stockholder of the Company and will beneficially
own 100% of the outstanding Class B Common Stock, which will represent
approximately 96.1% of the combined voting power of all the outstanding Common
Stock and approximately 83.2% of the economic interest in the Company (or
approximately 95.6% and 81.4%, respectively, if the Underwriters' over-allotment
options are exercised in full). For so long as The Hartford continues to
beneficially own shares of Common Stock representing more than 50% of the
combined voting power of the outstanding Common Stock, it generally will be able
to approve any matter submitted to a vote of the stockholders, including, among
other things, the election of the entire Board of Directors or the amendment of
the Certificate of Incorporation and By-laws without the consent of the other
stockholders of the Company. In addition, through its controlling beneficial
ownership of the Company (as well as certain provisions of the Master
Intercompany Agreement discussed under "-- Intercompany Arrangements -- Master
Intercompany Agreement"), The Hartford will be able to exercise a controlling
influence over the business and affairs of the Company, including determinations
with respect to mergers or other business combinations involving the Company,
the acquisition or disposition of assets by the Company, the Company's access to
the capital markets, the payment of dividends and any change of control of the
Company. In the foregoing situations or otherwise, various conflicts of interest
between the Company and The Hartford could arise. Furthermore, ownership
interests of directors or officers of the Company in common stock of The
Hartford or service as a director or officer of both the Company and The
Hartford could create, or appear to create, potential conflicts of interest when
directors and officers are faced with decisions that could have different
implications for the Company and The Hartford.
COMPETITION
The Hartford historically has conducted the operations of its Annuity,
Individual Life Insurance and Employee Benefits segments (each as described in
this Prospectus) in the United States and Canada solely through the Company and
its subsidiaries. The Hartford has informed the Company that it currently
intends to continue this strategy with respect to those products and services
currently being offered by the Company through those business segments.
Separately, The Hartford has informed the Company that The Hartford intends to
engage in efforts to provide investment management services to large businesses,
some of which may be customers of the Company. The Company currently does not
plan to enter those lines of business in the United States and Canada in which
The Hartford or any of its subsidiaries (other than the Company or any of its
subsidiaries) currently operates. The Hartford currently provides commercial
property-casualty insurance, property-casualty reinsurance and personal lines
(including homeowners and auto) coverages.
The Hartford historically has conducted its international life insurance
and annuity operations both through the Company, and its subsidiaries, and
through other subsidiaries of The Hartford. Currently, The Hartford holds life
insurance and annuity operations internationally through direct or indirect
wholly owned subsidiaries in The Netherlands, Spain and the United Kingdom,
while the Company operates lines of business in Brazil and Argentina. There is
no current intention on the part of the Company or The Hartford to enter such
lines of business in countries in which The Hartford or the Company,
respectively, currently operates.
The Certificate of Incorporation of the Company provides that, subject to
any contractual agreements of the Company to the contrary, and subject to
applicable law, The Hartford or any subsidiary thereof (other than the Company
or any of its subsidiaries) will have the right to compete with the Company or
any of its subsidiaries. For a further discussion of the Company's Certificate
of Incorporation, see "Certain Provisions of the Certificate of Incorporation
and By-Laws of the Company". It is possible that areas of competition and
conflicts of interest may arise between the
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two companies or their respective subsidiaries in the future. No assurance can
be given that such areas of competition or conflicts of interest will not arise
or will be resolved in a manner favorable to the Company.
The Hartford has advised the Company that its current intent is to continue
to hold all the Class B Common Stock it beneficially owns. However, The Hartford
has no contractual obligation to retain its shares of Class B Common Stock,
except for a limited period described in "Underwriting". In addition, the
Company has agreed that it will, upon the request of The Hartford, use its best
efforts to effect the registration under applicable federal and state securities
laws of any shares of Common Stock held by The Hartford or any of its
affiliates. See "-- Intercompany Arrangements -- Master Intercompany Agreement".
The address of The Hartford is Hartford Plaza, Hartford, Connecticut 06115.
BOARD OF DIRECTORS
Promptly following the completion of the Equity Offerings, The Hartford and
the Company expect to elect two additional directors of the Company who will be
persons not currently or formerly associated with The Hartford or the Company.
The Board of Directors will then consist of ten members, including eight who are
directors and/or officers of The Hartford. See "Management -- Directors".
Members of the Board of Directors will be divided into three classes and serve
staggered three-year terms. The Hartford will have the ability to change the
size and composition of the Company's Board of Directors.
INTERCOMPANY ARRANGEMENTS
The Company's relationship with The Hartford will be governed by, among
other things, certain agreements to be entered into in connection with the
Equity Offerings and possibly in the future, including the Master Intercompany
Agreement, the Investment Management Agreements, the Tax Sharing Agreement and
the Simsbury Sublease, the material terms of which are summarized below. The
agreements entered into in connection with the Equity Offerings generally will
maintain the relationship between the Company and The Hartford in a manner
consistent in all material respects with past practice. Under applicable
insurance holding company laws, agreements between the Company's insurance
subsidiaries and The Hartford or its affiliates must be fair and reasonable and
may be subject to the approval of applicable state insurance commissioners.
However, none of these agreements, nor any agreements entered into in the future
between the Company and The Hartford or their respective subsidiaries (for so
long as The Hartford maintains controlling beneficial ownership in the Company),
will result from arm's-length negotiations and, as a result, the terms of
certain of such agreements may be less favorable to the Company than could be
obtained from an independent third party.
The descriptions set forth below are intended to be summaries and, while
material terms of the agreements are set forth herein, the descriptions are
qualified in their entirety by reference to the relevant agreement or form
thereof filed with the Registration Statement of which this Prospectus forms a
part.
MASTER INTERCOMPANY AGREEMENT
SERVICES. The Company and The Hartford will enter into the Master
Intercompany Agreement which will identify those services that The Hartford will
agree to provide to the Company and that the Company will agree to provide to
The Hartford, with the costs of such services allocated according to established
methodologies determined on an annual basis by The Hartford, in its sole
discretion, after consultation with the Company, which evidence each such
party's fair and reasonable share of such costs. Such allocation of costs for
such services provided in prior years is reflected in the Company's consolidated
financial statements. In particular, The Hartford intends to allow eligible
employees of the Company to continue to participate in The Hartford's employee
benefit plans.
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The general purpose of the Master Intercompany Agreement is to ensure that
The Hartford continues to provide to the Company the range of services provided
by it prior to the Equity Offerings. These services include, among others,
certain corporate relations, executive, government affairs, human resources,
legal, investment, finance, real estate, information management, internal audit,
cash management, tax and treasury services.
In addition, the Company will have the exclusive right under the Master
Intercompany Agreement to distribute certain of its products through The
Hartford. The Hartford will not solicit or encourage any of its independent
agents to (x) sell or endorse any products of another company similar in type
and nature to such products of the Company or (y) transfer any of such
independent agents' in force business with the Company relating to such products
to another company.
APPROVAL OF CORPORATE ACTIVITIES. The Master Intercompany Agreement also
will require that, prior to the date on which The Hartford ceases to
beneficially own 50% or more of the combined voting power of the Voting Stock
then outstanding, neither the Company nor any of its subsidiaries may undertake
or agree to undertake any of the following without the prior written consent of
The Hartford:
(i) any merger or consolidation (or equivalent transaction) of the
Company or any of its subsidiaries with or into any corporation,
partnership, joint venture or any other person, or division thereof, which
merger or consolidation (or equivalent transaction) is material to the
Company and its subsidiaries taken as a whole;
(ii) the acquisition by the Company or any of its subsidiaries of a
majority of the issued and outstanding shares of capital stock or all or
substantially all the assets of any corporation, partnership, joint venture
or any other person involving consideration or value in excess of $5
million;
(iii) any sale, assignment, lease, transfer or other disposition, or
the pledge, mortgage or encumbrance, of assets of the Company or any of its
subsidiaries other than (w) any transaction in the ordinary course of
business and consistent with past practice, (x) any acquisition,
disposition or transfer of securities pursuant to investment portfolio
decisions in the ordinary course of business and consistent with past
practice, (y) any transaction between or among any of the Company and its
subsidiaries or (z) any transaction, or series of related transactions,
which does not involve aggregate consideration or value in excess of $5
million;
(iv) any transaction, or series of related transactions, not
specifically enumerated in subparagraphs (i) through (iii) above, involving
aggregate consideration, value or liabilities in excess of $10 million or
that is or are otherwise material to the Company and its subsidiaries taken
as a whole;
(v) any transaction, or series of related transactions, that could
have a material effect on The Hartford;
(vi) any increase or decrease in, or the reclassification of, the
authorized capital stock of the Company or the creation of any class or
series of capital stock of the Company;
(vii) the dissolution, liquidation or winding up of the Company;
(viii) any redemption, acquisition or issuance by the Company of any
shares of its capital stock or any options, warrants or rights to acquire
such capital stock or securities convertible into or exchangeable for
capital stock, other than issuances in respect of and pursuant to the
requirements of the 1997 Restricted Stock Plan, the 1997 Stock Plan, the
1997 Bonus Swap Plan and the 1997 Stock Purchase Plan or such other
employee and director stock option, profit sharing or other benefit plans
of the Company in effect from time to time;
(ix) the declaration or payment of dividends on or in respect of any
class or series of capital stock of the Company or any other distribution
to the stockholders of the Company,
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other than dividends on or in respect of the Common Stock consistent with
the Company's dividend policy then in effect; and
(x) any direct or indirect act that would result, either alone or
taking into account the business, operations, properties, activities and
legal and regulatory status of The Hartford and the Company, in (i) The
Hartford or any of its subsidiaries (other than the Company and any of its
subsidiaries) being required to file any notice, report or other document
or make any registration with, or obtain any approval, consent or
authorization of, any governmental or regulatory agency, other than in the
ordinary course of business and consistent with past practice, or otherwise
becoming subject to any applicable law or regulation or (ii) any director
of The Hartford being ineligible to serve or prohibited from so serving as
a director of The Hartford under or pursuant to any applicable law or
regulation.
REGISTRATION RIGHTS. The Master Intercompany Agreement will further
provide that, upon the request of The Hartford or any other Rights Holder, the
Company will use its best efforts to effect the registration under the
applicable federal and state securities laws of any of the shares of Common
Stock (and any other securities issued in respect of or in exchange therefor)
beneficially owned by The Hartford or any such other Rights Holder, as
applicable, for sale in accordance with its intended method of disposition
thereof, and will take such other actions as may be necessary to permit the sale
thereof in other jurisdictions, subject to certain limitations specified in the
Master Intercompany Agreement. The Hartford and any other Rights Holder also
will each have the right, subject to certain limitations, to include at any time
and from time to time the shares of Common Stock (and any other securities
issued in respect of or in exchange therefor) beneficially owned by it in
certain other registrations of such securities initiated by the Company on its
own behalf or on behalf of its other stockholders. The Company generally will
agree, subject to the provisions of the Master Intercompany Agreement, to pay
all out-of-pocket costs and expenses in connection with each such registration
that The Hartford or any other Rights Holder requests or in which The Hartford
or any other Rights Holder participates. Subject to certain limitations
specified in the Master Intercompany Agreement, such registration rights will be
assignable by The Hartford or any other Rights Holder and their assigns. The
Master Intercompany Agreement will contain customary terms and provisions with
respect to, among other things, registration procedures and certain rights to
indemnification and contribution granted by the parties thereunder in connection
with such a registration.
INDEMNIFICATION. The Master Intercompany Agreement will provide for the
assumption of liabilities and cross-indemnities allocating liability in respect
of the Company's businesses to the Company and in respect of The Hartford's
businesses (other than the businesses of the Company and its subsidiaries) to
The Hartford. In addition, for those liabilities not specifically arising out of
or allocable to either of their respective former or present businesses, the
parties will agree to share such liabilities, allocating 30% of the cost of such
liabilities to the Company and 70% of the cost of such liabilities to The
Hartford. In addition, pursuant to the terms of the Master Intercompany
Agreement, the Company will be responsible for 30% of certain shared liabilities
not specifically arising out of or allocable to any of the present or former
businesses of ITT, New ITT or The Hartford under the distribution agreement
executed in connection with the ITT Spin-Off (the "Spin-Off Distribution
Agreement") and for which The Hartford has responsibility thereunder. See
"-- ITT Spin-Off".
Under the tax allocation agreement entered into in connection with the ITT
Spin-Off (the "Spin-Off Tax Agreement"), The Hartford also is responsible for a
one-third share of certain federal, state or foreign tax liabilities with
respect to the ITT Spin-Off and certain business activities of ITT prior to the
date of such ITT Spin-Off. See "-- ITT Spin-Off". Pursuant to the Master
Intercompany Agreement, the Company will be responsible for 30% of any such
liabilities and The Hartford will be responsible for 70% of any such
liabilities. In addition, the Company and The Hartford will agree that, pursuant
to the Master Intercompany Agreement, any sales or use tax arising from or
imposed upon the transfer of property or services by either of them or their
respective subsidiaries following the
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completion of the Equity Offerings will be the liability of the party receiving
such property or services. The Master Intercompany Agreement also will provide
that the Company and its subsidiaries will be liable for any payroll tax
attributable to 1997 that arises from the employment by the Company after the
completion of the Equity Offerings of individuals who perform services for the
Company or any of its subsidiaries during 1997. Further, the Master Intercompany
Agreement will provide that the Company and its subsidiaries or The Hartford and
its subsidiaries (other than the Company and its subsidiaries) (each group, an
"Indemnifiable Group"), as applicable, will each indemnify the other
Indemnifiable Group for any taxes, including interest and penalties thereon
(regardless of which Indemnifiable Group member taxes are imposed upon),
attributable to, or otherwise arising as a result of, the exercise by the
Internal Revenue Service, or any other governmental revenue authority, of the
authority granted under Section 482 of the Internal Revenue Code or any similar
statutory provision, to distribute, apportion or allocate gross income,
deductions, credits or allowances between or among The Hartford or any of its
subsidiaries (other than the Company and its subsidiaries) and the Company and
its subsidiaries, as applicable.
LICENSE AND SUBLICENSE. Hartford Fire will grant to (x) the Company the
Hartford License and the right to grant Hartford Sublicenses to the extent
described under "Risk Factors -- Control by and Relationship with The
Hartford -- Intercompany Arrangements -- Master Intercompany Agreement" and (y)
the Company and/or certain of its subsidiaries a personal, non-transferable
sublicense to use the "ITT" name and marks, including the logo, owned by ITT
Sheraton Corporation (each, an "ITT Sublicense") which was previously licensed
to Hartford Fire under the ITT Trade Name and Service Mark License Agreement
(the "ITT License Agreement") entered into in connection with the ITT Spin-Off,
each such license subject to customary usage restrictions. The rights that will
be granted under an ITT Sublicense may be restricted or terminated pursuant to
the terms of the ITT License Agreement, including a provision that allows for
termination by The Hartford of its license thereunder upon six months' prior
written notice. Moreover, the ITT License Agreement provides that ITT may, under
certain limited circumstances, terminate the ITT License Agreement and thereby
the ITT Sublicenses. For a description of the circumstances under which ITT may
terminate the ITT License Agreement, see "-- ITT Spin-Off".
Subject to the foregoing limitations, each of the Hartford License, any
Hartford Sublicenses and the ITT Sublicenses will be perpetual, except that, in
the event that The Hartford reduces its beneficial ownership below 50% of the
combined voting power of the outstanding Voting Stock, Hartford Fire may revoke
the Hartford License and/or any Hartford Sublicenses upon the later of the fifth
anniversary of the date of consummation of the Equity Offerings or one year
after receipt by the Company of written notice of Hartford Fire's intention to
revoke the Hartford License and/or any Hartford Sublicenses. However, only with
respect to any future international property-casualty operations conducted by
the Company, the Hartford License and/or any Hartford Sublicenses may be revoked
by Hartford Fire upon six months' written notice in the event that The Hartford
reduces its beneficial ownership below 50% of the combined voting power of the
outstanding Voting Stock. Each ITT Sublicense will terminate on the earlier of
(i) the earliest termination date specified in the ITT License Agreement or (ii)
the date that The Hartford reduces its beneficial ownership below 50% of the
combined voting power of the outstanding Voting Stock; provided, however, that
if the Company provides an indemnity to The Hartford to cover any resulting
liabilities, the Company may elect to have each ITT Sublicense terminate only
upon the earliest termination date specified in the ITT License Agreement. In
addition, in each case the Hartford License, any Hartford Sublicenses and the
ITT Sublicenses may be revoked immediately in certain other limited, customary
circumstances, such as material breach of any such licenses, insolvency and any
non-permitted transfers of such licenses and sublicenses. Each of the Company
and The Hartford will agree to indemnify the other and any of its subsidiaries,
and their respective employees, officers, directors and agents, from and against
any claims, demands, suits, actions, damages and judgments brought or obtained
by a third party arising out of any (i) use of the "Hartford" name and/or any of
the various trademarks and service marks licensed pursuant to the Hartford
License and any Hartford Sublicenses by the Company or certain of its
subsidiaries or The Hartford or any of its subsidiaries,
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as applicable, or (ii) breach by the Company or certain of its subsidiaries or
The Hartford and any of its subsidiaries, as applicable, of the terms and
conditions of the Hartford License and any Hartford Sublicenses, as applicable.
In addition, Hartford Fire will agree to indemnify the Company and any of its
subsidiaries, and their respective employees, officers, directors and agents,
from and against any claims, demands, suits, actions, damages and judgments
brought or obtained by a third party arising out of an assertion that the use of
such "Hartford" name, trademarks or service marks infringes the trade names,
trademarks and service marks of a third party. The Company will be able to
assign its rights in the Hartford License to a third party upon the prior
written approval of Hartford Fire. See "Risk Factors -- Control by and
Relationship with The Hartford -- Intercompany Arrangements -- Master
Intercompany Agreement".
TERM. The Master Intercompany Agreement will contain various termination
provisions. In the case of the provision of services, the relevant provisions of
the Master Intercompany Agreement will be subject to termination by the Company
or The Hartford, upon six months' prior written notice, on and after the date on
which The Hartford ceases to own 50% or more of the combined voting power of the
Voting Stock then outstanding and as otherwise specified therein. As noted
above, the provisions in respect of approval of certain corporate activities by
The Hartford will only be effective so long as The Hartford beneficially owns
50% or more of the combined voting power of the outstanding Voting Stock. The
Master Intercompany Agreement will not provide for termination of the provisions
in respect of registration rights and indemnification discussed above. For a
discussion of the termination provisions in respect of the Hartford License, any
Hartford Sublicenses and the ITT Sublicenses, see "-- License and Sublicense".
TAX SHARING AGREEMENT AND TAX CONSOLIDATION
Pursuant to the Tax Sharing Agreement, the Company, its subsidiaries and
The Hartford will make payments between them such that, with respect to any
period, the amount of taxes to be paid by the Company, subject to certain
adjustments, generally will be determined as though the Company were to file
separate federal, state and local income tax returns (including, except as
provided below, any amounts determined to be due as a result of a
redetermination of the tax liability of The Hartford arising from an audit or
otherwise). With respect to certain tax items, however, such as foreign tax
credits, alternative minimum tax credits, net operating losses and net capital
losses, the Company's right to reimbursement will be determined based on the
usage of such credits or losses by the consolidated group.
The Hartford will continue to have all the rights of a parent of a
consolidated group (and similar rights provided for by applicable state and
local law with respect to a parent of a combined, consolidated or unitary
group), will be the sole and exclusive agent for the Company in any and all
matters relating to the tax liabilities of the Company, will have sole and
exclusive responsibility for the preparation and filing of all tax returns (or
amended returns) and will have the power, in its sole discretion, to contest or
compromise any asserted tax adjustment or deficiency and to file, litigate or
compromise any claim for refund on behalf of the Company.
The Hartford will control all the tax decisions of the Company, as is
presently the case, by virtue of its controlling beneficial ownership of the
Company and the terms of the Tax Sharing Agreement. Under the Tax Sharing
Agreement, The Hartford will have sole authority to respond to and conduct all
tax proceedings (including tax audits) relating to the Company, file all returns
on behalf of the Company and determine the amount of the Company's liability to
(or entitlement to payment from) The Hartford under the Tax Sharing Agreement.
This arrangement may result in conflicts of interest between the Company and The
Hartford. For example, under the Tax Sharing Agreement, The Hartford will be
able to choose to contest, compromise or settle any adjustment or deficiency
proposed by the relevant taxing authority in a manner that may be beneficial to
The Hartford and detrimental to the Company.
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Provided that The Hartford continues to beneficially own, directly or
indirectly, at least 80% of the combined voting power and the value of the
outstanding capital stock of the Company, the Company will be included for
federal income tax purposes in the consolidated group of which The Hartford is
the common parent. It is the present intention of The Hartford and its
subsidiaries to continue to file a single consolidated federal income tax
return. In certain circumstances, certain of the Company's subsidiaries also
will be included with certain subsidiaries of The Hartford (other than Company
subsidiaries) in combined, consolidated or unitary income tax groups for state
and local tax purposes. Each member of a consolidated group for federal income
tax purposes is jointly and severally liable for the federal income tax
liability of each other member of the consolidated group. Similar principles
apply with respect to members of a combined group for state law tax purposes.
Accordingly, although the Tax Sharing Agreement will allocate tax liabilities
between the Company and The Hartford during the period in which the Company is
included in The Hartford's consolidated group, the Company could be liable for
the federal income tax liability of any other member of The Hartford
consolidated group in the event any such liability is incurred, and not
discharged, by such other member.
In addition, provided that The Hartford continues to beneficially own at
least 80% of the combined voting power or the value of the outstanding capital
stock of the Company, the Company will be included for federal income tax
purposes in the controlled group of which The Hartford is the common parent.
Each member of a controlled group is jointly and severally liable for pension
funding and pension termination liabilities of each other member of the
controlled group, as well as certain benefit plan taxes. Accordingly, the
Company could be liable for pension funding, pension termination liabilities and
certain other pension-related excise taxes as well as other taxes of another
member of The Hartford-controlled group in the event any such liability is
incurred, and not discharged, by such other member.
INVESTMENT MANAGEMENT AGREEMENTS
The Investment Management Agreements will provide that the investment staff
of The Hartford will implement (e.g., selection, purchase and sale of
securities) the investment strategies determined by the investment strategy
group of the Company and act as advisor to certain of the Company's
non-guaranteed separate accounts and mutual funds. The Investment Management
Agreements also will provide that the Company will pay a fee designed to reflect
the actual costs of providing such services. In addition, the Investment
Management Agreements generally will provide that, prior to April 1, 2000, The
Hartford may not terminate such Agreements, and the Company may only terminate
such Agreements, upon six months' written notice, based on The Hartford's
failure to satisfy performance benchmarks agreed to by the parties. Further, the
Investment Management Agreements generally will provide that from and after
April 1, 2000, the Investment Management Agreements will continue unless 180
days' prior written notice of termination is provided on or after October 1,
1999 by one party to the other. The Investment Management Agreements for the
Company's mutual funds will be terminable by any of the mutual funds' board of
directors at any time. See "Risk Factors -- Control by and Relationship with The
Hartford -- Intercompany Arrangements -- Investment Management Agreements".
SIMSBURY SUBLEASE
The Company's headquarters, located in Simsbury, Connecticut, is currently
leased from a third party by Hartford Fire pursuant to a sale-leaseback
arrangement. After the Equity Offerings, the Company or one of its subsidiaries
will sublease from Hartford Fire the right to use the headquarters building
pursuant to the Simsbury Sublease. The right to purchase the facility and the
renewal option in respect of the sale-leaseback arrangement are being retained
by Hartford Fire. In addition, a subsidiary of The Hartford owns the land
underlying and surrounding the headquarters building. The Hartford Fire sublease
expires on January 1, 2010. Rental payments are fixed (but not level) over the
term of the lease. The Company expects to pay rent of $12 million in each of
1997, 1998 and
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1999, respectively, $21 million in each of 2000 and 2001, respectively, and $175
million thereafter in the aggregate over the remaining term of the sublease.
ITT SPIN-OFF
The agreements entered into in connection with the ITT Spin-Off are not
affected by the Equity Offerings and, in material part, to the extent still in
force and effect, are the obligations of The Hartford. However, certain matters
addressed in the agreements relating to the ITT Spin-Off are also addressed in
agreements to be entered into in connection with the Equity Offerings. The Spin-
Off Distribution Agreement provides for, among other things, the assumption of
liabilities and cross-indemnities designed generally to allocate among ITT, New
ITT and The Hartford, effective as of the effective date of the ITT Spin-Off
(the "Distribution Date"), financial responsibility for the liabilities arising
out of or in connection with their respective businesses, including liabilities
in respect of The Hartford's business, and for certain shared liabilities not
specifically arising out of or allocable to any of their respective former or
present businesses. The Hartford is responsible for one-third of the costs of
such shared liabilities under the Spin-Off Distribution Agreement. The
intellectual property agreements entered into in connection with the ITT
Spin-Off provide for the licensing to and among such entities of rights under
patents, copyrights, software, technology, trade secrets and certain other
intellectual property owned by them and their respective subsidiaries as of the
Distribution Date, including a grant of rights and licenses to The Hartford
(with rights to sublicense to its subsidiaries) to continue to use the "ITT"
name and marks in the operation of its business following the Distribution Date,
subject to certain conditions. For a description of the allocation of the above-
described shared liabilities between the Company and The Hartford, see
"-- Master Intercompany Agreement -- Indemnification".
However, under the terms of the ITT License Agreement, ITT may, in its
discretion, terminate such agreement in the event of a change of control of The
Hartford, which is defined therein to include (i) the sale of 20% or more of the
outstanding common stock of The Hartford to any person, (ii) a tender or
exchange offer for 15% or more of the outstanding common stock of The Hartford,
(iii) a consolidation or merger in which The Hartford is not the surviving
corporation and (iv) a change in the majority of the members of the board of
directors of The Hartford during any twelve-month period. Pursuant to the Master
Intercompany Agreement, Hartford Fire will grant the ITT Sublicenses to the
Company and certain of its subsidiaries subject to the foregoing terms and
conditions and certain other terms and conditions included in the ITT License
Agreement. See "-- Master Intercompany Agreement -- License and Sublicense".
The Spin-Off Tax Agreement provides that New ITT and The Hartford will pay
their respective shares of ITT's consolidated tax liability for the tax years
that they were included in ITT's consolidated federal income tax return, as well
as their respective shares of any state, local and foreign taxes attributable to
periods prior to the Distribution Date. The Hartford is responsible for a
one-third share of certain federal, state or foreign tax liabilities with
respect to the ITT Spin-Off and certain business activities of ITT prior to the
date of such ITT Spin-Off. While there can be no ultimate assurance, management
does not believe that its share of any such tax liabilities under the Spin-Off
Tax Agreement will have a material adverse effect on the results of operations,
financial condition or businesses of the Company. For a description of the
allocation of such liabilities between the Company and The Hartford, see
"-- Master Intercompany Agreement -- Indemnification".
HARTFORD FIRE GUARANTEE
Pursuant to the Guarantee Agreement, Hartford Fire has provided to Hartford
Life and Accident and Hartford Life an unconditional guarantee since 1990, on
behalf of and for the benefit of such subsidiaries and the owners of the life,
disability and other insurance and annuity contracts issued by either such
subsidiary, in respect of any contractual claims made under such contracts by
the beneficiaries thereof. Upon the completion of the Equity Offerings, Hartford
Fire will terminate such
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guarantee; however, the guarantee will remain in full force and effect with
respect to any outstanding contracts at the time of such termination. Although
management does not believe the termination of the guarantee will have an
adverse impact on sales, it is possible that future sales of some of the
Company's products could be adversely impacted as a result of the absence of the
marketing benefit associated with such guarantee.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Equity Offerings, the Company will have issued and
outstanding 23,000,000 shares of Class A Common Stock (or 26,000,000 shares if
the Underwriters' over-allotment options are exercised in full) and 114,000,000
shares of Class B Common Stock. All of the shares of Class A Common Stock sold
in the Equity Offerings will be freely tradeable without restrictions under the
Securities Act, except for shares owned by "affiliates" of the Company, as such
term is defined in Rule 144, which will be subject to the resale limitations of
Rule 144. All the outstanding shares of Class B Common Stock held by The
Hartford will continue to be "restricted securities" as defined in Rule 144 and
may not be resold in the absence of registration under the Securities Act or
pursuant to an exemption from such registration, including, among others, the
exemptions provided by Rule 144. The Company has agreed that it will, upon the
request of The Hartford or any other Rights Holder, except for a limited period
described in "Underwriting", use its best efforts to effect the registration
under the applicable federal and state securities laws of any shares of capital
stock held by The Hartford or any such other Rights Holder, as applicable, or
any of its affiliates (with such rights to be assignable by The Hartford or any
such other Rights Holder under certain circumstances). See "Certain
Relationships and Transactions -- Intercompany Arrangements -- Master
Intercompany Agreement -- Registration Rights".
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are required to be aggregated), including affiliates of the
Company, who has beneficially owned "restricted securities" for at least a year
may sell within any three-month period a number of such shares that does not
exceed the greater of (i) 1% of the total number of outstanding shares of Class
A Common Stock or (ii) the reported average weekly trading volume of the Class A
Common Stock on all national securities exchanges during the four calendar weeks
preceding the date on which notice of the sale is filed with the Commission.
Sales under Rule 144 are also subject to certain manner-of-sale provisions,
notice requirements and the availability of current public information about the
Company. A person who is not deemed to have been an "affiliate" of the Company
at any time during the 90 days preceding a sale, and who has beneficially owned
"restricted securities" for at least two years, may sell such shares under Rule
144(k) without regard to the volume limitations, manner-of-sale provisions or
notice requirements. Sales of "restricted securities" by affiliates, even after
a two-year holding period, must continue to be made in brokers' transactions
subject to the volume limitations described above. As defined in Rule 144, an
"affiliate" of an issuer is a person that directly or indirectly through the use
of one or more intermediaries, controls, is controlled by or is under common
control with, such issuer. For the foregoing purposes, The Hartford, as the
beneficial owner of all the Class B Common Stock, is an "affiliate" of the
Company. The above summary of Rule 144 is not intended to be a complete
description of that rule.
Rule 144A provides a non-exclusive safe harbor exemption from the
registration requirements of the Securities Act for specified resales of
restricted securities to certain institutional investors. In general, Rule 144A
allows unregistered resales of restricted securities to a "qualified
institutional buyer", which generally includes an entity, acting for its own
account or for the account of other qualified institutional buyers, that in the
aggregate owns or invests at least $100 million in securities of unaffiliated
issuers. Rule 144A does not extend an exemption to the offer or sale of
securities that, when issued, were of the same class as securities listed on a
national securities exchange or quoted on an automated quotation system. The
shares of Class B Common Stock outstanding as of the date of this Prospectus
would be eligible for resale under Rule 144A because such shares, when issued,
were not of the same class as any listed or quoted securities. The above summary
of Rule 144A is not intended to be a complete description of that rule.
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The Company intends to file one or more registration statements on Form S-8
pursuant to the Securities Act to register the shares of Class A Common Stock
that will be reserved for issuance under certain of its benefit plans, thus
permitting the resale in the public market, without restriction under the
Securities Act, of any shares of Class A Common Stock issued upon exercise of
options that will be granted by the Company under such benefit plans to
non-affiliates. Any such registration statements will become effective
immediately upon filing. As of the date of this Prospectus, no options to
purchase shares of Class A Common Stock have been granted by the Company to any
of its employees under its benefit plans.
Prior to the Equity Offerings, there has been no public market for the
Class A Common Stock and no prediction can be made as to the effect, if any,
that future sales or the availability of shares for future sales, will have on
the market price of the shares of Class A Common Stock prevailing from time to
time. Sales of substantial amounts of Class A Common Stock or Class B Common
Stock, or the perception that such sales could occur, could adversely affect the
prevailing market prices of the Class A Common Stock, or the ability of the
Company to raise capital through public offerings of equity securities. The
Class A Common Stock has been approved for listing, subject to notice of
issuance, on the NYSE under the symbol "HLI".
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 600,000,000 shares
of Class A Common Stock, par value $.01 per share, 600,000,000 shares of Class B
Common Stock, par value $.01 per share, and 50,000,000 shares of Preferred
Stock, par value $.01 per share. Of the shares of Class A Common Stock,
23,000,000 shares are being offered hereby (or 26,000,000 shares if the
Underwriters' over-allotment options are exercised in full) and 114,000,000
shares are reserved for issuance upon conversion of any of the Class B Common
Stock into Class A Common Stock. 114,000,000 shares of Class B Common Stock are
outstanding and held by The Hartford or one of its directly or indirectly wholly
owned subsidiaries as of the date hereof. None of the shares of Preferred Stock
will be outstanding upon the completion of the Equity Offerings. A description
of various provisions of the Company's Certificate of Incorporation and By-laws
affecting the rights of the Class A Common Stock, Class B Common Stock and
Preferred Stock is set forth below. This description is intended as a summary
and is qualified in its entirety by reference to the Company's Certificate of
Incorporation and By-laws filed as exhibits to the Registration Statement of
which this Prospectus is a part.
CLASS A COMMON STOCK AND CLASS B COMMON STOCK
DIVIDENDS
Holders of Class A Common Stock and Class B Common Stock are entitled to
receive ratably such dividends, if any, as may be declared by the Board of
Directors out of funds legally available for the payment thereof, subject to any
preferential dividend rights of any outstanding Preferred Stock. Cash dividends
may be declared and paid to the holders of Class A Common Stock only if at such
time cash dividends in the same amount per share are declared and paid to the
holders of Class B Common Stock, and vice versa. Dividends payable other than in
cash or Common Stock (or in rights options, warrants or securities convertible
into or exchangeable for Common Stock) will be declared and paid to holders of
Class A Common Stock and Class B Common Stock on a pro rata per share basis.
Dividends consisting of shares of Common Stock, or of rights, options, warrants
or other securities convertible into or exchangeable for such shares, may be
declared and paid to holders of Class A Common Stock only if a like dividend is
declared and paid to holders of Class B Common Stock, and vice versa, and, to
that end, shares of Class A Common Stock, or any rights, options, warrants or
securities convertible into or exchangeable for Class A Common Stock, would be
declared and paid only to holders of shares of Class A Common Stock and shares
of Class B
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Common Stock, or any rights, options, warrants or securities convertible into or
exchangeable for Class B Common Stock, would be declared and paid only to
holders of Class B Common Stock. The Company may not reclassify, subdivide or
combine the shares of either class of Common Stock without at the same time
proportionately reclassifying, subdividing or combining the shares of the other
class.
For a discussion of certain limitations on the payment of dividends by the
Company, see "Risk Factors -- Holding Company Structure; Restrictions on
Dividends", "Certain Relationships and Transactions -- Intercompany
Arrangements -- Master Intercompany Agreement -- Approval of Corporate
Activities".
VOTING RIGHTS
Holders of Class A Common Stock and Class B Common Stock generally have
identical voting rights and vote together (and not as separate classes), except
that holders of Class A Common Stock are entitled to one vote per share while
holders of Class B Common Stock are entitled to five votes per share and the
shares of Class B Common Stock maintain certain conversion rights and transfer
restrictions as described below. Except as required by law or as provided below,
all matters to be voted on by stockholders must be approved by a majority (or,
in the case of the election of directors, by a plurality) of the votes entitled
to be cast in person or by proxy by all shares of Class A Common Stock and Class
B Common Stock, voting together as a single class, subject to any voting rights
granted to holders of any outstanding Preferred Stock. Holders of shares of
Class A Common Stock and Class B Common Stock are not entitled to cumulate their
votes in the election of directors. Except as otherwise provided by law, and
subject to any voting rights granted to holders of any outstanding Preferred
Stock, amendments to the Certificate of Incorporation (including any such
amendment to increase or decrease the authorized shares of any class) must be
approved by a majority of the votes entitled to be cast in person or by proxy by
all outstanding shares of Class A Common Stock and Class B Common Stock, voting
together as a single class, except that certain provisions of the Certificate of
Incorporation may be amended only with the approval of the holders of at least
80% of the combined voting power of the Common Stock then outstanding. See
"Certain Provisions of the Certificate of Incorporation and By-Laws of the
Corporation -- Corporate Opportunities". However, amendments to the Certificate
of Incorporation that would change the powers, preferences and relative
participating, optional or other special rights of the Class A Common Stock or
Class B Common Stock also must be approved by a majority of the outstanding
shares of such class voting as a separate class. The superior voting rights of
the Class B Common Stock described above may discourage unsolicited tender
offers and merger proposals.
CONVERSION
Following the completion of the Equity Offerings, each share of Class B
Common Stock is convertible at any time by the holder thereof at the option of
such holder into one share of Class A Common Stock, except as provided herein.
Subject to the exceptions described in the following sentence, upon the sale or
other transfer (whether by merger, operation of law or otherwise) by a
stockholder of the Company of shares of Class B Common Stock such that any
person or persons, other than such stockholder or any of its affiliates (within
the meaning of the rules and regulations under the Exchange Act), or a Class B
Transferee (as defined below), will have beneficial ownership thereof, such
shares will automatically convert into an equal number of shares of Class A
Common Stock. However, if shares of Class B Common Stock representing 50% or
more of all the then outstanding shares of Common Stock (calculated without
regard to the difference in voting rights between the classes of Common Stock)
are transferred by the holder thereof in a single transaction, or series of
related transactions, to any person or group of affiliated persons not
affiliated with such transferor (a "Class B Transferee"), such shares of Class B
Common Stock so transferred will not automatically convert into shares of Class
A Common Stock upon such transfer.
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Each share of Class B Common Stock retained by such transferor following any
such transfer will automatically convert into a share of Class A Common Stock
upon such transfer. In addition, each share of Class B Common Stock will
automatically convert into one share of Class A Common Stock on the date on
which the number of shares of Class B Common Stock then outstanding is less than
50% of the then outstanding shares of Common Stock.
The provisions of the Company's Certificate of Incorporation described
above are generally designed so that, were The Hartford to reduce its ownership
of shares of the Class B Common Stock to less than 50% of all the then
outstanding shares of Common Stock (calculated without regard to the difference
in voting rights between the classes of Common Stock), its shares of Class B
Common Stock would be automatically converted into Class A Common Stock, thereby
resulting in all holders of Common Stock having identical voting rights other
than any Class B Transferee. However, The Hartford (and any Class B Transferee)
is permitted to transfer shares of Class B Common Stock representing 50% or more
of all the then outstanding shares of Common Stock (calculated without regard to
the difference in voting rights between the classes of Common Stock) to a Class
B Transferee with the effect that such Class B Transferee will succeed to the
ownership of such shares of Class B Common Stock and thus control of the
Company.
OTHER
Upon the liquidation, dissolution or winding up of the Company, whether
voluntary or involuntary, and subject to the rights of the holders of the
Preferred Stock, the net assets of the Company available for distribution to
stockholders of the Company shall be distributed pro rata to the holders of the
Common Stock in accordance with their respective rights and interests and the
Class B Common Stock shall rank pari passu with the Class A Common Stock as to
such distribution.
No shares of either class of Common Stock are subject to redemption or have
preemptive rights to purchase additional shares of Common Stock. However, see
"Certain Relationships and Transactions -- Intercompany Arrangements -- Master
Intercompany Agreement -- Registration Rights".
The outstanding shares of Class B Common Stock are, and the shares of Class
A Common Stock offered by the Company in the Equity Offerings will be, when
issued and paid for, fully paid and non-assessable.
PREFERRED STOCK
The authorized Preferred Stock of the Company is available for issuance
from time to time at the discretion of the Board of Directors without
stockholder approval. The Board of Directors has the authority to prescribe, for
each series of the Preferred Stock it establishes, the number of shares in that
series, the number of votes (if any) to which such shares in that series are
entitled, the dividends payable on such shares in that series, any conversion
rights applicable thereto and the other powers, preferences and relative
participating, optional or other special rights, and any qualifications,
limitations or restrictions of the shares in that series. Depending upon the
rights of such Preferred Stock, the issuance thereof could have an adverse
effect on holders of the Common Stock by delaying or preventing a change of
control of the Company, making removal of the present management of the Company
more difficult or resulting in restrictions upon the payment of dividends and
other distributions to the holders of the Common Stock.
RESTRICTIONS ON OWNERSHIP UNDER INSURANCE LAWS
Although the Certificate of Incorporation and By-laws of the Company do not
contain any provision restricting ownership of the Common Stock, under
applicable state insurance laws and regulations, no person may acquire control
of any of the insurance subsidiaries of the Company or any corporation
controlling such subsidiaries unless such person has filed a statement
containing specified information with appropriate regulatory authorities and
approval for such acquisition is obtained from such authorities. For example,
under the laws of the State of Connecticut, any person
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acquiring, directly by stock ownership or indirectly by revocable proxy or
otherwise, 10% or more of the voting securities of any other person is presumed
to have acquired control of such person, and, as a result, any person who
beneficially acquires 10% or more of the voting securities of the Company's
insurance company subsidiaries or the Company without obtaining the approval of
the Connecticut Insurance Commissioner would be in violation of Connecticut's
insurance holding company laws and may be subject to injunctive action requiring
disposition or seizure of such shares of voting securities and prohibiting the
voting of such shares, as well as other action determined by the applicable
regulatory authority. The application of such state insurance laws may be a
deterrent to any person proposing to acquire control of the Company,
particularly in a hostile transaction.
CERTAIN PROVISIONS OF THE
CERTIFICATE OF INCORPORATION AND
BY-LAWS OF THE COMPANY
TRANSACTIONS WITH INTERESTED PARTIES
The Company's Certificate of Incorporation includes certain provisions
addressing potential conflicts of interest between the Company and The Hartford
and regulating and defining the conduct of certain affairs of the Company as
they may involve The Hartford and its subsidiaries, directors and officers. The
Certificate of Incorporation provides that no contract, agreement, arrangement
or transaction (or amendment, modification or termination thereof) between the
Company and The Hartford or any of its subsidiaries (other than the Company and
its subsidiaries) or between the Company and any entity in which any of the
Company's directors has a financial interest (a "Related Entity"), or between
the Company and any director or officer of the Company, The Hartford or any
subsidiary of the Company or The Hartford or any Related Entity will be void or
voidable for the reason that The Hartford or any subsidiary thereof, any Related
Entity or any director or officer of the Company, The Hartford or any subsidiary
of the Company or The Hartford or any Related Entity is a party thereto, or
because any such director or officer is present at, participates in or votes at
a meeting of the Board of Directors or a committee thereof which authorizes such
contract, agreement, arrangement or transaction (or amendment, modification or
termination thereof), if:
(i) the material facts as to such contract, agreement, arrangement or
transaction (or amendment, modification or termination thereof) are
disclosed or are known to the Board of Directors or the committee thereof
that authorizes such contract, agreement, arrangement or transaction (or
amendment, modification or termination thereof) and the Board of Directors
or such committee in good faith authorizes, approves or ratifies such
contract, agreement, arrangement or transaction (or amendment, modification
or termination thereof) by the affirmative vote of a majority of the
Disinterested Directors (as defined below), even though the number of
Disinterested Directors voting may be less than a quorum;
(ii) the material facts as to such contract, agreement, arrangement or
transaction (or amendment, modification or termination thereof) are
disclosed or are known to the holders of Common Stock entitled to vote
thereon, and the contract, agreement, arrangement or transaction (or
amendment, modification or termination thereof) is specifically approved or
ratified in good faith by a majority of the votes entitled to be cast by
all then outstanding shares of Common Stock present in person or
represented by proxy and not owned by The Hartford or any subsidiary
thereof or a Related Entity, as the case may be; or
(iii) such contract, agreement, arrangement or transaction (or
amendment, modification or termination thereof) is fair as to the Company
at the time it is authorized, approved or ratified by the Board of
Directors, a committee thereof or the stockholders of the Company.
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<PAGE> 128
For purposes hereof, "Disinterested Directors" means the directors of the
Company who are not (i) officers of either the Company or The Hartford or any of
their respective subsidiaries or (ii) directors of The Hartford or any
subsidiary thereof (other than the Company).
CORPORATE OPPORTUNITIES
The Certificate of Incorporation further provides that, subject to any
contract to which the Company is a party and subject to applicable law, The
Hartford or any subsidiary thereof (other than the Company or any subsidiary
thereof) will have the right to: (i) engage in the same or similar business
activities or lines of business as the Company or any subsidiary thereof; (ii)
do business with any client or customer of the Company or any subsidiary
thereof; and (iii) employ or otherwise engage any officer or employee of the
Company or any subsidiary thereof. In addition, in the event that The Hartford
or any of its subsidiaries (other than the Company and its subsidiaries) or the
Company or any of its subsidiaries acquires knowledge of a potential transaction
or matter that may be a corporate opportunity for both The Hartford and the
Company, such person shall have no duty, other than pursuant to the laws of the
State of Delaware, to communicate or present such corporate opportunity to the
Company or The Hartford, as applicable.
CERTAIN AMENDMENTS TO THE CERTIFICATE OF INCORPORATION
Until The Hartford ceases to beneficially own, directly or indirectly, more
than 20% of the number of outstanding shares of Common Stock, the Certificate of
Incorporation requires the affirmative vote of the holders of 80% or more of the
combined voting power of the Common Stock then outstanding, voting together as a
single class, to alter, amend or repeal, or adopt any provision of the
Certificate of Incorporation which is inconsistent with, any provision of the
Certificate of Incorporation (whether directly or indirectly through any merger
of the Company with any other entity) relating to transactions with interested
parties and corporate opportunities (each as described above), as well as the
provision requiring such an 80% vote to effect such an alteration, amendment,
repeal or adoption. Thereafter, under the DGCL, an affirmative vote of 50% or
more of the combined voting power of the Common Stock then outstanding would be
required to effect such an alteration, amendment, repeal or adoption.
Accordingly, so long as The Hartford beneficially owns more than 20% of the
number of outstanding shares of Common Stock, it can prevent any such
alteration, amendment, repeal or adoption.
In addition, the Certificate of Incorporation requires the affirmative vote
of the holders of at least 80% of the combined voting power of all the then
outstanding shares of Common Stock, voting together as a single class, to alter,
amend or repeal, or adopt any provision of the Certificate of Incorporation
(whether directly or indirectly through any merger of the Company with any other
entity) which is inconsistent with, any provision of the Certificate of
Incorporation relating to the classification of the Board of Directors, the
filling of vacancies on the Board of Directors, the prohibition on the taking of
actions by stockholders by written consent in lieu of a meeting and the calling
of a special meeting of stockholders, as well as the provision requiring such an
80% vote to effect such an alteration, amendment, repeal or adoption.
POTENTIAL LIMITS ON CHANGE OF CONTROL
Certain provisions of the Certificate of Incorporation and By-laws may
delay, defer or prevent a tender offer, proxy contest or other takeover attempt
involving the Company. It is believed that such provisions will enable the
Company to develop its business in a manner that will foster its long-term
growth without disruption caused by the threat of a takeover not deemed by its
Board of Directors to be in the best interests of the Company and its
stockholders. In addition, these provisions also are intended to ensure that the
Board of Directors will have sufficient time to act in what the Board of
Directors believes to be in the best interests of the Company and its
stockholders. However, such provisions could have the effect of making it more
difficult for a third party to undertake, or discouraging a third party from
undertaking, an unsolicited takeover bid or otherwise attempting to obtain
control of the Company or the Board of Directors, although such proposals, if
made, might be
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considered desirable by a majority of the Company's stockholders. Such
provisions also may have the effect of making it more difficult for third
parties to cause the replacement of the current management of the Company
without the concurrence of the Board of Directors. These provisions include (i)
the availability of shares of Preferred Stock for issuance from time to time at
the discretion of the Board of Directors; (ii) prohibitions against stockholders
calling a special meeting of stockholders or acting by written consent in lieu
of a meeting; (iii) the classification of the Board of Directors into three
classes, each of which will serve for different three-year periods; (iv) a
requirement, pursuant to Section 141 of the DGCL, that, due to the
classification of the Board of Directors, directors of the Company may only be
removed for cause; (v) a requirement that certain provisions of the Certificate
of Incorporation may be amended only with the approval of the holders of at
least 80% of the combined voting power of the Common Stock then outstanding;
(vi) requirements for advance notice for raising business or making nominations
at stockholders' meetings; and (vii) the ability of the Board of Directors to
increase the size of the board and to appoint directors to fill newly created
directorships. The Hartford, as owner of more than 80% of the combined voting
power of all classes of voting stock, could sell or otherwise dispose of a
substantial portion of its holdings and still be able to block any tender offer,
proxy contest or other takeover attempt by any third party and certain other
material transactions and matters.
LIMITATION ON LIABILITY
To the fullest extent permitted by applicable law as then in effect, no
director of the Company shall be personally liable to the Company or any of its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
Company or its stockholders; (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law; (iii) under
Section 174 of the DGCL; or (iv) for any transaction from which the director
derived an improper personal benefit.
While the Certificate of Incorporation provides directors with protection
from awards for monetary damages for breaches of their duty of care, it does not
eliminate such duty. Accordingly, the Certificate of Incorporation should have
no effect on the availability of equitable remedies such as an injunction or
recission based on a director's breach of his or her duty of care and does not
eliminate or limit a director's liability arising in connection with causes of
action brought under the federal securities laws. This provision, however, may
discourage or deter stockholders or management from bringing a lawsuit against a
director for a breach of his or her fiduciary duty, though such an action, if
successful, might otherwise have benefited the Company and its stockholders.
The By-laws provide that the Company, to the fullest extent permitted by
applicable law as then in effect, will indemnify any person who was or is
involved in any manner or is threatened to be made so involved in any
threatened, pending or completed investigation, claim, action, suit or
proceeding, by reason of the fact that such person was or is a director,
officer, employee or agent of the Company or was or is serving at the request of
the Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against all expenses,
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such investigation, claim, action, suit or
proceeding. To receive such indemnification under the DGCL as currently in
effect, such a person must have been successful in such investigation, claim,
action, suit or proceeding or acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the
Company.
DELAWARE STATUTE
The Company is a Delaware corporation subject to Section 203 of the DGCL.
Section 203 provides that, subject to certain exceptions specified therein, a
corporation may not engage in any business combination, including mergers or
consolidations or acquisitions of assets or additional shares of the
corporation, with any "interested stockholder" for a period of three years
following the time that such stockholder became an interested stockholder unless
(i) prior to such time, the
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<PAGE> 130
board of directors of the corporation approved either the business combination
or the transaction which resulted in the stockholder becoming an interested
stockholder, (ii) upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested stockholder owned
at least 85% of the voting stock of the corporation outstanding at the time the
transaction commenced (excluding certain shares) or (iii) at or subsequent to
such time, the business combination is approved by the board of directors of the
corporation and authorized at an annual or special meeting of stockholders, and
not by written consent, by the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the interested stockholder.
Except as otherwise specified in Section 203 of the DGCL, an "interested
stockholder" is defined to include (x) any person that is the owner of 15% or
more of the outstanding voting stock of the corporation or is an affiliate or
associate of the corporation and was the owner of 15% or more of the outstanding
voting stock of the corporation at any time within the three-year period
immediately prior to the relevant date and (y) the affiliates and associates of
any such person. Under certain circumstances, Section 203 of the DGCL makes it
more difficult for an interested stockholder to effect various business
combinations with a corporation for the above-referenced three-year period,
although the stockholders may elect to exclude a corporation from the
restrictions imposed thereunder. By virtue of its beneficial ownership of the
Class B Common Stock, The Hartford is in a position to elect to exclude the
Company from the restrictions under Section 203 of the DGCL, although it
currently has no intention to do so.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Class A Common Stock is The Bank
of New York.
VALIDITY OF CLASS A COMMON STOCK
The validity of the Class A Common Stock offered hereby will be passed upon
for the Company by Cravath, Swaine & Moore, New York, New York, and for the
Underwriters by Sullivan & Cromwell, New York, New York.
EXPERTS
The audited consolidated financial statements and financial statement
schedules of the Company and its subsidiaries, as of December 31, 1996 and 1995,
and for each of the years in the three-year period ended December 31, 1996, have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included herein and
elsewhere in the Registration Statement to which this Prospectus relates in
reliance upon the authority of said firm as experts in giving said reports.
Reference is made to said reports which include an explanatory paragraph with
respect to the change in the method of accounting for debt and equity securities
as of January 1, 1994, as discussed in Note 2 of notes to consolidated financial
statements.
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CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS OF CLASS A COMMON STOCK
The following is a general discussion of certain United States federal
income and estate tax consequences of the purchase, ownership and disposition of
Class A Common Stock by a holder that, for United States federal tax purposes,
is not a "United States person" (a "Non-United States Holder"). For purposes of
this discussion, a "United States person" means any person or entity which is
(a) a citizen or resident of the United States, (b) a corporation created or
organized in or under the laws of the United States or of any political
subdivision thereof or (c) an estate or trust that is subject to United States
federal taxation on its income regardless of its source. This summary does not
address all United States federal income and estate tax considerations that may
be relevant to a Non-United States Holder in light of its particular
circumstances or to certain Non-United States Holders that may be subject to
special treatment under United States federal tax laws (i.e., insurance
companies, tax-exempt organizations, financial institutions or broker-dealers).
Furthermore, this summary does not discuss any aspects of foreign, state or
local taxation. This summary is based on current provisions of the Internal
Revenue Code, existing, temporary and proposed United States Treasury
regulations promulgated thereunder and administrative and judicial
interpretations thereof, all of which are subject to change, possibly with
retroactive effect. Each prospective Non-United States Holder is advised to
consult its tax advisor with respect to the tax consequences of purchasing,
owning and disposing of Class A Common Stock.
DIVIDENDS
Dividends paid with respect to the Class A Common Stock to a Non-United
States Holder generally will be subject to withholding of United States federal
income tax at a 30% rate (or such lower rate as may be specified by an
applicable income tax treaty), unless the dividend (i) is effectively connected
with the conduct of a trade or business of the Non-United States Holder within
the United States or (ii) if a tax treaty applies, is attributable to a United
States permanent establishment of the Non-United States Holder. Such U.S.
federal withholding tax will apply without regard to whether a dividend
represents a distribution of current or accumulated earnings and profits of the
Company or a return of basis for U.S. federal income tax purposes. In order to
claim the benefit of an applicable tax treaty rate, a Non-United States Holder
may have to file with the Company or its dividend paying agent an exemption or
reduced treaty rate certificate or letter in accordance with the terms of such
treaty. To the extent that a dividend represents a return of basis for U.S.
federal income tax purposes, a Non-United States Holder may obtain a refund of
any amounts currently withheld with respect to such return of basis by filing an
appropriate claim for a refund with the Internal Revenue Service.
Dividends which are effectively connected with such a United States trade
or business or, if a tax treaty applies, are attributable to such a United
States permanent establishment, are generally subject to tax on a net income
basis (that is, after allowance for applicable deductions) at rates applicable
to United States citizens, resident aliens and domestic United States
corporations and are not generally subject to withholding. Any such effectively
connected dividends received by a Non-United States corporation may also, under
certain circumstances, be subject to an additional "branch profits tax" at a 30%
rate or such lower rate as may be specified by an applicable income tax treaty.
Under current United States Treasury regulations, dividends paid to an
address outside the United States are presumed to be paid to a resident of such
country for purposes of the withholding discussed above (unless the payer has
knowledge to the contrary), and, under the current interpretation of United
States Treasury regulations, for purposes of determining the applicability of a
tax treaty rate. Under recently proposed United States Treasury regulations (the
"Proposed Regulations"), not currently in effect, however, a Non-United States
Holder of Class A Common Stock who wishes to claim the benefit of an applicable
treaty rate would be required to satisfy applicable certification and other
requirements. The Proposed Regulations are proposed to be
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<PAGE> 132
effective for payments made after December 31, 1997. There can be no assurance
that the Proposed Regulations will be adopted or what the provisions will
include if and when adopted in temporary or final form. Certain certification
and disclosure requirements must be complied with in order to be exempt from
withholding under the effectively connected income exemption discussed above.
A Non-United States Holder of Class A Common Stock that is eligible for a
reduced rate of United States tax withholding pursuant to an income tax treaty
may obtain a refund of any excess amounts currently withheld by filing an
appropriate claim for refund with the Internal Revenue Service.
SALE OR DISPOSITION OF CLASS A COMMON STOCK
A Non-United States Holder generally will not be subject to United States
federal income tax on any gain recognized on the sale or other disposition of
Class A Common Stock unless (i) (a) the gain is effectively connected with a
trade or business of the Non-United States Holder in the United States or (b) if
a tax treaty applies, the gain is attributable to a United States permanent
establishment of the Non-United States Holder; (ii) in the case of a Non-United
States Holder who is an individual and holds the Class A Common Stock as a
capital asset, such holder is present in the United States for 183 or more days
in the taxable year of the disposition and either (a) has a "tax home" for
United States federal income tax purposes in the United States or (b) has an
office or other fixed place of business in the United States to which the gain
is attributable; (iii) the Non-United States Holder is subject to tax pursuant
to the provisions of United States federal income tax laws applicable to certain
United States expatriates; or (iv)(a) the Company is or has been a "U.S. real
property holding corporation" for United States federal income tax purposes at
any time during the five-year period ending on the date of the disposition, or,
if shorter, the period during which the Non-United States Holder held the Class
A Common Stock, and (b) assuming that the Class A Common Stock continues to be
"regularly traded on an established securities market" for tax purposes, the
Non-United States Holder holds, directly or indirectly, at any time during the
five-year period ending on the date of disposition, more than 5% of the
outstanding Class A Common Stock. The Company believes it is not currently a
U.S. real property holding corporation and does not anticipate becoming such a
corporation.
If an individual Non-United States Holder falls under clause (i) above,
such individual generally will be taxed on the net gain derived from a sale
under regular graduated United States federal income tax rates. If an individual
Non-United States Holder falls under clause (ii) above, such individual
generally will be subject to a flat 30% tax on the gain derived from a sale,
which may be offset by certain United States capital losses (notwithstanding the
fact that such individual is not considered a resident of the United States).
Thus, Non-United States Holders who have spent (or expect to spend) 183 days or
more in the United States in the taxable year in which they contemplate a sale
of Class A Common Stock are urged to consult their tax advisors as to the tax
consequences of such sale.
If a Non-United States Holder that is a foreign corporation falls under
clause (i) above, it generally will be taxed on its net gain under regular
graduated United States federal income tax rates. Effectively connected gains
realized by a Non-United States corporation may also, under certain
circumstances, be subject to an additional "branch profits tax" at a 30% rate or
such lower rate as may be specified by an applicable income tax treaty.
BACKUP WITHHOLDING AND REPORTING REQUIREMENTS
The Company must report annually to the Internal Revenue Service and to
each Non-United States Holder the amount of dividends paid to, and the tax
withheld with respect to, such holder, regardless of whether any tax was
actually withheld. This information may also be made available to the tax
authorities in the Non-United States Holder's country of residence.
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Under current law, United States backup withholding (which generally is
imposed at a 31% rate) generally will not apply to (i) the payment of dividends
paid on Class A Common Stock to a Non-United States Holder at an address outside
the United States or (ii) the payment of the proceeds of a sale of Class A
Common Stock to or through the foreign office of a broker. However, under the
Proposed Regulations, dividend payments generally will be subject to information
reporting and backup withholding unless applicable certification requirements
are satisfied. In the case of the payment of proceeds from such a sale of Class
A Common Stock through a foreign office of a broker that is a United States
person or a "U.S. related person," however, information reporting (but not
backup withholding) is required with respect to the payment unless the broker
has documentary evidence in its files that the owner is a Non-United States
Holder (and has no actual knowledge to the contrary) and certain other
requirements are met or the holder otherwise establishes an exemption. For this
purpose, a "U.S. related person" is (i) a "controlled foreign corporation" for
United States federal income tax purposes or (ii) a foreign person 50% or more
of whose gross income from all sources for the three-year period ending with the
close of its taxable year preceding the payment (or for such part of the period
that the broker has been in existence) is derived from activities which are
effectively connected with the conduct of a United States trade or business. The
payment of the proceeds of a sale of shares of Class A Common Stock to or
through a United States office of a broker is subject to information reporting
and possible backup withholding at a rate of 31% unless the holder certifies,
among other things, its non-United States status under penalties of perjury or
otherwise establishes an exemption.
Backup withholding is not an additional tax. Amounts withheld under the
backup withholding rules are generally allowable as a refund or credit against
such Non-United States Holder's United States federal income tax liability, if
any, provided that the required information is furnished to the Internal Revenue
Service.
FEDERAL ESTATE TAXES
Class A Common Stock owned or treated as owned by an individual who is not
a citizen or resident of the United States (as defined for United States federal
estate tax purposes) at the time of death will be included in such individual's
gross estate for United States federal estate tax purposes unless an applicable
estate tax treaty provides otherwise.
THE FOREGOING DISCUSSION IS A SUMMARY OF THE PRINCIPAL UNITED STATES
FEDERAL INCOME AND ESTATE TAX CONSEQUENCES OF THE OWNERSHIP, SALE OR OTHER
DISPOSITION OF CLASS A COMMON STOCK BY NON-UNITED STATES HOLDERS. ACCORDINGLY,
INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE UNITED
STATES FEDERAL INCOME TAX CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION OF CLASS
A COMMON STOCK, INCLUDING THE APPLICATION AND EFFECT OF THE LAWS OF ANY STATE,
LOCAL, FOREIGN OR OTHER TAXING JURISDICTION.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants........................................... F-2
Consolidated Statements of Income for each of the three years in the period ended
December 31, 1996............................................................... F-3
Consolidated Balance Sheets as of December 31, 1995 and 1996....................... F-4
Consolidated Statements of Stockholder's Equity for each of the three years in the
period ended December 31, 1996.................................................. F-5
Consolidated Statements of Cash Flows for each of the three years in the period
ended December 31, 1996......................................................... F-6
Notes to Consolidated Financial Statements......................................... F-7
Condensed Consolidated Statements of Income (Unaudited) for the three months ended
March 31, 1996 and 1997......................................................... F-28
Condensed Consolidated Balance Sheets (Unaudited) as of December 31, 1996 and March
31, 1997........................................................................ F-29
Condensed Consolidated Statements of Stockholder's Equity (Unaudited) for the three
months ended March 31, 1997..................................................... F-30
Condensed Consolidated Statements of Cash Flows (Unaudited) for the three months
ended March 31, 1996 and 1997................................................... F-31
Notes to Condensed Consolidated Financial Statements (Unaudited)................... F-32
</TABLE>
F-1
<PAGE> 135
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Hartford Life, Inc.:
We have audited the accompanying consolidated balance sheets of Hartford
Life, Inc. (a Delaware corporation and wholly owned subsidiary of Hartford
Accident and Indemnity Company) and subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of income, stockholder's equity
and cash flows for each of the three years in the period ended December 31,
1996. These consolidated financial statements are the responsibility of Hartford
Life, Inc.'s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Hartford Life, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996 in conformity with generally accepted
accounting principles.
As discussed in Note 2 of notes to consolidated financial statements,
Hartford Life, Inc. adopted a new accounting standard promulgated by the
Financial Accounting Standards Board, changing its method of accounting, as of
January 1, 1994, for debt and equity securities.
/s/ ARTHUR ANDERSEN LLP
Hartford, Connecticut
February 10, 1997
F-2
<PAGE> 136
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
REVENUES
Premiums and other considerations...................... $2,139 $2,643 $3,069
Net investment income.................................. 1,403 1,451 1,534
Net realized capital gains (losses).................... 1 (4) (219)
------ ------ ------
TOTAL REVENUES...................................... 3,543 4,090 4,384
------ ------ ------
BENEFITS, CLAIMS AND EXPENSES
Benefits, claims and claim adjustment expenses......... 2,254 2,395 2,727
Amortization of deferred policy acquisition costs...... 149 205 241
Dividends to policyholders............................. 419 675 635
Interest expense....................................... 29 35 55
Other insurance expense................................ 469 554 695
------ ------ ------
TOTAL BENEFITS, CLAIMS AND EXPENSES................. 3,320 3,864 4,353
------ ------ ------
INCOME BEFORE INCOME TAX EXPENSE......................... 223 226 31
Income tax expense....................................... 72 76 7
------ ------ ------
NET INCOME..................................... $ 151 $ 150 $ 24
====== ====== ======
PRO FORMA NET INCOME PER SHARE (UNAUDITED)............... $ .19
======
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of the above statements.
F-3
<PAGE> 137
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------
1995 1996
------- -------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, available for sale, at fair value (amortized cost
$16,156 and $15,659).............................................. $16,139 $15,711
Equity securities, available for sale, at fair value................. 63 119
Policy loans, at outstanding balance................................. 3,380 3,839
Other investments, at cost........................................... 490 161
------- -------
TOTAL INVESTMENTS................................................. 20,072 19,830
------- -------
Cash................................................................... 70 72
Premiums and amounts receivable........................................ 157 170
Reinsurance recoverable................................................ 5,855 5,839
Deferred policy acquisition costs...................................... 2,220 2,800
Deferred income tax.................................................... 443 543
Other assets........................................................... 849 909
Separate account assets................................................ 36,296 49,770
------- -------
TOTAL ASSETS...................................................... $65,962 $79,933
======== ========
LIABILITIES
Future policy benefits................................................. $ 3,554 $ 4,026
Other policyholder funds............................................... 22,764 22,213
Other liabilities...................................................... 1,439 1,757
Allocated Advances from parent......................................... 732 893
Separate account liabilities........................................... 36,296 49,770
------- -------
TOTAL LIABILITIES................................................. 64,785 78,659
------- -------
STOCKHOLDER'S EQUITY
Preferred Stock, par value $.01 per share; 50,000,000 shares
authorized; no shares issued and outstanding.........................
Common Stock, par value $.01 per share, 1,000 shares authorized; 100
shares issued and outstanding........................................ -- --
Class A Common Stock, par value $.01 per share,
600,000,000 shares authorized; no shares issued and outstanding......
Class B Common Stock, par value $.01 per share,
600,000,000 shares authorized; no shares issued and outstanding......
Capital surplus........................................................ 585 585
Net unrealized capital (loss) gain on investments, net of tax.......... (44) 29
Retained earnings...................................................... 636 660
------- -------
TOTAL STOCKHOLDER'S EQUITY........................................ 1,177 1,274
------- -------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY........................ $65,962 $79,933
======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of the above statements.
F-4
<PAGE> 138
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(IN MILLIONS)
<TABLE>
<CAPTION>
NET
UNREALIZED
CAPITAL
CLASS CLASS GAIN (LOSS)
A B ON TOTAL
PREFERRED COMMON COMMON COMMON CAPITAL INVESTMENTS, RETAINED STOCKHOLDER'S
STOCK STOCK STOCK STOCK SURPLUS NET OF TAX EARNINGS EQUITY
--------- ------ ------ ------ ------- -------------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993...... $ -- $ -- $ -- $ -- $ 355 $ (6) $ 576 $ 925
Net income...................... -- -- -- -- -- -- 151 151
Dividends declared on common
stock......................... -- -- -- -- -- -- (17) (17)
Capital contribution............ -- -- -- -- 50 -- -- 50
Change in net unrealized capital
gain (loss) on investments,
net of tax(1)................. -- -- -- -- -- (724) -- (724)
Translation adjustments......... -- -- -- -- -- -- 1 1
--- --- --- ---- ----- ----- ------
BALANCE, DECEMBER 31, 1994...... -- -- -- -- 405 (730) 711 386
Net income...................... -- -- -- -- -- -- 150 150
Dividends declared on common
stock......................... -- -- -- -- -- -- (226) (226)
Capital contribution............ -- -- -- -- 180 -- -- 180
Change in net unrealized capital
gain (loss) on investments,
net of tax.................... -- -- -- -- -- 686 -- 686
Translation adjustments......... -- -- -- -- -- -- 1 1
--- --- --- ---- ----- ----- ------
BALANCE, DECEMBER 31, 1995...... -- -- -- -- 585 (44) 636 1,177
Net income...................... -- -- -- -- -- -- 24 24
Change in net unrealized capital
gain (loss) on investments,
net of tax.................... -- -- -- -- -- 73 -- 73
--- --- --- ---- ----- ----- ------
BALANCE, DECEMBER 31, 1996...... $ -- $ -- $ -- $ -- $ 585 $ 29 $ 660 $1,274
=== === === ==== ===== ===== ======
</TABLE>
- ---------------
(1) The 1994 change in net unrealized capital gain (loss) on investments, net of
tax, includes a gain of $103 due to the adoption of SFAS No. 115 as
discussed in Note 2(b) of notes to consolidated financial statements.
The accompanying notes to consolidated financial statements
are an integral part of the above statements.
F-5
<PAGE> 139
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income................................................ $ 151 $ 150 $ 24
Adjustments to net income:
Depreciation and amortization............................. 35 17 12
Net realized capital (gains) losses on sale of
investments............................................. (1) 4 219
Increase in premiums receivable........................... (21) (27) (13)
Increase in other liabilities............................. 201 171 433
Change in receivables, payables and accruals.............. 102 (266) 2
(Decrease) increase in accrued taxes...................... (65) 35 (90)
Increase in deferred income taxes......................... (109) (104) (137)
Increase in deferred policy acquisition costs............. (470) (390) (580)
Increase in liability for future policy benefits.......... 371 654 472
(Increase) decrease in reinsurance recoverable and related
assets.................................................. (5) 22 (4)
------- ------- -------
CASH PROVIDED BY OPERATING ACTIVITIES................ 189 266 338
------- ------- -------
INVESTING ACTIVITIES
Purchases of fixed maturity investments................... (9,968) (6,950) (7,045)
Sales of fixed maturity investments....................... 6,262 5,494 4,018
Maturities and principal paydowns of fixed maturity
investments............................................. 2,069 1,847 2,890
Purchase of other investments............................. (1,530) (928) (391)
Sales of other investments................................ 167 64 284
Net sales (purchases) of short-term investments........... 181 (189) 302
------- ------- -------
CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES..... (2,819) (662) 58
------- ------- -------
FINANCING ACTIVITIES
Increase in Allocated Advances from parent................ 100 -- 115
Capital contribution...................................... 50 -- --
Dividends paid............................................ (17) -- (19)
Net receipts from (disbursements for) investment and
universal life-type contracts credited to (charged from)
policyholder accounts................................... 2,523 431 (490)
------- ------- -------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES..... 2,656 431 (394)
------- ------- -------
Net increase in cash...................................... 26 35 2
Impact of foreign exchange................................ (1) 1 --
Cash -- beginning of year................................. 9 34 70
------- ------- -------
CASH -- END OF YEAR.................................. $ 34 $ 70 $ 72
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
CASH PAID DURING THE YEAR FOR:
Income taxes.............................................. $ 257 $ 173 $ 166
Interest.................................................. $ 29 $ 35 $ 55
SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION
Capital contribution...................................... $ -- $ 180 $ --
Dividends................................................. $ -- $ 207 $ --
Increase in Allocated Advances from parent for other
assets.................................................. $ -- $ -- $ 46
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of the above statements.
F-6
<PAGE> 140
HARTFORD LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN MILLIONS)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Hartford Life, Inc. (the "Company") was formed on December 13, 1996 and
capitalized on December 16, 1996 with the contribution of all the outstanding
common stock of Hartford Life and Accident Insurance Company ("Hartford Life and
Accident"). The Company is a direct subsidiary of Hartford Accident and
Indemnity Company ("Hartford Accident and Indemnity") and is ultimately a
subsidiary of Hartford Fire Insurance Company ("Hartford Fire"). Hartford Fire
is an indirect wholly owned subsidiary of ITT Hartford Group, Inc. ("The
Hartford"). On December 19, 1995, ITT Industries, Inc. (formerly ITT
Corporation) ("ITT") distributed all the outstanding shares of capital stock of
The Hartford to ITT stockholders of record on such date (the transactions
relating to such distribution are referred to herein as the "ITT Spin-Off"). As
a result of the ITT Spin-Off, The Hartford became an independent, publicly
traded company. The Company is a holding company and as such has no material
business of its own.
The Company is a leading insurance and financial services company with
operations that provide: (a) annuity products such as individual variable
annuities and fixed market value adjusted annuities, deferred compensation and
retirement plan services and mutual funds for savings and retirement needs; (b)
life insurance for income protection and estate planning; and (c) employee
benefits products such as group life and group disability insurance.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements present the financial
position, results of operations and cash flows of Hartford Life, Inc. and
Hartford Life and Accident and subsidiaries on the basis of historical cost, in
a manner similar to pooling of interests accounting. Hartford Life and Accident
directly owns all the outstanding shares of capital stock of ITT Hartford Life
of Canada Insurance Company and Hartford Life Insurance Company, which in turn
owns all outstanding shares of ITT Hartford Life and Annuity Insurance Company
and ITT Hartford International Life Reassurance Corporation.
These financial statements present the financial position, results of
operations and cash flows of the Company as if it were a separate entity for all
periods presented. All material intercompany transactions and balances between
the Company and its subsidiaries have been eliminated. The consolidated
financial statements are prepared on a basis of generally accepted accounting
principles which differ materially from the statutory accounting prescribed by
various insurance regulatory authorities.
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CHANGES IN ACCOUNTING PRINCIPLES
On November 14, 1996, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 96-12, "Recognition of Interest Income and Balance Sheet
Classification of Structured Notes". This Issue requires companies to record
income on certain structured securities on a retrospective interest method. The
Company adopted EITF No. 96-12 for structured securities
F-7
<PAGE> 141
HARTFORD LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS)
acquired after November 14, 1996. Adoption of EITF No. 96-12 did not have a
material effect on the Company's financial condition or results of operations.
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation", which was effective in 1996. As permitted by SFAS No.
123, the Company continued to measure compensation costs of employee stock
option plans (relating to options on common stock of The Hartford) using the
intrinsic value method prescribed by Accounting Principles Board Opinion No. 25.
As of February 10, 1997, the Company had not adopted an employee stock
compensation plan. Certain officers of the Company participate in The Hartford's
stock option plan. Compensation costs allocated by The Hartford to the Company,
as well as pro forma compensation costs as determined under SFAS No. 123, were
immaterial to the results of operations for 1995 and 1996.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities". This statement
established criteria for determining whether transferred assets should be
accounted for as sales or secured borrowings. Subsequently, in December 1996,
the FASB issued SFAS No. 127, "Deferral of Effective Date of Certain Provisions
of FASB Statement No. 125", which defers the effective date of certain
provisions of SFAS No. 125 for one year. Adoption of SFAS No. 125 is not
expected to have a material effect on the Company's financial condition or
results of operations.
Effective January 1, 1994, the Company adopted SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities". The new standard
requires, among other things, that securities be classified as
"held-to-maturity", "available-for-sale" or "trading" based on the Company's
intentions with respect to the ultimate disposition of the security and its
ability to effect those intentions. The classification determines the
appropriate accounting carrying value (cost basis or fair value) and, in the
case of fair value, whether the fair value difference from cost, net of tax,
impacts stockholder's equity directly or is reflected in the Consolidated
Statements of Income. Investments in equity securities had previously been and
continue to be recorded at fair value with the corresponding after-tax impact
included in stockholder's equity. Under SFAS No. 115, the Company's fixed
maturity investments are classified as "available-for-sale" and, accordingly,
these investments are reflected at fair value with the corresponding impact
included as a component of stockholder's equity designated as "Net unrealized
capital gain (loss) on investments, net of tax". As with the underlying
investment security, unrealized capital gains and losses on derivative financial
instruments are considered in determining the fair value of the portfolios. The
impact of adoption was an increase to stockholder's equity of $103. The
Company's cash flows were not impacted by this change in accounting principle.
In February 1997, FASB issued SFAS No. 128, "Earnings per Share". This
statement establishes standards for computing and presenting earnings per share
("EPS") and applies to entities with publicly held common stock or potential
common stock. This statement simplifies the standards for computing earnings per
share previously found in APB Opinion No. 15, "Earnings per Share", and makes
them comparable to international EPS standards. It replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual presentation
of basic and diluted EPS on the face of the income statement for all entities
with complex capital structures and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation. This statement is effective for financial
statements for both interim and annual periods ending after December 15, 1997.
The Company has not yet quantified the effect of adopting this statement.
F-8
<PAGE> 142
HARTFORD LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS)
REVENUE RECOGNITION
Revenues for universal life policies and investment products consist of
policy charges for the cost of insurance, policy administration and surrender
charges assessed to policy account balances and are recognized in the period in
which services are provided. Premiums for traditional life insurance policies
are recognized as revenues when they are due from policyholders.
FUTURE POLICY BENEFITS AND OTHER POLICYHOLDER FUNDS
Liabilities for future policy benefits are computed by the net level
premium method using interest rate assumptions varying from 3% to 11% and
withdrawal and mortality assumptions appropriate at the time the policies were
issued. Health reserves, which are the result of sales of group long-term and
short-term disability, stop loss, Medicare supplement and individual disability
products, are stated at amounts determined by estimates on individual cases and
estimates of unreported claims based on past experience. Liabilities for
universal life-type and investment contracts are stated at policyholder account
values before surrender charges.
DEFERRED POLICY ACQUISITION COSTS
Policy acquisition costs, including commissions and certain underwriting
expenses associated with acquiring business, are deferred and amortized over the
estimated lives of the contracts, generally 20 years. Generally, acquisition
costs are deferred and amortized using the retrospective deposit method. Under
the retrospective deposit method, acquisition costs are amortized in proportion
to the present value of expected gross profits from surrender charges,
investment, mortality and expense margins. Actual gross profits can vary from
management's estimates resulting in increases or decreases in the rate of
amortization. Management periodically updates these estimates, when appropriate,
and evaluates the recoverability of the deferred acquisition cost asset. When
appropriate, management revises its assumptions on the estimated gross profits
of these contracts and the cumulative amortization for the books of business are
reestimated and readjusted by a cumulative charge or credit to income.
The Company's other insurance expense includes the following:
<TABLE>
<CAPTION>
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Commissions...................................................... $ 623 $ 705 $ 949
Deferred acquisition costs....................................... (628) (633) (836)
Other............................................................ 474 482 582
----- ----- -----
Total expense............................................... $ 469 $ 554 $ 695
====== ====== ======
</TABLE>
POLICYHOLDER REALIZED CAPITAL GAINS AND LOSSES
Realized capital gains and losses on security transactions associated with
the Company's immediate participation guaranteed contracts are excluded from
revenues and deferred, since under the terms of the contracts the realized gains
and losses will be credited to policyholders in future years as they are
entitled to receive them.
F-9
<PAGE> 143
HARTFORD LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS)
FOREIGN CURRENCY TRANSLATION
Foreign currency translation gains and losses are reflected in
stockholder's equity. Balance sheet accounts are translated at the exchange
rates in effect at each year end and income statement accounts are translated at
the average rates of exchange prevailing during the year. The national
currencies of international operations are generally their functional
currencies.
INVESTMENTS
The Company's investments in fixed maturities include bonds, redeemable
preferred stock and commercial paper which are classified as
"available-for-sale" and accordingly are carried at fair value with the
after-tax difference from cost reflected as a component of stockholder's equity
designated as "Net unrealized capital gain (loss) on investments, net of tax".
Equity securities, which include common and non-redeemable preferred stocks, are
carried at fair value with the after-tax difference from cost reflected in
stockholder's equity. Policy and mortgage loans are each carried at their
outstanding balance which approximates fair value. Investments in partnerships
and trusts are carried at cost. Net realized capital gains (losses), after
deducting the policyholders' share, are reported as a component of revenue and
are determined on a specific identification basis.
The Company's accounting policy for impairment recognition requires
recognition of an other than temporary impairment charge on a security if it is
determined that the Company is unable to recover all amounts due under the
contractual obligations of the security. In addition, for securities expected to
be sold, an other than temporary impairment charge is recognized if the Company
does not expect the fair value of a security to recover to cost or amortized
cost prior to the expected date of sale. Once an impairment charge has been
recorded, the Company then continues to review the other than temporarily
impaired security for appropriate valuation on an ongoing basis. During 1996, it
was determined that certain individual securities within the investment
portfolio supporting the Company's block of traditional guaranteed rate
contracts written prior to 1995 ("Closed Book GRC") could not recover to
amortized cost prior to sale. Therefore, an other than temporary impairment loss
of $88 after tax was recorded.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses a variety of derivative financial instruments including,
swaps, caps, floors, forwards and exchange traded-financial futures and options
as part of an overall risk management strategy. These instruments are used as a
means of hedging exposure to price, foreign currency and/or interest rate risk
on anticipated investment purchases or existing assets and liabilities. The
Company does not hold or issue derivative financial instruments for trading
purposes. The Company's accounting for derivative financial instruments used to
manage risk is in accordance with the concepts established in SFAS No. 80,
Accounting for Futures Contracts, SFAS No. 52, Foreign Currency Translation,
American Institute of Certified Public Accountants Statement of Position 86-2,
Accounting for Options, and various EITF pronouncements. Written options are, in
all cases, used in conjunction with other assets and derivatives as part of the
Company's asset/liability management strategies. Derivative instruments are
carried at values consistent with the asset or liability being hedged.
Derivatives used to hedge fixed maturities or equities are carried at fair value
with the after-tax difference from cost reflected in stockholder's equity.
Derivatives used to hedge other invested assets or liabilities are carried at
cost.
Derivatives must be designated at inception as a hedge and measured for
effectiveness both at inception and on an ongoing basis. The Company's minimum
correlation threshold for hedge designation is 80%. If correlation, which is
assessed monthly and measured based on a rolling three
F-10
<PAGE> 144
HARTFORD LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS)
month average, falls below 80%, hedge accounting will be terminated. Derivatives
used to create a synthetic asset must meet synthetic accounting criteria
including designation at inception and consistency of terms between the
synthetic and the instrument being replicated. Interest rate swaps are the
primary type of derivatives used to convert London interbank offered quotations
for U.S. dollar deposits ("LIBOR") based variable rate instruments to fixed rate
instruments. Synthetic instrument accounting, consistent with industry practice,
provides that the synthetic asset is accounted for like the financial instrument
it is intended to replicate. Derivatives which fail to meet risk management
criteria are marked to market with the impact reflected in the Consolidated
Statements of Income.
Gains or losses on financial futures contracts entered into in anticipation
of the future receipt of product cash flows are deferred and, at the time of the
ultimate purchase, reflected as an adjustment to the cost basis of the purchased
asset. Gains or losses on futures used in invested asset risk management are
deferred and adjusted into the cost basis of the hedged asset when the futures
contracts are closed, except for futures used in duration hedging which are
deferred and are adjusted into the cost basis on a quarterly basis. The
adjustments to the cost basis are amortized into investment income over the
remaining asset life.
Open forward commitment contracts are marked to market through
stockholder's equity. Such contracts are recorded at settlement by recording the
purchase of the specified securities at the previously committed price. Gains or
losses resulting from the termination of the forward commitment contracts before
the delivery of the securities are recognized immediately in the Consolidated
Statements of Income as a component of net investment income.
The cost of purchased options and/or premiums received on covered written
options, entered into as part of an asset/liability management strategy, is/are
adjusted into the cost basis of the underlying asset or liability and amortized
over the remaining life of the hedge. Gains or losses on expiration or
termination of the hedge are adjusted into the basis of the underlying asset or
liability and amortized over the remaining asset life. The Company had not
written any options as of December 31, 1995 and 1996.
Interest rate swaps involve the periodic exchange of payments without the
exchange of underlying principal or notional amounts. Net receipts or payments
are accrued and recognized over the life of the swap agreement as an adjustment
to income. Should the swap be terminated, the gain or loss is adjusted into the
basis of the asset or liability and amortized over the remaining life. Should
the hedged asset be sold or liability terminated without terminating the swap
position, any swap gains or losses are immediately recognized in earnings.
Interest rate swaps purchased in anticipation of an asset purchase (an
"anticipatory transaction") are recognized consistent with the underlying asset
components such that the settlement component is recognized in the Consolidated
Statements of Income while the change in market value is recognized as an
unrealized gain or loss.
Premiums paid on purchased floor or cap agreements and the premium received
on issued floor or cap agreements (used for risk management) are adjusted into
the basis of the applicable asset and amortized over the asset life. Gains or
losses on termination of such positions are adjusted into the basis of the asset
or liability and amortized over the remaining asset life. Net payments are
recognized as an adjustment to income or basis adjusted and amortized depending
on the specific hedge strategy.
Forward exchange contracts and foreign currency swaps are accounted for in
accordance with SFAS No. 52.
F-11
<PAGE> 145
HARTFORD LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS)
RELATED PARTY TRANSACTIONS
Transactions of the Company with Hartford Accident and Indemnity and its
affiliates relate principally to tax settlements, reinsurance, insurance
coverage, rental and service fees and payment of dividends and capital
contributions. In addition, certain affiliated insurance companies purchased
group annuity contracts from the Company to fund pension costs and claim
annuities to settle casualty claims. Substantially all general insurance
expenses related to the Company, including rent and employee benefit plan
expenses, are initially paid by Hartford Fire. Direct expenses are allocated to
the Company using specific identification, and indirect expenses are allocated
using other applicable methods. Indirect expenses include those for corporate
areas which, depending on type, are allocated based on either a percentage of
direct expenses or on utilization. Indirect expenses allocated to the Company by
The Hartford were $46, $51, and $45 in 1994, 1995, and 1996, respectively.
Management of the Company believes that the methods used are reasonable. In
addition, the Company was charged its share of costs allocated to The Hartford
by ITT prior to the ITT Spin-Off, which were immaterial in 1994 and 1995.
Included in other liabilities is $44 and $61 due The Hartford as of December 31,
1995 and 1996, respectively.
The Company cedes approximately $24,000 of individual and group life
insurance in force to companies affiliated with The Hartford (and paid premiums
of $3 but did not pay or receive any commissions in respect thereto) and assumes
approximately $122 of premiums relating to stop loss and short-term disability
written by a number of The Hartford's property-casualty subsidiaries (and,
consistent with industry practice, reimbursed the ceding Company $12 for
commissions and $3 for premium taxes incurred as a result of writing these
policies).
On June 30, 1995, the ownership of ITT Lyndon Insurance Company was
transferred to the Company via a capital contribution of $180, representing the
net assets of such company.
DIVIDENDS TO POLICYHOLDERS
Certain life insurance policies contain dividend payment provisions that
enable the policyholder to participate in the earnings of the life insurance
subsidiaries of the Company. The participating insurance in force accounted for
28%, 23%, and 25% in 1994, 1995, and 1996, respectively, of total insurance in
force.
3. EVENTS SUBSEQUENT TO DATE OF AUDITORS' REPORT -- PRO FORMA INFORMATION
(UNAUDITED)
On February 7, 1997, the Company declared a dividend of $1,184 payable to
its direct parent, Hartford Accident and Indemnity. As a result, the Company
borrowed $1,084 on February 18, 1997, pursuant to a $1,300 line of credit, with
interest payable at the two-month Eurodollar rate plus 15 basis points (5.65% at
the inception of the borrowing) (for a description of the line of credit and the
calculation of the applicable Eurodollar rate, see Note 15), which, together
with a promissory note in the amount of $100, was paid as a dividend to Hartford
Accident and Indemnity on February 20, 1997. Of the $1,184 dividend, $893
constituted a repayment of the portion of The Hartford's third-party
indebtedness internally allocated, for financial reporting purposes, to the
Company's life insurance subsidiaries (the "Allocated Advances"). The principal
on this promissory note is due and payable February 19, 1998, together with
interest payable at the two-month Eurodollar rate (determined as described in
Note 15 in respect of the above-referenced line of credit) plus 15 basis points
(initially 5.60% upon the execution of this promissory note).
On April 3, 1997, the Company reclassified the authorized shares of common
stock, par value $.01 per share, of the Company into Class B Common Stock, par
value $.01 per share (the "Class B
F-12
<PAGE> 146
HARTFORD LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS)
Common Stock"), and authorized the Class A Common Stock, par value $.01 per
share (the "Class A Common Stock") and the preferred stock, par value $.01 per
share (the "Preferred Stock"). Holders of Class A Common Stock and Class B
Common Stock are entitled to receive ratably such dividends, if any, as may be
declared by the Board of Directors, subject to any preferential dividend rights
of any outstanding Preferred Stock, and generally have identical voting rights
and vote together (and not as separate classes), except that holders of Class A
Common Stock are entitled to one vote per share while holders of Class B Common
Stock are entitled to five votes per share. Also, each share of Class B Common
Stock is convertible into a share of Class A Common Stock at any time at the
option of the holder and will automatically convert into a share of Class A
Common Stock (i) upon the transfer of such share Class B Common Stock by the
holder thereof to a non-affiliate (except where the shares of Class B Common
Stock so transferred represent 50% or more of all the outstanding shares of
Common Stock, calculated without regard to the difference in voting rights
between the classes of Common Stock) or (ii) in the event that the number of
shares of outstanding Class B Common Stock is less than 50% of all the Common
Stock then outstanding.
On April 4, 1997, the Company declared and paid a dividend of $25 to
Hartford Accident and Indemnity in the form of a promissory note in such amount.
The principal on this promissory note is due and payable April 3, 1998, together
with interest payable at the one-month Eurodollar rate (determined as described
in Note 15 in respect of the above-referenced line of credit) plus 15 basis
points (initially 5.84% upon the execution of this promissory note).
Pro forma net income per share data is presented only for the year ended
December 31, 1996, as such information for earlier periods would not be
meaningful. Pro forma net income per share data is calculated based upon the
shares of Class B Common Stock owned by The Hartford immediately prior to the
Equity Offerings (see Note 15) plus an assumed issuance of Class A Common Stock
in the Equity Offerings (the number of shares that, based on the midpoint of the
range of the estimated initial public offering prices and the estimated
underwriting discounts and expenses payable by the Company, would result in net
proceeds equal to the excess of the amount of the February and April 1997
dividends over the 1996 earnings and the Allocated Advances from parent).
4. INVESTMENTS
COMPONENTS OF NET INVESTMENT INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1994 1995 1996
------- ------ ------
<S> <C> <C> <C>
Interest income................................... $ 1,345 $1,450 $1,546
Income from other investments..................... 69 13 3
------ ------ ------
Gross investment income........................... 1,414 1,463 1,549
Less: Investment expenses......................... 11 12 15
------ ------ ------
NET INVESTMENT INCOME............................. $ 1,403 $1,451 $1,534
====== ====== ======
</TABLE>
F-13
<PAGE> 147
HARTFORD LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS)
COMPONENTS OF NET REALIZED CAPITAL GAINS (LOSSES)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
---------------------------------
1994 1995 1996
------- ------ ------
<S> <C> <C> <C>
Fixed maturities.................................. $ (37) $ 30 $ (214)
Equity securities................................. (9) (6) 2
Real estate and other............................. 47 (26) (4)
Less: Decrease in liability to policyholders for
realized capital gains.......................... -- (2) (3)
------- ------ ------
NET REALIZED CAPITAL GAINS (LOSSES)............... $ 1 $ (4) $ (219)
======== ====== ======
</TABLE>
COMPONENTS OF NET UNREALIZED CAPITAL GAINS (LOSSES) ON EQUITY SECURITIES
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
---------------------------------
1994 1995 1996
------- ------ ------
<S> <C> <C> <C>
Gross unrealized gains............................ $ 3 $ 4 $ 7
Gross unrealized losses........................... (11) (2) (1)
------- ------ ------
Net unrealized capital (losses) gains............. (8) 2 6
Deferred income tax (asset) liability............. (3) -- 2
------- ------ ------
Net unrealized capital (losses) gains,
after-tax....................................... (5) 2 4
Balance beginning of year......................... (6) (5) 2
------- ------ ------
CHANGE IN NET UNREALIZED CAPITAL GAINS (LOSSES) ON
EQUITY SECURITIES............................... $ 1 $ 7 $ 2
======== ====== ======
</TABLE>
COMPONENTS OF NET UNREALIZED CAPITAL (LOSSES) GAINS ON FIXED MATURITIES
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------------
1994 1995 1996
------- ------ ------
<S> <C> <C> <C>
Gross unrealized gains................................ $ 174 $ 581 $ 425
Gross unrealized losses............................... (1,333) (598) (373)
Unrealized losses (gains) credited to policyholders... 43 (53) (13)
------- ------ ------
Net unrealized capital (losses) gains................. (1,116) (70) 39
Deferred income tax (asset) liability................. (391) (24) 14
------- ------ ------
Net unrealized capital (losses) gains, after-tax...... (725) (46) 25
Balance beginning of year............................. 103 (725) (46)
------- ------ ------
CHANGE IN NET UNREALIZED CAPITAL (LOSSES) GAINS ON
FIXED MATURITIES.................................... $ (828) $ 679 $ 71
======== ====== ======
</TABLE>
F-14
<PAGE> 148
HARTFORD LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS)
COMPONENTS OF FIXED MATURITIES INVESTMENTS
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1995
-------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
U.S. government and government agencies and
authorities (guaranteed and sponsored)........ $ 554 $ 5 $ (9) $ 550
U.S. government and government agencies and
authorities (guaranteed and sponsored) --
asset-backed.................................. 3,880 230 (407) 3,703
States, municipalities and political
subdivisions.................................. 202 4 (3) 203
International governments....................... 364 21 (4) 381
Public utilities................................ 1,027 31 (2) 1,056
All other corporate including international..... 4,682 190 (98) 4,774
All other corporate -- asset-backed............. 3,421 81 (63) 3,439
Short-term investments.......................... 1,088 -- -- 1,088
Certificates of deposit......................... 938 19 (12) 945
------- --- ----- -------
TOTAL FIXED MATURITIES.......................... $16,156 $581 $ (598) $16,139
======= === ===== =======
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
-------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
U.S. government and government agencies and
authorities (guaranteed and sponsored)........ $ 194 $ 13 $ (4) $ 203
U.S. government and government agencies and
authorities (guaranteed and sponsored) --
asset-backed.................................. 2,167 165 (138) 2,194
States, municipalities and political
subdivisions.................................. 423 6 (11) 418
International governments....................... 380 19 (4) 395
Public utilities................................ 967 13 (9) 971
All other corporate including international..... 5,477 137 (125) 5,489
All other corporate -- asset-backed............. 4,151 57 (60) 4,148
Short-term investments.......................... 765 -- -- 765
Certificates of deposit......................... 1,135 15 (22) 1,128
------- ---- ----- -------
TOTAL FIXED MATURITIES.......................... $15,659 $425 $ (373) $15,711
======= ==== ===== =======
</TABLE>
The amortized cost and fair value of fixed maturities at December 31, 1996,
by maturity, are shown below. Asset-backed securities, including mortgage-backed
securities and collateralized mortgage obligations, are distributed to maturity
year based on the Company's estimates of the rate of future prepayments of
principal over the remaining life of such securities. These estimates are
developed using prepayment speeds reported in broker consensus data. Such
estimates are derived from prepayment speeds experienced at the interest rate
levels projected for the underlying mortgages and can be expected to vary from
actual experience. Expected maturities differ from contractual maturities due to
call or prepayment provisions.
F-15
<PAGE> 149
HARTFORD LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS)
<TABLE>
<CAPTION>
MATURITY AMORTIZED COST FAIR VALUE
---------------------------------------------------------- -------------- ----------
<S> <C> <C>
One year or less.......................................... $ 2,920 $ 2,936
Over one year through five years.......................... 6,646 6,705
Over five years through ten years......................... 3,993 3,982
Over ten years............................................ 2,100 2,088
------- -------
TOTAL........................................... $ 15,659 $ 15,711
======= =======
</TABLE>
Sales of fixed maturities excluding short-term fixed maturities for the
years ended December 31, 1994, 1995 and 1996 resulted in proceeds of $6,262,
$5,494 and $4,018, respectively, resulting in gross realized capital gains of
$79, $111 and $102, respectively, and gross realized capital losses (including
investment writedowns) of $116, $81 and $316, respectively, not including
policyholder gains and losses. Sales of equity securities for the years ended
December 31, 1994, 1995 and 1996 resulted in proceeds of $58, $42 and $74,
respectively, resulting in gross realized capital gains of $5, $0 and $2,
respectively, and gross realized capital losses of $14, $6 and $0, respectively,
not including policyholder gains and losses.
CONCENTRATION OF CREDIT RISK
As of December 31, 1996, the Company had a reinsurance recoverable of
$3,800 from Mutual Benefit Life Assurance Corporation ("Mutual Benefit"),
supported by assets in a security trust of $3,800 (including policy loans of
$3,300). The risk of Mutual Benefit becoming insolvent is mitigated by the
reinsurance agreement's requirement that the assets be kept in a security trust
with the Company as sole beneficiary.
The Company has invested in the securities of a single issuer in amounts
greater than 10% of stockholder's equity. The table below details the issuer and
the amount invested by the Company, as of December 31, 1996. Excluding these
investments and investments in U.S. government and agencies, the Company has no
other significant concentrations of credit risk in fixed maturities.
<TABLE>
<CAPTION>
AMORTIZED FAIR
ISSUER COST VALUE RATING
- -------------------------------------------- --------- ----- -------------------------
<S> <C> <C> <C>
MBNA Credit Card............................ $ 180 $ 181 BBB-AAA
Green Tree Financial Corporation............ $ 175 $ 175 A-AAA
Province of Quebec.......................... $ 152 $ 158 A+ (Standard and Poor's)
Traveler's Group, Inc....................... $ 160 $ 160 A+ (Standard and Poor's)
Finova Capital.............................. $ 136 $ 137 A- (Standard and Poor's)
Ford Motor Corporation...................... $ 143 $ 144 A+ (Standard and Poor's)
Sears, Roebuck and Co. ..................... $ 131 $ 131 BBB - A-
</TABLE>
DERIVATIVE INVESTMENTS
Derivatives play an important role in facilitating the management of
interest rate risk, in creating opportunities to develop asset packages which
efficiently fund product obligations, in hedging against indexation risks which
affect the value of certain liabilities, and in adjusting investment risk
characteristics when dictated by significant changes in market risks. As an end
user of derivatives, the Company uses a variety of derivative financial
instruments, including swaps, caps, floors, forwards and exchange traded
financial futures and options in order to hedge exposure to price, foreign
currency and/or interest rate risk on anticipated investment purchases or
existing assets and liabilities. The notional amounts of derivative contracts
represent the basis upon which pay and
F-16
<PAGE> 150
HARTFORD LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS)
receive amounts are calculated and are not reflective of credit risk for
derivative contracts. Credit risk for derivative contracts is limited to the
amounts calculated to be due to the Company on such contracts. The Company
believes it maintains prudent policies regarding the financial stability and
credit standing of its major counterparties and typically requires credit
enhancement provisions to further limit its credit risk for derivative
contracts. Many of these derivative contracts are bilateral agreements that are
not assignable without the consent of the relevant counterparty. Notional
amounts pertaining to derivative financial instruments totaled $9,627 and
$10,877 at December 31, 1995 and 1996, respectively ($7,919 and $8,249 related
to life insurance investments and $1,708 and $2,628 related to life insurance
liabilities at December 31, 1995 and 1996, respectively).
The following table summarizes the Company's derivatives, segregated by
major categories, as of December 31, 1995 and 1996.
<TABLE>
<CAPTION>
AMOUNTS HEDGED (NOTIONAL AMOUNTS) (EXCLUDING LIABILITY HEDGES)
---------------------------------------------------------------------
PURCHASED
TOTAL ISSUED OPTIONS, INTEREST FOREIGN TOTAL
CARRYING CAPS & CAPS & RATE CURRENCY NOTIONAL
VALUE FLOORS(C) FLOORS(D) FUTURES(E) SWAPS(H) SWAPS(F) AMOUNT
-------- --------- --------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
1995
Asset-backed securities (excluding
inverse floaters and
anticipatory)................... $ 6,375 $ 118 $ 3,433 $ 323 $ 290 $ -- $4,164
Inverse floaters(A)............... 770 560 354 18 681 -- 1,613
Anticipatory(G)................... (3) -- -- 478 240 -- 718
Other bonds and notes............. 7,909 33 66 323 798 186 1,406
Short-term investments............ 1,088 -- -- -- -- -- --
------- ------ ------ ------ ------ ---- ------
TOTAL FIXED MATURITIES.... 16,139 711 3,853 1,142 2,009 186 7,901
Equity securities, policy loans
and other investments........... 3,933 -- -- -- 18 -- 18
------- ------ ------ ------ ------ ---- ------
TOTAL INVESTMENTS......... $20,072 $ 711 $ 3,853 $1,142 $2,027 $186 $7,919
======= ====== ====== ====== ====== ==== ======
TOTAL DERIVATIVES -- FAIR
VALUE(B)................ $ (32) $ 47 $ -- $ (113) $(24) $ (122)
====== ====== ====== ====== ==== ======
</TABLE>
F-17
<PAGE> 151
HARTFORD LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS)
<TABLE>
<CAPTION>
AMOUNTS HEDGED (NOTIONAL AMOUNTS) (EXCLUDING LIABILITY HEDGES)
---------------------------------------------------------------------
PURCHASED
TOTAL ISSUED OPTIONS, INTEREST FOREIGN TOTAL
CARRYING CAPS & CAPS & RATE CURRENCY NOTIONAL
VALUE FLOORS(C) FLOORS(D) FUTURES(E) SWAPS(H) SWAPS(F) AMOUNT
-------- --------- --------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
1996
Asset-backed securities (excluding
inverse floaters and
anticipatory)................... $ 5,939 $ 500 $ 2,454 $ -- $ 941 $ -- $3,895
Inverse floaters(A)............... 404 98 856 -- 346 -- 1,300
Anticipatory(G)................... -- -- -- 287 105 -- 392
Other bonds and notes............. 8,603 456 747 50 1,265 125 2,643
Short-term investments............ 765 -- -- -- -- -- --
------- ------ ------ ------ ------ ---- ------
TOTAL FIXED MATURITIES.... 15,711 1,054 4,057 337 2,657 125 8,230
Equity securities, policy loans
and other investments........... 4,119 -- -- -- 19 -- 19
------- ------ ------ ------ ------ ---- ------
TOTAL INVESTMENTS......... $19,830 $ 1,054 $ 4,057 $ 337 $2,676 $125 $8,249
======= ====== ====== ====== ====== ==== ======
TOTAL DERIVATIVES -- FAIR
VALUE(B)................ $ (10) $ 35 $ -- $ (27) $ (9) $ (11)
====== ====== ====== ====== ==== ======
</TABLE>
- ---------------
(A) Inverse floaters are variations of collateralized mortgage obligations for
which the coupon rates move inversely with an index rate such as LIBOR. The
risk to principal is considered negligible as the underlying collateral for
the securities is guaranteed or sponsored by government agencies. To address
the volatility risk created by the coupon variability, the Company uses a
variety of derivative instruments, primarily interest rate swaps and
purchased caps and floors.
(B) The fair value of derivative instruments including swaps, caps, floors,
futures, options and forward commitments was determined using dealer quoted
prices, for 1995, and using a pricing model which is validated through
quarterly comparison to dealer quoted prices, for 1996.
(C) The 1995 data includes issued caps of $475 with a weighted average strike
rate of 8.5% (ranging from 7.0% to 10.4%) and over 85% maturing in 2000
through 2004. In addition, issued floors totaled $236, a weighted average
strike rate of 8.1% (ranging from 5.3% to 10.9%) and mature through 2007
with 76% maturing by 2004. The 1996 data includes issued caps of $433 with a
weighted average strike rate of 8.21% (ranging from 7.0% to 9.5%) and over
93% maturing in 2000 through 2005. In addition, issued floors totaled $621,
have a weighted average strike rate of 5.16% (ranging from 4.875% to 7.85%)
with all of them maturing by the end of 2005.
(D) The 1995 data includes purchased floors of approximately $2,100 and
purchased caps of approximately $1,800. The floors have a weighted average
strike price of 5.7% (ranging from 3.7% to 6.8%) and over 87% mature in 1997
through 1999. The caps have a weighted average strike price of 7.6% (ranging
from 4.5% to 10.1%) and over 82% mature in 1997 through 2000. The 1996 data
includes purchased floors of approximately $2,600, purchased options of $10
and purchased caps of approximately $1,400. The floors have a weighted
average strike rate of 5.77% (ranging from 3.70% to 7.85%) and over 95%
mature in the years 1997 through 2001. The options mature in 1997. The caps
have a weighted average of 7.68% (ranging from 4.40% to 10.125%) and over
77% of them mature in the years 1997 through 2001.
(E) As of December 31, 1995 and 1996, over 95% and 71% respectively, of the
notional futures contracts expire within one year.
(F) As of December 31, 1995 and 1996, over 25% and 42%, respectively, of the
Company's foreign currency swaps expire within one year; the balance mature
over the succeeding 4 to 5 years.
(G) Deferred gains and losses on anticipatory transactions are included in the
carrying value of bond investments in the Consolidated Balance Sheets. At
the time of the ultimate purchase, they are reflected as a basis adjustment
to the purchased asset. At December 31, 1995, the Company had $12.9 in net
deferred gains for futures, interest rate swaps and purchased options. The
Company basis adjusted $12.6 of the deferred gains in 1996. At December 31,
1996, the Company had $5.7 in net deferred gains for futures, interest rate
swaps and purchased options. The Company expects to basis adjust the $5.7 of
deferred gains in 1997.
(H) For additional information on the Company's interest rate swaps, see the
table on page F-19.
The following table summarizes the maturities by notional value of interest
rate swaps outstanding at December 31, 1995 and 1996, and the related weighted
average interest pay rate or receive rate. The variable rates represent spot
rates (primarily 90-day LIBOR) as of December 31,
F-18
<PAGE> 152
HARTFORD LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS)
1996. Such variable rates have been calculated assuming that the spot rates
remain unchanged throughout the life of the interest rate swaps.
<TABLE>
<CAPTION>
LATEST
1996 1997 1998 1999 2000 THEREAFTER TOTAL MATURITY
----- ----- ----- ----- ----- ---------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995
PAY FIXED/RECEIVE VARIABLE
Notional value.................... $ 15 $ 50 $ -- $ 453 $ 31 $ 229 $ 778 2004
Weighted average pay rate......... 4.95% 7.28% -- 8.10% 7.11% 7.78% 7.85%
Weighted average receive rate..... 5.81% 5.94% -- 5.75% 5.70% 5.88% 5.80%
PAY VARIABLE/RECEIVE FIXED
Notional value.................... $ 120 $ 68 $ 25 $ 25 $ 35 $ 295 $ 568 2007
Weighted average pay rate......... 5.89% 8.63% 5.93% -- 5.88% 4.35% 5.41%
Weighted average receive rate..... 2.78% 7.87% 4.00% -- 6.48% 6.66% 5.56%
PAY VARIABLE/RECEIVE DIFFERENT
VARIABLE
Notional value.................... $ 161 $ 18 $ 36 $ 12 $ 200 $ 254 $ 681 2004
Weighted average pay rate......... 5.51% 6.19% 3.65% 3.45% 4.53% 16.26% 5.59%
Weighted average receive rate..... 6.48% 8.10% 5.58% 5.16% 6.81% 5.91% 6.55%
Total interest rate swaps......... $ 296 $ 136 $ 61 $ 490 $ 266 $ 778 $2,027 2007
Total weighted average pay rate... 5.64% 7.78% 4.58% 7.57% 5.01% 6.40% 6.51%
Total weighted average receive
rate............................ 4.94% 7.19% 4.94% 5.44% 6.64% 6.30% 5.91%
</TABLE>
<TABLE>
<CAPTION>
LATEST
1997 1998 1999 2000 2001 THEREAFTER TOTAL MATURITY
----- ----- ----- ----- ----- ---------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996
PAY VARIABLE/RECEIVE FIXED
Notional value.................... $ -- $ 50 $ 165 $ 35 $ 162 $ 334 $ 746 2016
Weighted average pay rate......... -- 5.7% 5.8% 5.5% 5.5% 5.6% 5.6%
Weighted average receive rate..... -- 3.2% 1.5% 6.5% 6.3% 6.7% 5.2%
PAY FIXED/RECEIVE VARIABLE
Notional value.................... $ 86 $ 25 $ 486 $ 74 $ 582 $ 399 $1,652 2007
Weighted average pay rate......... 7.5% -- 6.4% 6.7% 7.0% 6.8% 6.8%
Weighted average receive rate..... 5.6% -- 5.6% 5.7% 6.2% 5.8% 5.9%
PAY VARIABLE/RECEIVE DIFFERENT
VARIABLE
Notional value.................... $ 19 $ 15 $ -- $ 200 $ -- $ 44 $ 278 2007
Weighted average pay rate......... 5.9% 5.7% -- 6.4% -- 12.9% 7.4%
Weighted average receive rate..... 3.7% 5.5% -- 5.0% -- 6.4% 5.2%
Total interest rate swaps......... $ 105 $ 90 $ 651 $ 309 $ 744 $ 777 $2,676 2016
Total weighted average pay rate... 7.2% 5.7% 6.2% 6.4% 6.7% 6.6% 6.5%
Total weighted average receive
rate............................ 5.2% 3.8% 4.4% 5.4% 6.2% 6.3% 5.6%
</TABLE>
In addition, interest rate sensitivity related to certain Company insurance
liabilities was altered primarily through interest rate swap agreements. The
notional amount of the liability agreements in which the Company generally pays
one variable rate in exchange for another was approximately $2,500 at December
31, 1995 and 1996. As of December 31, 1996, the weighted average pay rate was
5.6% and the weighted average receive rate was 6.5%. These agreements mature at
various times through 2001.
F-19
<PAGE> 153
HARTFORD LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS)
A reconciliation between notional amounts at December 31, 1995 and 1996 by
derivative type and strategy is as follows:
<TABLE>
<CAPTION>
BY DERIVATIVE TYPE
-----------------------------------------------
12/31/95 12/31/96
NOTIONAL MATURITIES/ NOTIONAL
AMOUNT ADDITIONS TERMINATIONS AMOUNT
--------- --------- ------------ --------
<S> <C> <C> <C> <C>
Caps............................................... $ 2,284 $ 1,293 $ 1,715 $ 1,862
Floors............................................. 2,380 2,184 1,165 3,399
Options............................................ -- 10 -- 10
Swaps/Forwards..................................... 3,821 4,292 2,844 5,269
Futures............................................ 1,142 3,776 4,581 337
------ ------- ------- -------
TOTAL.................................... $ 9,627 $ 11,555 $ 10,305 $ 10,877
====== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
BY STRATEGY
-----------------------------------------------
12/31/95 12/31/96
NOTIONAL MATURITIES/ NOTIONAL
AMOUNT ADDITIONS TERMINATIONS AMOUNT
--------- --------- ------------ --------
<S> <C> <C> <C> <C>
Liability.......................................... $ 1,708 $ 2,057 $ 1,137 $ 2,628
Anticipatory....................................... 718 2,117 2,443 392
Asset.............................................. 3,037 1,572 2,229 2,380
Portfolio.......................................... 4,164 5,809 4,496 5,477
------ ------- ------- -------
TOTAL.................................... $ 9,627 $ 11,555 $ 10,305 $ 10,877
====== ======= ======= =======
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, 1995 DECEMBER 31, 1996
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
<S> <C> <C> <C> <C>
ASSETS
Fixed maturities.................................... $ 16,139 $16,139 $ 15,711 $15,711
Equity securities................................... 63 63 119 119
Policy loans........................................ 3,380 3,380 3,839 3,839
Mortgage loans...................................... 271 271 2 2
Investments in partnerships and trust............... 180 194 66 68
Other............................................... 39 39 93 119
LIABILITIES
Other policy benefits............................... $ 12,727 $12,767 $ 11,707 $11,469
Allocated Advances.................................. 732 732 893 893
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument: fair value for fixed maturities and
equity securities approximate those quotations published by applicable stock
exchanges or received from other reliable sources; policy and mortgage loan
carrying amounts approximate fair value; investments in partnerships and trusts
are based on external market valuations from partnership and trust managements;
fair value of derivative instruments, including swaps, caps, floors, futures,
and forward commitments, is determined by using a pricing model which is
validated through quarterly comparison to dealer quoted
F-20
<PAGE> 154
HARTFORD LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS)
market prices; and other policy benefits payable for investment type contracts
are determined by estimating future cash flows discounted at the yearend market
rate.
5. INCOME TAX
The Company and The Hartford have entered into a tax sharing agreement
under which each member in the consolidated U.S. federal income tax return will
make payments between them such that, with respect to any period, the amount of
taxes to be paid by the Company, subject to certain adjustments, generally will
be determined as though the Company were to file separate federal, state and
local income tax returns.
As long as The Hartford continues to beneficially own, directly or
indirectly, at least 80% of the combined voting power and 80% of the value of
the outstanding capital stock of the Company, the Company will be included for
federal income tax purposes in the consolidated group of which The Hartford is
the common parent. It is the current intention of The Hartford and its
subsidiaries to continue to file a single consolidated federal income tax
return. The Company will continue to remit (receive from) The Hartford a current
income tax provision (benefit) computed in accordance with such tax sharing
agreement. The Company's effective tax rate was 32%, 34% and 23% in 1994, 1995
and 1996, respectively.
Income tax expense was as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Current......................................................... $ 202 $ 213 $ 134
Deferred........................................................ (130) (137) (127)
----- ----- -----
TOTAL................................................. $ 72 $ 76 $ 7
===== ===== =====
</TABLE>
A reconciliation of the tax provision at the U.S. federal statutory rate to
the provision for income taxes is as follows:
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED
DECEMBER 31,
-----------------
1994 1995 1996
--- --- ---
<S> <C> <C> <C>
Tax provision at U.S. statutory rate................................... $78 $79 $11
Tax-exempt income...................................................... (4) (3) (2)
Foreign tax credit..................................................... -- (4) --
Other.................................................................. (2) 4 (2)
---- ---- ----
TOTAL........................................................ $72 $76 $ 7
==== ==== ====
</TABLE>
Income taxes paid were $257, $173, and $166 in 1994, 1995 and 1996,
respectively. The current tax refund due from The Hartford was $16 and $59 as of
December 31, 1995 and 1996, respectively.
F-21
<PAGE> 155
HARTFORD LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS)
Deferred tax assets (liabilities) included the following:
<TABLE>
<CAPTION>
AS OF DECEMBER
31,
-----------------
1995 1996
---- ----
<S> <C> <C>
Tax return deferred acquisition costs............................... $405 $524
Financial statement deferred acquisition costs and reserves......... 181 (260)
Employee benefits................................................... 13 15
Unrealized loss (gain) on investments............................... 24 (16)
Investments and other............................................... (180) 280
---- ----
TOTAL..................................................... $443 $543
==== ====
</TABLE>
Prior to the Tax Reform Act of 1984, the Life Insurance Company Income Tax
Act of 1959 permitted the deferral from taxation of a portion of statutory
income under certain circumstances. In such circumstances, the deferred income
was accumulated in a "Policyholders' Surplus Account" and will be taxable in the
future only under conditions which management considers to be remote; therefore,
no federal income taxes have been provided on this deferred income. The balance
for tax return purposes of the Policyholders' Surplus Account as of December 31,
1996 was $37.
6. REINSURANCE
The Company cedes insurance to non-affiliated insurers in order to limit
its maximum loss. Such transfer does not relieve the Company of its primary
liability. The Company also assumes insurance from other insurers. Group life
and accident and health insurance business is reinsured to unaffiliated
companies.
Insurance net retained premiums were comprised of the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Gross premiums................................................ $1,989 $2,348 $3,077
Insurance assumed............................................. 334 608 405
Insurance ceded............................................... (184) (313) (413)
------ ------ ------
TOTAL............................................... $2,139 $2,643 $3,069
====== ====== ======
</TABLE>
Reinsurance recoveries, which reduced death and other benefits, for the
years ended December 31, 1994, 1995 and 1996 approximated $113, $162 and $239,
respectively.
Also in December 1994, the Company ceded to a third party approximately
$1,000 in individual variable annuities on a modified coinsurance basis. In
December 1995, the Company ceded approximately $1,200 in individual variable
annuities on a modified coinsurance basis to a third party. The Company, and
thereby the coinsurer, does not retain the investment risk with respect to its
variable annuity contracts. The policyholder elects the investment options and
all investment gains and losses are then credited to the policyholder's account.
In addition, the liability structure of the variable annuity contracts does not
contain significant actuarial risk of mortality or morbidity. These transactions
did not have a material impact on consolidated net income.
In May 1994, the Company assumed the life insurance policies and the
individual annuities of Pacific Standard with reserves and account values of
approximately $434. The Company received cash and investment-grade assets to
support the life insurance and individual annuity contract obligations assumed.
F-22
<PAGE> 156
HARTFORD LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS)
7. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
The Company's employees are included in Hartford Fire's noncontributory
defined benefit pension plans. These plans provide pension benefits that are
based on years of service and the employee's compensation during the last ten
years of employment. The Company's funding policy is to contribute annually an
amount between the minimum funding requirements set forth in the Employee
Retirement Income Security Act of 1974, as amended, and the maximum amount that
can be deducted for federal income tax purposes. Generally, pension costs are
funded through the purchase of the Company's group pension contracts. The cost
to the Company was approximately $7, $6 and $7 in 1994, 1995 and 1996,
respectively.
The Company also provides, through Hartford Fire, certain health care and
life insurance benefits for eligible retired employees. A substantial portion of
the Company's employees may become eligible for these benefits upon retirement.
The Company's contribution for health care benefits will depend on the retiree's
date of retirement and years of service. In addition, the plan has a defined
dollar cap which limits average Company contributions. The Company has prefunded
a portion of the health care and life insurance obligations through trust funds
where such prefunding can be accomplished on a tax effective basis.
Postretirement health care and life insurance benefits expense, allocated by The
Hartford, was immaterial to the results of operations for 1994, 1995 and 1996,
respectively.
The assumed rate of future increases in the per capita cost of health care
(the health care trend rate) was 9.3% for 1996, decreasing ratably to 6.0% in
the year 2001. Increasing the health care trend rates by one percent per year
would have an immaterial impact on the accumulated postretirement benefit
obligation and the annual expense. To the extent that the actual experience
differs from the inherent assumptions, the effect will be amortized over the
average future service of the covered employees.
8. ALLOCATED ADVANCES FROM PARENT
For financial reporting purposes, the Company has treated certain amounts
previously allocated by The Hartford to the Company's life insurance
subsidiaries as Allocated Advances from parent. Such Allocated Advances were not
treated as liabilities or indebtedness for tax and statutory accounting
purposes. Cash received in respect of Allocated Advances was used to support the
growth of the life insurance subsidiaries and was treated as surplus for
statutory accounting purposes. Interest expense represents the expense
internally allocated to the Company with respect to the Allocated Advances based
on The Hartford's actual (third party) external borrowing costs. Interest
expense paid was treated as dividends for tax and statutory accounting purposes.
The weighted average interest rate paid by the Company was 6.5%, 6.8%, and 7.1%
in 1994, 1995 and 1996, respectively.
9. BUSINESS SEGMENT INFORMATION
The Company sells financial products such as fixed and variable annuities,
retirement plan services, and life and disability insurance on both an
individual and a group basis. The Company divides its businesses into four
segments: Annuity, Individual Life Insurance, Employee Benefits and Guaranteed
Investment Contracts. In addition, the Company also maintains a Corporate
Operation. The Annuity segment offers individual variable annuities and fixed
market value adjusted annuities, deferred compensation and retirement plan
services, mutual funds, investment management services and other financial
products. The Individual Life Insurance segment sells a variety of individual
life insurance products, including variable life, universal life and
interest-sensitive whole life policies.
F-23
<PAGE> 157
HARTFORD LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS)
The Employee Benefits segment sells group insurance products, including group
life and group disability insurance and corporate-owned life insurance, and
engages in certain international operations. The Guaranteed Investment Contracts
segment sells a limited amount of guaranteed investment contracts and contains
Closed Book GRC. Through its Corporate Operation, the Company reports items that
are not directly allocable to any of its business segments. Included in the
Corporate Operation are: (i) unallocated income and expense, (ii) the Company's
group medical business, which it exited in 1993, and (iii) certain other items
not directly allocable to any segment. Net realized capital gains and losses are
recognized in the period of realization, but are allocated to the segments
utilizing durations of the segment portfolios.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
REVENUES
Annuity............................................. $ 594 $ 720 $ 973
Individual Life Insurance........................... 391 408 472
Employee Benefits................................... 1,986 2,515 2,833
Guaranteed Investment Contracts..................... 481 378 34
Corporate Operation................................. 91 69 72
------- ------- -------
TOTAL REVENUES................................. $ 3,543 $ 4,090 $ 4,384
======= ======= =======
INCOME BEFORE INCOME TAX EXPENSE
Annuity............................................. $ 129 $ 168 $ 224
Individual Life Insurance........................... 40 58 68
Employee Benefits................................... 81 101 115
Guaranteed Investment Contracts..................... 2 (103) (346)
Corporate Operation................................. (29) 2 (30)
------- ------- -------
INCOME BEFORE INCOME TAX EXPENSE............... $ 223 $ 226 $ 31
======= ======= =======
ASSETS
Annuity............................................. $29,837 $39,673 $52,967
Individual Life Insurance........................... 2,808 3,173 3,968
Employee Benefits................................... 9,346 15,137 16,297
Guaranteed Investment Contracts..................... 7,337 6,069 4,533
Corporate Operation................................. 955 1,910 2,168
------- ------- -------
TOTAL ASSETS................................... $50,283 $65,962 $79,933
======= ======= =======
</TABLE>
10. STATUTORY NET INCOME AND SURPLUS
A significant percentage of the consolidated statutory surplus is
permanently reinvested or is subject to various state regulatory restrictions
which limit the payment of dividends without prior approval. The total amount of
statutory dividends which may be paid by the insurance subsidiaries of the
Company in 1997, without prior approval, is estimated to be $132. Statutory net
income and surplus as of and for the years ended December 31 were:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER
31,
------------------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Statutory net income................................. $ 74 $ 113 $ 171
====== ====== ======
Statutory surplus.................................... $1,088 $1,224 $1,320
====== ====== ======
</TABLE>
The insurance subsidiaries of the Company prepare their statutory financial
statements in accordance with accounting practices prescribed by the State of
Connecticut Insurance Department and the State of New Jersey Insurance
Department. Prescribed statutory accounting practices
F-24
<PAGE> 158
HARTFORD LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS)
include publications of the National Association of Insurance Commissioners, as
well as state laws, regulations, and general administrative rules.
11. SEPARATE ACCOUNTS
The Company maintained separate account assets and liabilities totaling
$36,296 and $49,770 at December 31, 1995 and 1996, respectively, which are
reported at fair value. Separate account assets are segregated from other
investments, and investment income and gains and losses accrue directly to the
policyholder. Separate accounts reflect two categories of risk assumption: non-
guaranteed separate accounts of approximately $25,900 and $39,400 at December
31, 1995 and 1996, respectively, wherein the policyholder assumes the investment
risk, and guaranteed separate account assets of approximately $10,400 at
December 31, 1995 and 1996, wherein the Company contractually guarantees either
a minimum return or account value to the policyholder. Included in the
non-guaranteed category are policy loans of approximately $1,700 and $2,000 at
December 31, 1995 and 1996, respectively. Investment income (including
investment gains and losses) and interest credited to policyholders on separate
account assets are not reflected in the Consolidated Statements of Income.
Separate account management fees, net of minimum guarantees, were $256, $387 and
$538 in 1994, 1995 and 1996, respectively.
The guaranteed separate accounts include modified guaranteed individual
annuity and modified guaranteed life insurance. The average credited interest
rate on these contracts was 6.53% at December 31, 1996. The assets that support
these liabilities were comprised of approximately $10,200 in fixed maturities at
December 31, 1996. The portfolios are segregated from other investments and are
managed so as to minimize liquidity and interest rate risk. In order to minimize
the risk of disintermediation associated with early withdrawals, individual
annuity and modified guaranteed life insurance contracts carry a graded
surrender charge as well as a market value adjustment. Additional investment
risk is hedged using a variety of derivatives of approximately $100 in carrying
value and $2,400 in notional amounts at December 31, 1996.
12. CLAIM RESERVES
The following table displays the development of the claim reserves
(included in future policy benefits on the Consolidated Balance Sheets)
resulting primarily from group disability products as of December 31, 1995 and
1996:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------
1995 1996
------ ------
<S> <C> <C>
CLAIM RESERVES, JANUARY 1...................................... $1,115 $1,254
------ ------
Less: Reinsurance recoverable, January 1....................... 38 35
------ ------
Incurred expenses related to:
Current year................................................. 632 799
Prior year................................................... (28) (66)
------ ------
Total incurred............................................ 604 733
------ ------
Paid expenses related to:
Current year................................................. 227 236
Prior year................................................... 235 273
------ ------
Total paid................................................ 462 509
------ ------
Add: Reinsurance recoverable, December 31...................... 35 53
------ ------
CLAIM RESERVES, DECEMBER 31.................................... $1,254 $1,496
====== ======
</TABLE>
F-25
<PAGE> 159
HARTFORD LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS)
13. COMMITMENTS AND CONTINGENCIES
Under insurance guaranty fund laws existing in each state, the District of
Columbia and Puerto Rico, insurers licensed to do business can be assessed by
state insurance guaranty associations for certain obligations of insolvent
insurance companies to policyholders and claimants. Recent regulatory actions
against certain large life insurers encountering financial difficulty have
prompted various state insurance guaranty associations to begin assessing life
insurance companies for the deemed losses. Most of these laws do provide,
however, that an assessment may be excused or deferred if it would threaten an
insurer's solvency and further provide annual limits on such assessments. A
large part of the assessments paid by the Company's insurance subsidiaries
pursuant to these laws may be used as credits for a portion of the Company's
insurance subsidiaries' premium taxes. The Company paid guaranty fund
assessments of approximately $11, $13 and $12 in 1994, 1995 and 1996,
respectively, of which $5, $7 and $6 were estimated to be creditable against
premium taxes.
The Company is a defendant in various lawsuits arising in the ordinary
course of business. In the opinion of management, the resolution of these
matters is not expected to have a material adverse effect on the Company's
business, financial position, or results of operations.
The rent paid to Hartford Fire for the space occupied by the Company was
$11 in 1994, 1995, and 1996. The Company expects to pay annual rent of $12 in
each of 1997, 1998, and 1999, $21 in each of 2000 and 2001, and $175 thereafter
over the remaining term of the sublease, which expires on December 31, 2009.
Rental expense is recognized on a level basis over the term of the sublease and
amounted to approximately $14 in 1994, 1995 and 1996.
14. QUARTERLY RESULTS FOR 1996 AND 1995 (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
----------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------------- ----------- -------------- ---------------
1996 1995 1996 1995 1996 1995 1996 1995
------ ------ ---- ---- ----- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues...................... $1,303 $1,065 $987 $896 $ 817 $1,062 $1,277 $1,067
Benefits, claims, and expenses... 1,264 1,030 944 857 931 1,025 1,221 1,028
------ ------ ---- ---- ----- ------ ------ ------
Net income.................... $ 39 $ 35 $ 43 $ 39 $(114) $ 37 $ 56 $ 39
====== ====== ===== ===== ====== ====== ====== ======
</TABLE>
15. SUBSEQUENT EVENTS
On February 10, 1997, the Company filed a Registration Statement with the
Securities and Exchange Commission relating to the U.S. and international
offerings of shares of Class A Common Stock (the "Equity Offerings")
representing up to 20% ownership of the Company. After completion of the Equity
Offerings, The Hartford would own all of the shares of Class B Common Stock
(after reclassification of the Company's common stock into Class B Common
Stock). The Company intends to use the estimated net proceeds of the Equity
Offerings to make a capital contribution to its insurance subsidiaries, to
reduce its third-party indebtedness and for other general corporate purposes.
The Hartford has advised the Company that its current intent is to continue
to beneficially own at least 80% of the Company, but it is under no contractual
obligation to do so, except for a limited period. Provided that The Hartford
continues to beneficially own at least 80% of the combined voting power or the
value of the outstanding capital stock of the Company, the Company will be
included for federal income tax purposes in the controlled group of which The
Hartford is the common parent.
F-26
<PAGE> 160
HARTFORD LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS)
Each member of a controlled group is jointly and severally liable for pension
funding and pension termination liabilities of each other member of the
controlled group, as well as certain benefit plan taxes. Accordingly, the
Company could be liable for pension funding, pension termination liabilities and
certain other pension-related excise taxes as well as other taxes of another
member of The Hartford controlled group in the event any such liability is
incurred, and not discharged, by such other member.
In connection with the proposed Equity Offerings, the Company plans to
enter into formal agreements, including a master intercompany agreement,
investment management agreements and a new tax sharing agreement, with The
Hartford covering such matters as corporate services, approval of certain
corporate activities, registration rights, owned and leased space, allocation of
expenses, taxes and liabilities, investment advisory services, use of trademarks
and certain other corporate matters. As part of the master intercompany
agreement, the Company would agree to remit to The Hartford 30% of any shared
liabilities for which The Hartford is responsible in respect of the ITT
Spin-Off, 30% of any taxes which may be assessed to The Hartford relating to the
ITT Spin-Off and will indemnify The Hartford for certain other tax liabilities.
As of December 31, 1996, there was no known liability associated with the ITT
Spin-Off. Such agreements are meant to maintain the relationship between the
Company and The Hartford in a manner consistent in all material respects with
past practice. As a result, management believes these agreements should not have
a material impact on the results of operations of the Company.
In addition, under insurance company holding laws, agreements between the
Company's insurance subsidiaries and The Hartford must be fair and reasonable
and may be subject to the approval of applicable insurance commissioners. The
agreements will be intended to maintain the relationship between the Company and
The Hartford in a manner generally consistent with past practices. However, none
of these arrangements will result from arm's-length negotiations and, therefore,
the prices charged to the Company and its subsidiaries for services provided
under these arrangements may be higher or lower than prices that may be charged
by third parties.
On February 10, 1997, the Company entered into a $1,300 unsecured
short-term credit facility with a syndicate of four banks. Interest on
borrowings will be equal to a Eurodollar rate determined by taking the average
one, two, three or six-month rate (based upon the applicable interest period
selected by the Company) at which deposits in U.S. dollars are offered by each
of the four participating lenders in London, England to prime banks in the
London interbank market, plus an applicable margin (based upon the Company's
current public debt ratings). Borrowings must be repaid by February 9, 1998.
F-27
<PAGE> 161
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS
ENDED MARCH 31,
-------------------
1996 1997
------ ------
<S> <C> <C>
REVENUES
Premiums and other considerations.................................... $ 941 $ 679
Net investment income................................................ 362 375
Net realized capital gains (losses).................................. -- 1
------ ------
TOTAL REVENUES.................................................... 1,303 1,055
------ ------
BENEFITS, CLAIMS AND EXPENSES
Benefits, claims and claim adjustment expenses....................... 651 659
Amortization of deferred policy acquisition costs.................... 66 83
Dividends to policyholders........................................... 286 54
Interest expense..................................................... 11 16
Other insurance expense.............................................. 230 143
------ ------
TOTAL BENEFITS, CLAIMS AND EXPENSES............................... 1,244 955
------ ------
INCOME BEFORE INCOME TAX EXPENSE....................................... 59 100
Income tax expense..................................................... 20 37
------ ------
NET INCOME................................................... $ 39 $ 63
====== ======
Pro forma net income per share......................................... $ 0.51
======
</TABLE>
The accompanying notes to condensed consolidated financial statements
(unaudited) are an integral part of the above statements.
F-28
<PAGE> 162
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
-------------------------- -----------
DECEMBER 31, MARCH 31, MARCH 31,
1996 1997 1997
------------ --------- -----------
<S> <C> <C> <C>
ASSETS
Investments:
Fixed maturities, available for sale, at fair value
(amortized cost $15,659 and $15,697)............. $ 15,711 $15,550 $15,550
Equity securities, available for sale, at fair
value............................................ 119 107 107
Policy loans, at outstanding balance................ 3,839 3,757 3,757
Other investments, at cost.......................... 161 179 179
------------ --------- -----------
TOTAL INVESTMENTS................................ 19,830 19,593 19,593
------------ --------- -----------
Cash.................................................. 72 82 82
Premiums and amounts receivable....................... 170 163 163
Reinsurance recoverable............................... 5,839 5,750 5,750
Deferred policy acquisition costs..................... 2,800 2,930 2,930
Deferred income tax................................... 543 584 584
Other assets.......................................... 909 987 987
Separate account assets............................... 49,770 51,413 51,413
------------ --------- -----------
TOTAL ASSETS..................................... $ 79,933 $81,502 $81,502
=========== ======== ==========
LIABILITIES
Future policy benefits................................ $ 4,026 $ 4,227 $ 4,227
Other policyholder funds.............................. 22,213 21,590 21,590
Other liabilities..................................... 1,757 2,164 2,164
Borrowings under line of credit....................... -- 1,084 1,084
Short-term debt due parent............................ -- 100 125
Allocated Advances from parent........................ 893 -- --
Separate account liabilities.......................... 49,770 51,413 51,413
------------ --------- -----------
TOTAL LIABILITIES................................ 78,659 80,578 80,603
------------ --------- -----------
STOCKHOLDER'S EQUITY
Preferred Stock, par value $.01 per share; 50,000,000
shares authorized; no shares issued and
outstanding.........................................
Common Stock, par value $.01 per share, 1,000 shares
authorized; 100 shares issued and outstanding....... -- -- --
Class A Common Stock, par value $.01 per share,
600,000,000 shares authorized; no shares issued and
outstanding.........................................
Class B Common Stock, par value $.01 per share,
600,000,000 shares authorized; 114,000,000 shares
issued and outstanding, pro forma................... 1
Capital surplus....................................... 585 585 584
Net unrealized capital gain (loss) on investments, net
of tax.............................................. 29 (93) (93)
Retained earnings..................................... 660 432 407
------------ --------- -----------
TOTAL STOCKHOLDER'S EQUITY....................... 1,274 924 899
------------ --------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY....... $ 79,933 $81,502 $81,502
=========== ======== ==========
</TABLE>
The accompanying notes to condensed consolidated financial statements
(unaudited) are an integral part of the above statements.
F-29
<PAGE> 163
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
NET
UNREALIZED
CLASS CLASS CAPITAL
A B GAIN(LOSS) ON TOTAL
PREFERRED COMMON COMMON COMMON CAPITAL INVESTMENTS, RETAINED STOCKHOLDER'S
STOCK STOCK STOCK STOCK SURPLUS NET OF TAX EARNINGS EQUITY
--------- ------- ------ ------ ------- -------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996.... $ -- $ -- $ -- $ -- $ 585 $ 29 $ 660 $ 1,274
Net income.................... -- -- -- -- -- -- 63 63
Dividend declared February 20,
1997........................ -- -- -- -- -- -- (291) (291)
Change in net unrealized
capital gain (loss) on
investments, net of tax..... -- -- -- -- -- (122) -- (122)
----- ----- ----- ----- ----- ----- ----- -----
BALANCE, MARCH 31, 1997....... -- -- -- -- 585 (93) 432 924
Issuance of Class B Common
Stock....................... -- -- -- 1 (1) -- -- --
Dividend declared April 4,
1997........................ -- -- -- -- -- -- (25) (25)
----- ----- ----- ----- ----- ----- ----- -----
PRO FORMA BALANCE, MARCH 31,
1997........................ $ -- $ -- $ -- $ 1 $ 584 $ (93) $ 407 $ 899
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
The accompanying notes to condensed consolidated financial statements
(unaudited) are an integral part of the above statements.
F-30
<PAGE> 164
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
1996 1997
------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net income............................................................ $ 39 $ 63
Adjustments to net income:
Depreciation and amortization......................................... 8 7
Net realized capital gains on sale of investments..................... -- (1)
Increase in premiums receivable....................................... 2 8
Increase in other liabilities......................................... 336 389
Change in receivables, payables and accruals.......................... 86 (36)
Increase (decrease) in accrued taxes.................................. 73 (9)
(Decrease) increase in deferred income taxes.......................... (83) 23
Increase in deferred policy acquisition costs......................... (96) (131)
Increase in liability for future policy benefits...................... 76 200
Decrease (increase) in reinsurance recoverable and related assets..... 11 (90)
------- -------
CASH PROVIDED BY OPERATING ACTIVITIES............................ 452 423
------- -------
INVESTING ACTIVITIES
Purchases of fixed maturity investments............................... (1,812) (1,935)
Sales of fixed maturity investments................................... 748 1,177
Maturities and principal paydowns of fixed maturity investments....... 672 764
Purchase of other investments......................................... (489) (45)
Sales of other investments............................................ 179 164
Net sales (purchases) of short-term investments....................... 222 (121)
------- -------
CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES................. (480) 4
------- -------
FINANCING ACTIVITIES
Increase in short-term debt........................................... -- 1,084
Decrease in Allocated Advances from parent............................ -- (893)
Dividends paid........................................................ (19) (191)
Net receipts from (disbursements for) investment and universal
life-type contracts credited to (charged from) policyholder
accounts............................................................ 55 (417)
------- -------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES................. 36 (417)
------- -------
Net increase in cash.................................................. 8 10
Impact of foreign exchange............................................ -- --
Cash -- beginning of period........................................... 70 72
------- -------
CASH -- END OF PERIOD............................................ $ 78 $ 82
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
CASH PAID DURING THE PERIOD FOR:
Income taxes.......................................................... $ 128 $ 11
Interest.............................................................. $ 11 $ 16
SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION
Dividends............................................................. $ -- $ 100
</TABLE>
The accompanying notes to condensed consolidated financial statements
(unaudited) are an integral part of the above statements.
F-31
<PAGE> 165
HARTFORD LIFE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN MILLIONS)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Hartford
Life, Inc. (the "Company") have been prepared in accordance with generally
accepted accounting principles for interim periods. In the opinion of
management, these statements include all normal recurring adjustments necessary
to present fairly the financial position, results of operations and cash flows
for the periods presented. For a description of accounting policies, see Note 1
of notes to consolidated financial statements for the year ended December 31,
1996 included elsewhere in this Prospectus.
2. STOCK OFFERING
On February 10, 1997, the Company filed a Registration Statement with the
Securities and Exchange Commission relating to the U.S. and international
offerings of shares of Class A Common Stock (the "Equity Offerings")
representing up to 20% ownership of the Company. After completion of the Equity
Offerings, ITT Hartford Group, Inc. ("The Hartford") would own all of the shares
of Class B Common Stock (after reclassification of the Company's common stock
into Class B Common Stock on April 3, 1997). The Company intends to use the
estimated net proceeds of the Equity Offerings to make a capital contribution to
its insurance subsidiaries, to reduce its third-party indebtedness and for other
general corporate purposes.
3. DEBT
On February 7, 1997, the Company declared a dividend of $1,184 payable to
its direct parent, Hartford Accident and Indemnity Company ("Hartford Accident
and Indemnity"). As a result, the Company borrowed $1,084 on February 18, 1997,
pursuant to a $1,300 line of credit, with interest payable at the two-month
Eurodollar rate plus 15 basis points (5.65% at the inception of the borrowing)
(for a description of the line of credit and the calculation of the applicable
Eurodollar rate, see Note 15 of notes to consolidated financial statements for
the year ended December 31, 1996, included elsewhere in this Prospectus), which,
together with a promissory note in the amount of $100, was paid as a dividend to
Hartford Accident and Indemnity on February 20, 1997. Of the $1,184 dividend,
$893 constituted a repayment of the portion of The Hartford's third-party
indebtedness internally allocated, for financial reporting purposes, to the
Company's life insurance subsidiaries (the "Allocated Advances"). The principal
on this promissory note is due and payable February 19, 1998, together with
interest payable at the two-month Eurodollar rate (determined as described
above) plus 15 basis points (initially 5.60% upon the execution of this
promissory note).
4. PRO FORMA INFORMATION
On April 3, 1997, the Company reclassified the authorized shares of common
stock, par value $.01 per share, of the Company into Class B Common Stock, par
value $.01 per share (the "Class B Common Stock") and authorized the Class A
Common Stock, par value $.01 per share (the "Class A Common Stock") and the
preferred stock, par value $.01 per share (the "Preferred Stock"). Holders of
Class A Common Stock and Class B Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the Board of Directors, subject to
any preferential dividend rights of any outstanding Preferred Stock, and
generally have identical voting rights and vote together (and not as separate
classes), except that holders of Class A Common Stock are entitled to one vote
per share while holders of Class B Common Stock are entitled to five votes per
share. Also, each share of Class B Common Stock is convertible into a share of
Class A
F-32
<PAGE> 166
HARTFORD LIFE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN MILLIONS)
Common Stock at any time at the option of the holder and will automatically
convert into a share of Class A Common Stock (i) upon the transfer of such share
of Class B Common Stock by the holder thereof to a non-affiliate (except where
the shares of Class B Common Stock so transferred represent 50% or more of all
the outstanding shares of Common Stock, calculated without regard to the
difference in voting rights between the classes of Common Stock) or (ii) in the
event that the number of shares of outstanding Class B Common Stock is less than
50% of all the Common Stock then outstanding.
On April 4, 1997, the Company declared and paid a dividend of $25 to
Hartford Accident and Indemnity in the form of a promissory note in such amount.
The principal on this promissory note is due and payable April 3, 1998, together
with the interest payable at the one-month Eurodollar rate (determined as
described above) plus 15 basis points (initially 5.84% upon the execution of
this promissory note).
The pro forma balance sheet and pro forma statement of stockholder's equity
reflect the above transactions as if they had occurred on March 31, 1997.
Pro forma net income per share data is calculated based upon the shares of
Class B Common Stock owned by The Hartford immediately prior to the Equity
Offerings plus an assumed issuance of Class A Common Stock in the Equity
Offerings (the number of shares that, based on the midpoint of the range of the
estimated initial public offering prices and the estimated underwriting
discounts and expenses payable by the Company, would result in net proceeds
equal to the excess of the amount of the February and April 1997 dividends over
the earnings for the year ended December 31, 1996 and the three months ended
March 31, 1997 and the Allocated Advances from parent).
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<PAGE> 167
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to each of the U.S. Underwriters named below, and
each of such U.S. Underwriters, for whom Goldman, Sachs & Co., Dean Witter
Reynolds Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan
Stanley & Co. Incorporated and Smith Barney Inc. are acting as representatives,
has severally agreed to purchase from the Company, the respective number of
shares of Class A Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
CLASS A
UNDERWRITER COMMON STOCK
- ------------------------------------------------------------------------------ ------------
<S> <C>
Goldman, Sachs & Co. ......................................................... 2,520,800
Dean Witter Reynolds Inc. .................................................... 2,520,800
Merrill Lynch, Pierce, Fenner & Smith Incorporated............................ 2,520,800
Morgan Stanley & Co. Incorporated............................................. 2,520,800
Smith Barney Inc. ............................................................ 2,520,800
Advest, Inc. ................................................................. 230,000
Sanford C. Bernstein & Co., Inc. ............................................. 230,000
J.C. Bradford & Co. .......................................................... 230,000
Conning & Company............................................................. 230,000
Credit Suisse First Boston Corporation........................................ 368,000
Dain Bosworth Incorporated.................................................... 230,000
Dowling & Partners Securities, LLC............................................ 92,000
A. G. Edwards & Sons, Inc. ................................................... 368,000
Fox-Pitt, Kelton Inc. ........................................................ 230,000
Interstate/Johnson Lane Corporation........................................... 92,000
Janney Montgomery Scott Inc. ................................................. 92,000
Edward D. Jones & Co., L.P. .................................................. 368,000
Legg Mason Wood Walker, Incorporated.......................................... 230,000
Lehman Brothers Inc. ......................................................... 368,000
Neuberger & Berman, LLC....................................................... 92,000
PaineWebber Incorporated...................................................... 368,000
Piper Jaffray Inc. ........................................................... 230,000
Principal Financial Securities, Inc. ......................................... 230,000
Prudential Securities Incorporated............................................ 368,000
Raymond James & Associates, Inc. ............................................. 230,000
The Robinson-Humphrey Company, Inc. .......................................... 230,000
Stephens Inc. ................................................................ 230,000
Sutro & Co. Incorporated...................................................... 230,000
Wheat, First Securities, Inc. ................................................ 230,000
----------
Total.................................................................... 18,400,000
==========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the U.S.
Underwriters are committed to take and pay for all the shares offered hereby, if
any are taken.
The U.S. Underwriters propose to offer the shares of Class A Common Stock
in part directly to the public at the initial public offering price set forth on
the cover page of this Prospectus and in part to certain securities dealers at
such price less a concession of $1.00 per share. The U.S. Underwriters may
allow, and such dealers may reallow, a concession not in excess of $.10 per
share to certain brokers and dealers. After the shares of Class A Common Stock
are released for sale to the public, the offering price and other selling terms
may from time to time be varied by the representatives.
The Company has entered into an underwriting agreement (the "International
Underwriting Agreement") with the underwriters of the International Offering
(the "International Underwriters")
U-1
<PAGE> 168
providing for the concurrent offer and sale of 4,600,000 shares of Class A
Common Stock in an international offering outside the United States. The
offering price and aggregate underwriting discounts and commissions per share
for the two offerings are identical. The closing of the offering made hereby is
a condition to the closing of the International Offering, and vice versa. The
representatives of the International Underwriters are Goldman Sachs
International, Dean Witter International Ltd., Merrill Lynch International,
Morgan Stanley & Co. International Limited and Smith Barney Inc.
Pursuant to an Agreement between the U.S. and International Underwriting
Syndicates (the "Agreement Between") relating to the two offerings, each of the
U.S. Underwriters named herein has agreed that, as a part of the distribution of
the shares offered hereby and subject to certain exceptions, it will offer, sell
or deliver the shares of Class A Common Stock, directly or indirectly, only in
the United States of America (including the States and the District of
Columbia), its territories, its possessions and other areas subject to its
jurisdiction (the "United States") and to U.S. persons, which term shall mean,
for purposes of this paragraph: (a) any individual who is a resident of the
United States or (b) any corporation, partnership or other entity organized in
or under the laws of the United States or any political subdivision thereof and
whose office most directly involved with the purchase is located in the United
States. Each of the International Underwriters has agreed pursuant to the
Agreement Between that, as a part of the distribution of the shares offered as a
part of the International Offering, and subject to certain exceptions, it will
(i) not, directly or indirectly, offer, sell or deliver shares of Class A Common
Stock (a) in the United States or to any U.S. persons or (b) to any person who
it believes intends to reoffer, resell or deliver the shares in the United
States or to any U.S. persons and (ii) cause any dealer to whom it may sell such
shares at any concession to agree to observe a similar restriction.
Pursuant to the Agreement Between, sales may be made between the U.S.
Underwriters and the International Underwriters of such number of shares of
Class A Common Stock as may be mutually agreed. The price of any shares so sold
shall be the initial public offering price, less an amount not greater than the
selling concession.
The Company has granted the U.S. Underwriters an option exercisable for 30
days after the date of this Prospectus to purchase up to an aggregate of
2,400,000 additional shares of Class A Common Stock solely to cover
over-allotments, if any. If the U.S. Underwriters exercise their over-allotment
option, the U.S. Underwriters have severally agreed, subject to certain
conditions, to purchase approximately the same percentage thereof that the
number of shares to be purchased by each of them, as shown in the foregoing
table, bears to the 23,000,000 shares of Class A Common Stock offered. The
Company has granted the International Underwriters a similar option to purchase
up to an aggregate of 600,000 additional shares of Class A Common Stock.
At the request of the Company, up to 700,000 shares of Class A Common Stock
being offered in the Equity Offerings are being reserved for sale to employees
(other than international employees) of the Company, The Hartford and their
respective affiliates, and the respective directors thereof, at the initial
public offering price. A limited group of individuals purchasing reserved shares
of Class A Common Stock may be required to agree not to sell, offer or otherwise
dispose of any of such shares of Class A Common Stock for a period of up to five
months after the date of this Prospectus.
The Company, The Hartford, certain subsidiaries of The Hartford and certain
executive officers and directors of the Company have agreed, subject to certain
exceptions, that, during the period beginning on the date of this Prospectus and
continuing to and including the date 180 days after the date of this Prospectus,
they will not offer, sell, contract to sell, file a registration statement with
respect to or otherwise dispose of, directly or indirectly, any Common Stock (or
any securities convertible into or exercisable or exchangeable for Common Stock)
or grant any options or warrants to purchase Common Stock, without the prior
written consent of the representatives of the Underwriters, except for the
shares of Class A Common Stock offered in connection with the Equity Offerings.
U-2
<PAGE> 169
The representatives of the Underwriters have informed the Company that they
do not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed 5% of the total number of shares of Class A
Common Stock offered by them.
Prior to the Equity Offerings, there has been no public market for the
shares of Class A Common Stock. The initial public offering price was negotiated
among the Company and the representatives of the U.S. Underwriters and the
International Underwriters. Among the factors considered in determining the
initial public offering price of the Class A Common Stock, in addition to
prevailing market conditions, were the Company's historical performance,
estimates of the business potential and earnings prospects of the Company, an
assessment of the Company's management and the consideration of the above
factors in relation to market valuation of companies in related businesses.
In connection with the Equity Offerings, the Underwriters may purchase and
sell the Class A Common Stock in the open market. These transactions may include
over-allotment and stabilizing transactions and purchases to cover syndicate
short positions created by the Underwriters in connection with the Equity
Offerings. Stabilizing transactions consist of certain bids or purchases for the
purpose of preventing or retarding a decline in the market price of the Class A
Common Stock; and syndicate short positions created by the Underwriters involve
the sale by the Underwriters of a greater number of shares of Class A Common
Stock than they are required to purchase from the Company in the Equity
Offerings. The Underwriters also may impose a penalty bid, whereby selling
concessions allowed to syndicate members or other broker-dealers in respect of
the Class A Common Stock sold in the Equity Offerings for their account may be
reclaimed by the syndicate if such securities are repurchased by the syndicate
in stabilizing or covering transactions. These activities may stabilize,
maintain or otherwise affect the market price of the Class A Common Stock, which
may be higher than the price that might otherwise prevail in the open market;
and these activities, if commenced, may be discontinued at any time. These
transactions may be effected on the NYSE, in the over-the-counter market or
otherwise.
The Class A Common Stock has been approved for listing, subject to notice
of issuance, on the NYSE under the trading symbol "HLI". In order to meet one of
the requirements for listing the Class A Common Stock on the NYSE, the
Underwriters will be required to undertake to sell lots of 100 or more shares to
a minimum of 2,000 beneficial holders.
Certain of the Underwriters have provided from time to time, and expect to
provide in the future, investment banking services to The Hartford and/or the
Company and their respective affiliates, for which such Underwriters have
received and will receive customary fees and commissions. In addition, certain
of the Underwriters distribute a number of the Company's products for which they
receive customary compensation. An affiliate of Dean Witter Reynolds Inc.
provides money management services for certain of the Company's products for
which it receives customary compensation.
The Company and The Hartford have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act.
U-3
<PAGE> 170
GLOSSARY OF SELECTED INSURANCE AND OTHER TERMS
The following Glossary includes definitions of certain insurance-related
terms as well as terms relating specifically to the Company and should be read
in conjunction with the terms defined elsewhere in this Prospectus.
ACCOUNT VALUE: The amount of money held in either a general account or
separate account of an insurance company to support policyholder liabilities.
ACCRUAL SECURITIES: A type of CMO the holder of which receives higher
principal amounts of bonds, in lieu of cash, for interest earned until all the
principal amounts of bonds preceding the accrual tranche have been fully repaid.
At such time, this security begins receiving both interest and principal in
cash.
ANNUITANT: A person who receives an income benefit from an annuity for
life or for a specified period.
ABS: Investment-grade securities representing undivided ownership
interests in a pool of financial assets, such as credit card receivables, auto
loans, equipment leases and bank loans.
AVR: Under statutory accounting practices, the asset valuation reserve is
a liability on a life insurance company's statutory financial statements
beginning with such company's statutory financial statements for 1992. AVR
establishes statutory reserves for debt securities, preferred stock, common
stock, mortgage loans, equity real estate and joint ventures and other invested
assets. AVR generally captures all net realized and unrealized capital gains and
losses on such assets, other than those resulting from changes in interest
rates. AVR has no effect on financial statements prepared in conformity with
GAAP.
BASIS POINT: The smallest measure used in quoting yields on bills, notes
and bonds. One basis point is .01%, or one one-hundredth of one percent of
yield. Thus, if a bond's yield increases from 8.00% to 8.50%, it would be said
to have risen 50 basis points.
CEDING: The reinsuring of all or a portion of an insurer's risk with
another insurer.
COLI: A fixed premium individual or group life insurance policy owned by a
company or a trust sponsored by a company. The proceeds from such a policy may
be used to help fund general corporate liabilities such as deferred compensation
plans or post-retirement obligations.
CMO: A mortgage-backed obligation secured by the cash flow of a pool of
mortgages. Regular principal and interest payments made by borrowers are
separated into different payment streams, creating several bonds that repay
invested capital at different rates.
CONVEXITY: A measure of the shape of the price/yield curve. Convexity
helps explain the difference between the prices estimated by standard duration
and the actual market prices of a security resulting from a change in
market-required yield.
COST OF INSURANCE: The mortality charges assessed against certain life
insurance policies such as universal life.
CREDITED RATES: Interest rates applied (i.e., credited) to life insurance
policies and annuity contracts, whether contractually guaranteed or currently
declared for a specified period, as outlined in the policy or contract.
DPAC: Deferred policy acquisition costs include commissions and certain
other underwriting, policy issuance and selling expenses which vary with and are
directly related to the production of
G-1
<PAGE> 171
business. These acquisition costs are deferred and later amortized in proportion
to either revenues or gross profits when reported in financial statements
prepared in conformity with GAAP.
DISINTERMEDIATION: The risk to a financial institution of a loss due to
the movement of policyholder funds at book (i.e., without a market value
adjustment) when interest rates are higher than at contract inception.
DURATION: A measure expressed in years of the price sensitivity of a
financial instrument to changes in interest rates.
FIXED MVA ANNUITIES: Fixed rate annuity contracts that guarantee that a
specific sum of money will be paid in the future, either as a lump sum or as
monthly income, to an annuitant. In the event of surrender prior to the
specified period, the MVA feature adjusts the surrender value of the contract
thereby protecting the Company from losses due to higher interest rates at the
time of surrender provided that the Company has appropriately matched its
portfolio of assets and liabilities. The amount of such payments will not
fluctuate due to adverse changes in the Company's investment return, mortality
experience or expenses.
FLOATER: Debt instrument with a variable coupon, paying a rate indexed to
any of a variety of rates, typically short term.
GENERAL ACCOUNT: All assets of an insurer other than those allocated to a
separate account. An insurer's general account consists of the assets held in
the general account of the insurer. The insurer bears the investment risk on the
invested assets of the general account.
GUARANTEED SEPARATE ACCOUNT: Assets held in an insurer's separate account,
where the insurer provides some form of guarantee on the rate credited to the
policy. This guarantee is backed by the general account assets of the insurer.
Assets held in guaranteed separate accounts usually contain a market value
adjustment to protect the insurer against disintermediation risk.
GENERAL INSURANCE EXPENSES: Costs incurred by an insurance company other
than agent commissions, other premium-related expenses and taxes; mainly the
administrative expense of running the company.
IMR: The interest maintenance reserve was adopted by the NAIC in December
1991 to be established under statutory accounting practices as a liability or a
non-admitted asset on a life insurer's statutory financial statements beginning
with the insurer's statutory financial statements for 1992. IMR applies to all
types of fixed income investments (bonds, preferred stocks, MBSs and mortgage
loans). IMR captures the net gains or losses from changes in the overall level
of interest rates which are realized upon the sale of investments and amortizes
these net realized capital gains or losses into income over the remaining life
of each investment sold. IMR has no effect on financial statements prepared in
conformity with GAAP.
IN FORCE: Insurance policies in effect.
INSURANCE GUARANTY FUNDS: Funds created in all fifty states, the District
of Columbia and Puerto Rico by law to cover funding shortfalls in paying claims
of insolvent insurance companies. These funds are maintained by assessments of
insurance companies operating in a particular state in proportion to their
business written in that state.
INTEREST-ONLY SECURITIES: Securities representing only the interest
payments of CMOs or MBS based on an underlying pool of mortgages. The interest
payments are "stripped" from the principal repayment obligation and can
represent the interest from an entire pool of mortgages or can be tranches
within a CMO.
INVERSE FLOATER: Mortgage-backed bond, usually part of a CMO, bearing an
interest rate that moves inversely with a specified index.
G-2
<PAGE> 172
LEVERAGED COLI: A fixed premium life insurance policy owned by a company
or a trust sponsored by a company. This general account policy provides cash
flow flexibility and optimizes certain tax advantages for a company or trust by
allowing it to borrow the policy cash value and receive certain interest
deductions on the policy loans.
MBS: An investment grade security backed by a pool of mortgages or trust
deeds.
MODIFIED GUARANTEED LIFE INSURANCE: Certain blocks of life insurance
policies, which have provisions protecting the Company from disintermediation
risk, assumed by the Company in connection with the rehabilitation of certain
insurance companies.
MORBIDITY: The relative incidence of disability or sickness due to disease
or physical impairment.
MORTALITY: The relative incidence of death.
MVA: The market value adjustment feature in the Company's fixed annuity
products that adjusts the surrender value of a contract in the event of
surrender prior to the end of the contract period to protect the Company against
losses due to higher interest rates at the time of surrender.
NEW ANNUALIZED WEIGHTED PREMIUM: An internal measure the Company developed
to measure new sales on an equivalent basis period-to-period and
product-to-product. For example, the premium for a new single premium life
insurance policy sold is divided by ten.
NON-GUARANTEED SEPARATE ACCOUNT: Assets held in an insurer's separate
account as to which the insurer does not guarantee any minimum return to the
policyholder. Rather, any investment income and net realized capital gains and
losses with respect to these assets accrue directly to the policyholder.
PAC: A CMO security, also known as a planned amortization class security,
which amortizes with a predetermined sinking fund as long as prepayments on the
underlying collateral remain within a broad range of speeds, providing the
holder with an enhanced degree of cash flow certainty.
PERSISTENCY: The rate, expressed as a percentage of the number of policies
remaining in force over the previous year, at which insurance policies or
annuity contracts remain in force.
POLICY: A life or disability or other insurance policy or annuity contract
issued by the Company's insurance subsidiaries.
PREMIUMS: The amount that a policy owner is charged, reflecting the
expectation of profit, loss or risk. The insurance company assumes certain risks
of the insured (e.g., mortality, morbidity) in exchange for a premium payment.
Premiums are calculated utilizing actuarial models and assumptions.
PREMIUM EQUIVALENTS: Claims and administration fees on self-funded
disability business.
PRINCIPAL-ONLY SECURITIES: Securities representing only the principal
repayment obligations of CMOs or MBS based on an underlying pool of mortgages.
The principal repayment obligations are "stripped" from the interest payments
and can represent the principal from an entire pool of mortgages or can be
tranches within a CMO.
REINSURANCE: The practice whereby one party (the reinsurer or assuming
company), in consideration of a premium paid to such party, agrees to indemnify
another party, called the ceding company. Reinsurance provides a primary insurer
with three major benefits: it reduces net liability on individual risks; it
helps to protect against losses; and it provides a primary insurer with
additional underwriting capacity in that the primary insurer can accept larger
risks and can expand the volume of business it writes with lower amounts of
capital.
RESERVES: Liabilities established by insurers that generally represent the
estimated discounted present value of the net cost of claims, payments or
contract liabilities and the related expenses that the insurer will ultimately
be required to pay in respect of insurance or annuities it has written.
SEPARATE ACCOUNTS: Investment accounts maintained by an insurer to which
funds have been allocated for certain policies under provisions of relevant
state insurance law. The investments in
G-3
<PAGE> 173
each separate account are maintained separately from those in other separate
accounts and the general account.
SEQUENTIAL-PAY SECURITIES: Bonds, also known as sequentials, that start to
pay principal when the principal and interest of classes with an earlier
priority have been fully repaid.
SINGLE PREMIUM VARIABLE LIFE INSURANCE: Investment-oriented life insurance
policy structured similarly to variable life insurance, except that a single
premium payment is made at the initiation of the policy rather than fixed
premiums throughout the term of the policy.
STATUTORY ACCOUNTING PRACTICES: Accounting practices prescribed or
permitted by an insurer's domiciliary state insurance regulatory authorities for
purposes of financial reporting to regulators. Statutory accounting practices
emphasize solvency rather than operating results that match revenues and
expenses during an accounting period.
STATUTORY ASSETS: Assets determined in accordance with statutory
accounting principles. This valuation methodology is generally considered very
conservative, but is deemed most appropriate by regulators in evaluating
solvency.
STATUTORY CAPITAL AND SURPLUS: The excess of statutory admitted assets
over statutory liabilities as shown on an insurer's statutory financial
statements.
STATUTORY RESERVE: Amounts established by state insurance law that an
insurer must have available to provide for future obligations with respect to
all policies. Statutory reserves are liabilities on the balance sheet of
financial statements prepared in conformity with statutory accounting practices.
STRUCTURED SETTLEMENT CONTRACTS: Contracts providing for periodic payments
to an injured person for a determinable number of years or for life, typically
in settlement of a claim under a property-casualty insurance policy.
SURRENDER CHARGE: The fee charged to a policy owner when a life insurance
policy or annuity is surrendered for its cash value prior to the end of the
surrender charge period. Such charge is intended to recover all or a portion of
policy acquisition costs and act as a deterrent to early surrender. Surrender
charges typically decrease over a set period of time as a percentage of the
account value in relation to the anticipated amortization of the deferred policy
acquisition costs.
TERM LIFE INSURANCE: Life insurance protection during a certain number of
years but expiring without policy cash value if the insured survives the stated
period.
THIRD-PARTY ADMINISTRATOR: An entity that processes insurance or
self-funded claims for, and/or provides administrative services to, companies or
associations that have purchased insurance coverage, including stop loss
insurance, for a fee.
UNDERWRITING: The process of examining, accepting or rejecting insurance
risks, and classifying those accepted, in order to charge an appropriate premium
for each accepted risk. The underwriter is expected to select business that will
produce an average risk of loss no greater than that anticipated for the class
of business. In the life insurance industry, underwriter may also mean an agent
or other field representative who is referred to as a "field underwriter".
UNIVERSAL LIFE INSURANCE: A form of life insurance where an insurance
account is maintained for each insurance policy. Premiums, net of specified
expenses, are credited to the account, as is interest, generally at a rate
determined from time to time by the insurer. Specific charges are made against
the account for the cost of insurance protection and for the insurer's expenses.
The universal life form allows considerable flexibility as to the amount and
timing of premium payments and for the level of death benefits provided.
VARIABLE ANNUITIES: Annuities in which premium payments are used to
purchase accumulation units. The value of a unit fluctuates in accordance with
the investment experience of a separate account; variable annuity contracts
typically include a general account guaranteed interest investment option. At
the time of the payment of benefits to the annuitant, the annuitant may
generally elect from a number of payment options that provide either fixed or
variable benefit payments.
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<PAGE> 174
VARIABLE COLI: A separate account COLI policy where the benefits payable
upon surrender of the policy or the death of certain of the policyholder's
employees vary to reflect the investment experience of the separate account
supporting such policy.
VARIABLE LIFE INSURANCE: Investment-oriented life insurance policy that
offers fixed premiums and a minimum death benefit and provides a return linked
to an underlying portfolio of securities that may be either in the general or
separate account of the insurer. The portfolio typically is a group of mutual
funds established by the insurer as a separate account, with the policyholder
given investment discretion in choosing among the investment alternatives
provided. In general, the better the total return on the investment portfolio,
the higher the death benefit or account value of the variable life policy.
WHOLE LIFE INSURANCE: Permanent life insurance offering guaranteed death
benefits and guaranteed cash values.
YIELD CURVE: A spectrum of measures that compares the interest rate yields
on securities of the same credit quality but with varying maturities ranging
from the shortest to the longest available.
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<PAGE> 175
=======================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information....................... 2
Prospectus Summary.......................... 3
Risk Factors................................ 14
Company Financing Plan...................... 24
Capitalization.............................. 25
Use of Proceeds............................. 26
Dividend Policy............................. 26
Dilution.................................... 27
Selected Consolidated Financial Data........ 28
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................ 32
Business.................................... 57
Management.................................. 92
Security Ownership of Management............ 114
Certain Relationships and Transactions...... 115
Shares Eligible for Future Sale............. 123
Description of Capital Stock................ 124
Certain Provisions of the Certificate of
Incorporation and By-Laws of the Company.. 127
Validity of Class A Common Stock............ 130
Experts..................................... 130
Certain United States Federal Tax
Consequences to Non-United States Holders
of Class A Common Stock................... 131
Index to Consolidated Financial
Statements................................ F-1
Underwriting................................ U-1
Glossary of Selected Insurance and Other
Terms..................................... G-1
</TABLE>
------------------
THROUGH AND INCLUDING JUNE 15, 1997 (THE 25TH DAY AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE CLASS A COMMON STOCK,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
=======================================================
=======================================================
23,000,000 SHARES
HARTFORD LIFE, INC.
CLASS A COMMON STOCK
(PAR VALUE $.01 PER SHARE)
------------------
PROSPECTUS
------------------
GOLDMAN, SACHS & CO.
DEAN WITTER REYNOLDS INC.
MERRILL LYNCH & CO.
MORGAN STANLEY & CO.
INCORPORATED
SMITH BARNEY INC.
REPRESENTATIVES OF THE UNDERWRITERS
=======================================================
<PAGE> 176
Filed Pursuant to Rule 424(b)(1)
Registration No. 333-21459
23,000,000 SHARES
HARTFORD LIFE, INC.
[HARTFORD LOGO] CLASS A COMMON STOCK
HARTFORD LIFE (PAR VALUE $.01 PER SHARE)
----------------------
Of the 23,000,000 shares of Class A Common Stock, par value $.01 per share
(the "Class A Common Stock"), being offered, 4,600,000 shares are being
offered hereby in an international offering outside the United States and
18,400,000 shares are being offered in a concurrent United States offering.
The initial public offering price and the aggregate underwriting discount per
share are identical for both Equity Offerings. See "Underwriting".
Hartford Life, Inc. (the "Company") is an indirect wholly owned subsidiary
of The Hartford Financial Services Group, Inc. (formerly known as ITT Hartford
Group, Inc.) ("The Hartford") and, upon completion of the Equity Offerings, The
Hartford will beneficially own 100% of the outstanding shares of Class B Common
Stock, which will represent approximately 83.2% of the economic interest (i.e.,
the right to participate in distributions in respect of the common equity) in
the Company (approximately 81.4% if the Underwriters' over-allotment options are
exercised in full).
Holders of Class A Common Stock generally have rights identical to holders
of Class B Common Stock, except that holders of Class A Common Stock are
entitled to one vote per share while holders of Class B Common Stock are
entitled to five votes per share on all matters submitted to a vote of the
Company's stockholders. Following completion of the Equity Offerings, The
Hartford will beneficially own shares of Class B Common Stock representing
approximately 96.1% of the combined voting power of all the Company's classes of
voting stock (approximately 95.6% if the Underwriters' over-allotment options
are exercised in full) and will thereby be able, among other things, to direct
the election of all the Company's directors and exercise a controlling influence
over the business and affairs of the Company. See "Risk Factors -- Control by
and Relationship with The Hartford" and "Description of Capital Stock".
The Hartford has advised the Company that its current intention is to
continue to hold all the shares of Class B Common Stock it beneficially owns.
However, The Hartford has no contractual obligation to retain its shares of
Class B Common Stock, except for a limited period described in "Underwriting".
Prior to the Equity Offerings, there has been no public market for the Class
A Common Stock. For factors considered in determining the initial public
offering price, see "Underwriting".
Up to 700,000 shares of Class A Common Stock are being reserved for sale to
certain employees of the Company, The Hartford and their respective affiliates,
and the respective directors thereof, at the initial public offering price.
SEE "RISK FACTORS" BEGINNING ON PAGE 14 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE CLASS A COMMON STOCK.
The Class A Common Stock has been approved for listing, subject to notice of
issuance, on the New York Stock Exchange under the symbol "HLI".
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE DISCOUNT(1) COMPANY(2)
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Per Share........................... $28.25 $1.62 $26.63
Total(3)............................ $649,750,000 $37,260,000 $612,490,000
</TABLE>
- ---------------
(1) The Company and The Hartford have agreed to indemnify the Underwriters
against certain liabilities, including liabilities under the Securities Act
of 1933. See "Underwriting".
(2) Before deducting estimated expenses of $5,000,000 payable by the Company.
(3) The Company has granted the International Underwriters an option for 30 days
to purchase up to an additional 600,000 shares of Class A Common Stock at
the initial public offering price per share, less the underwriting discount,
solely to cover over-allotments. Additionally, the Company has granted the
U.S. Underwriters a similar option with respect to an additional 2,400,000
shares of Class A Common Stock as part of the concurrent U.S. Offering. If
such options are exercised in full, the total initial public offering price,
underwriting discount and proceeds to Company will be $734,500,000,
$42,120,000 and $692,380,000, respectively. See "Underwriting".
------------------------
The shares of Class A Common Stock offered hereby are offered severally by
the International Underwriters, as specified herein, subject to receipt and
acceptance by them and subject to their right to reject any order in whole or in
part. It is expected that certificates for the shares of Class A Common Stock
will be ready for delivery in New York, New York on or about May 28, 1997,
against payment therefor in immediately available funds.
GOLDMAN SACHS INTERNATIONAL
DEAN WITTER INTERNATIONAL LTD.
MERRILL LYNCH INTERNATIONAL
MORGAN STANLEY & CO.
INTERNATIONAL
SMITH BARNEY INC.
ABN AMRO ROTHSCHILD BANQUE NATIONALE DE PARIS
BARCLAYS DE ZOETE WEDD LIMITED DRESDNER KLEINWORT BENSON
YAMAICHI INTERNATIONAL (EUROPE) LIMITED
------------------------
The date of this Prospectus is May 21, 1997.
<PAGE> 177
AVAILABLE INFORMATION
Hartford Life, Inc. has filed with the Securities and Exchange Commission
(the "Commission") a Registration Statement (which term shall include any
amendments thereto) on Form S-1 (the "Registration Statement") under the
Securities Act of 1933 (the "Securities Act"), with respect to the shares of
Class A Common Stock, par value $.01 per share (the "Class A Common Stock"),
being offered hereby. This Prospectus, which constitutes a part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto, to which
reference is hereby made. For further information with respect to the Company
and the Class A Common Stock being offered hereby, reference is made to the
Registration Statement, including the exhibits and schedules thereto. Statements
made in this Prospectus as to the contents of any contract, agreement or other
document referred to are not necessarily complete. With respect to each such
contract, agreement or other document filed as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the matter involved, and each such statement shall be deemed qualified in its
entirety by such reference. The Registration Statement and the exhibits and
schedules thereto, filed with the Commission by the Company, may be inspected
and copied at the public reference facilities maintained by the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
regional offices of the Commission located at Seven World Trade Center, Suite
1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 or on the internet at http://www.sec.gov.
Copies of such materials also may be obtained upon written request from the
Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates.
Upon the completion of the offering made hereby in the United States (the
"U.S. Offering") by the underwriters therefor (the "U.S. Underwriters") and the
concurrent international offering (the "International Offering" and, together
with the U.S. Offering, the "Equity Offerings") by the underwriters therefor
(the "International Underwriters" and, together with the U.S. Underwriters, the
"Underwriters"), the Company will be subject to the informational requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, will file reports and other information with the
Commission.
The Class A Common Stock has been approved for listing, subject to notice
of issuance, on the New York Stock Exchange (the "NYSE"). Upon such listing,
copies of the Registration Statement, including all exhibits thereto, and
periodic reports, proxy statements and other information will be available for
inspection at the offices of the New York Stock Exchange, Inc. located at 20
Broad Street, New York, New York 10005.
------------------------
CERTAIN PERSONS PARTICIPATING IN THE EQUITY OFFERINGS MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CLASS
A COMMON STOCK, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING
TRANSACTIONS IN SUCH SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN
CONNECTION WITH THE EQUITY OFFERINGS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING".
------------------------
THE COMPANY IS A HOLDING COMPANY WHICH OWNS DIRECTLY OR INDIRECTLY ALL THE
OUTSTANDING SHARES OF CAPITAL STOCK OF CERTAIN INSURANCE COMPANY SUBSIDIARIES
DOMICILED IN CONNECTICUT AND NEW JERSEY. INSURANCE LAWS OF SUCH STATES
APPLICABLE TO THE COMPANY GENERALLY PROVIDE THAT NO PERSON MAY ACQUIRE CONTROL
OF THE COMPANY, AND THUS INDIRECT CONTROL OF THESE INSURANCE COMPANY
SUBSIDIARIES, WITHOUT THE PRIOR APPROVAL OF THE APPROPRIATE INSURANCE
REGULATORS. IN GENERAL, ANY PERSON WHO ACQUIRES BENEFICIAL OWNERSHIP OF 10% OR
MORE OF THE VOTING SECURITIES OF THE COMPANY WOULD BE PRESUMED TO HAVE ACQUIRED
SUCH CONTROL, ALTHOUGH THE APPROPRIATE INSURANCE REGULATORS, UPON APPLICATION,
MAY DETERMINE OTHERWISE.
------------------------
FOR NORTH CAROLINA RESIDENTS: THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE COMMISSIONER OF INSURANCE FOR THE STATE OF NORTH CAROLINA,
NOR HAS THE COMMISSIONER OF INSURANCE RULED UPON THE ACCURACY OR ADEQUACY OF
THIS DOCUMENT.
------------------------
This Prospectus does not constitute an offer to sell or the solicitation of
an offer to buy the shares of Class A Common Stock in any jurisdiction in which
such offer or solicitation is unlawful. There are restrictions on the offer and
sale of the shares of Class A Common Stock in the United Kingdom. All applicable
provisions of the Financial Services Act 1986 and the Public Offers of
Securities Regulations 1995 with respect to anything done by any person in
relation to the shares of Class A Common Stock, in, from or otherwise involving
the United Kingdom must be complied with. See "Underwriting".
In this Prospectus, references to "dollars", "U.S. $" and "$" are to United
States dollars.
2
<PAGE> 178
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and consolidated financial statements appearing elsewhere
in this Prospectus. Unless the context otherwise requires, the "Company" means
Hartford Life, Inc. and its consolidated subsidiaries. See "Glossary of Selected
Insurance and Other Terms" for the definitions of certain insurance-related
terms which are printed in boldface type the first time they appear in this
Prospectus.
Unless otherwise indicated, financial information, operating statistics and
ratios applicable to the Company set forth in this Prospectus are based on
United States generally accepted accounting principles ("GAAP") rather than
STATUTORY ACCOUNTING PRACTICES. In addition, unless otherwise indicated, all
information in this Prospectus assumes no exercise of the Underwriters'
over-allotment options.
GENERAL
The Company is a leading insurance and financial services company with
operations that provide (i) annuity products such as individual VARIABLE
ANNUITIES and FIXED MVA ANNUITIES, deferred compensation and retirement plan
services and mutual funds for savings and retirement needs to over 1 million
customers, (ii) life insurance for income protection and estate planning to
approximately 500,000 customers and (iii) employee benefits products such as
group life and group disability insurance for the benefit of over 15 million
individuals. According to the latest publicly available data identified below,
with respect to the United States, the Company is the largest writer of both
total individual annuities and individual variable annuities based on sales for
the year ended December 31, 1996, the eighth largest consolidated life insurance
company based on STATUTORY ASSETS as of December 31, 1995, and the largest
writer of group short-term disability benefit plans and the second largest
writer of group long-term disability insurance based on full-year 1995 new
PREMIUMS and PREMIUM EQUIVALENTS.
The Company's assets have grown at a compound annual growth rate of 36%,
from $23 billion in 1992 to $80 billion in 1996. The Company has achieved rapid
growth of assets by pursuing a strategy of selling diverse and innovative
products through multiple 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 (the "Stag Logo"), one
of the most recognized symbols in the financial services industry. During this
period, the Company has attained strong market positions for its principal
product offerings -- annuities, individual life insurance and employee benefits.
In particular, the Company holds the leading market position in the individual
variable annuity industry based on sales for the year ended December 31, 1996.
The Company's sales of individual variable annuities grew from $1.8 billion in
1992 to $9.3 billion in 1996, and, for the year ended December 31, 1996, the
Company had a 13% market share (according to information compiled by Variable
Annuities Research and Data Service ("VARDS")). During this period of growth,
the Company's separate account assets, which are generated principally by the
sale of annuities, grew from 36% of total assets at December 31, 1992 to 62% of
total assets at December 31, 1996. The Company believes that such asset growth
stems from various factors including the variety and quality of its product
offerings, the performance of its products, the effectiveness of its multiple
channel distribution network, the quality of its customer service and the
overall growth of the variable annuity industry and the stock and bond markets.
However, there is no assurance that the Company's historical growth rate will
continue. See "Risk Factors -- Risks Associated with Certain Economic and Market
Factors".
Management believes the Company's substantial growth in assets, together
with management's effort to control expenses, has made the Company one of the
most efficient competitors in the insurance industry. In 1995, the Company had
the ninth lowest ratio of GENERAL INSURANCE EXPENSES to statutory assets, an
industry measure of operating efficiency, of the fifty largest U.S. life
insurers, based on statutory assets. The Company's ratio improved to .64% in
1996, from .72% in 1995 and 1.38% in 1992, as compared with the average ratio of
1.50% for the fifty largest U.S. life insurers for the year ended December 31,
1995, based on information compiled by A.M. Best Company, Inc. ("A.M. Best").
3
<PAGE> 179
ANALYSIS OF NET INCOME
As shown in the following table, the Company's operating results by segment
reflect: (i) strong results from its Annuity, Individual Life Insurance and
Employee Benefits segments, offset by (ii) results in its Guaranteed Investment
Contracts segment, from which management expects no material income or loss in
the future as described herein, and (iii) results in the Company's corporate
operation (the "Corporate Operation"). In response to the results in the
Guaranteed Investment Contracts segment in 1994, the Company undertook a
thorough review of the guaranteed investment contract market and determined to
substantially withdraw from the GENERAL ACCOUNT guaranteed rate contract ("GRC")
business in 1995. In 1996, the Company initiated certain asset sales and hedging
transactions to insulate itself from any ongoing income or loss associated with
the investment portfolio of Closed Book GRC (as defined below). Because the
Company does not expect any material income or loss from the Guaranteed
Investment Contracts segment in the years subsequent to 1996, management
believes that future earnings will be dependent on income from the Annuity,
Individual Life Insurance and Employee Benefits segments, net of the Corporate
Operation.
In the first quarter of 1997, net income increased by $24 million, or 62%,
to $63 million from $39 million in the first quarter of 1996 due to growth in
the Annuity, Individual Life Insurance and Employee Benefits segments of 30%,
22% and 13%, respectively, and the elimination of losses in the Guaranteed
Investment Contracts segment. These results were partially offset by higher
unallocated expense in the Corporate Operation primarily due to an increase in
interest expense related to the Pre-Offering Indebtedness. See "-- Company
Financing Plan".
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS
ENDED MARCH
FOR THE YEAR ENDED DECEMBER 31, 31,
--------------------------------- -------------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ----- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Annuity.................................... $ 35 $ 54 $ 84 $113 $ 145 $ 33 $ 43
Individual Life Insurance.................. 17 21 27 37 44 9 11
Employee Benefits.......................... 36 48 53 67 78 16 18
Guaranteed Investment Contracts(1)......... 21 30 1 (67) (225) (15) --
Corporate Operation(2)..................... (16) (28) (14) 3 (18) (4) (10)
Unallocated net realized capital gains
(losses)(3).............................. 8 5 -- (3) -- -- 1
Cumulative effect of changes in accounting
principles(4)............................ (47) -- -- -- -- -- --
---- ---- ---- ---- ---- --- ----
Net income............................... $ 54 $130 $151 $150 $ 24 $ 39 $ 63
==== ==== ==== ==== ==== === ====
</TABLE>
- ---------------
(1) The Company substantially withdrew from the general account GRC business in
1995. Management expects no material income or loss from the Guaranteed
Investment Contracts segment in the future as described herein.
(2) The Company maintains a Corporate Operation through which it reports items
that are not directly allocable to any of its business segments. Included in
the Corporate Operation are: (i) unallocated income and expense, (ii) the
Company's group medical business, which it exited in 1993, and (iii) certain
other items not directly allocable to any segment such as items related to
the ITT Spin-Off (as defined herein). For a discussion of the Corporate
Operation, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Results of Operations for the Years Ended
December 31, 1994, 1995 and 1996 -- Corporate Operation".
The following table details the components of the Corporate Operation:
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ----- ---- ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Unallocated income and expense.......... $(11) $ (3) $ (7) $(14) $ (18) $ (4) $ (10)
Group medical business.................. (5) (25) (7) (1) 1 -- --
ITT Spin-Off related items and other.... -- -- -- 18 (1) -- --
---- ---- ---- ---- ---- --- ----
Total Corporate Operation....... $(16) $(28) $(14) $ 3 $ (18) $ (4) $ (10)
==== ==== ==== ==== ==== === ====
</TABLE>
(3) Represents net realized capital gains (losses) that are not allocable to any
of the Company's business segments.
(4) Reflects the cumulative effect of adoption of Statement of Financial
Accounting Standards ("SFAS") No. 106, Employers' Accounting for
Postretirement Benefits Other Than Pensions, and SFAS No. 112, Employers'
Accounting for Postemployment Benefits.
4
<PAGE> 180
SEGMENT ANALYSIS
Annuity net income has grown at a compound annual rate of 43%, from $35
million in 1992 to $145 million in 1996. This segment offers individual variable
annuities and fixed MVA annuities, deferred compensation and retirement plan
services, mutual funds, investment management services and other financial
products. As indicated above, the Company is the largest writer of individual
annuities (according to information compiled by Life Insurance Marketing and
Research Association ("LIMRA")) and the largest writer of individual variable
annuities (according to information compiled by VARDS). In 1996, the Company
sold $9.8 billion of individual annuities, of which $9.3 billion were individual
variable annuities; of the Company's total individual annuities, $6.6 billion
were sold through broker-dealers and $3.2 billion were sold through banks. The
Company's variable annuity product offerings include the Putnam Capital Manager
Variable Annuity and The Director, two of the four highest selling variable
annuity contracts in the United States for the year ended December 31, 1996.
These variable annuity products allow customers to save for retirement on a
tax-deferred basis through a variety of mutual funds provided by the Company.
The Company's fixed MVA annuity also provides customers a tax-deferred savings
vehicle with fixed rates for guaranteed periods. As of December 31, 1996, such
fixed rates ranged from 3.4% to 9.3% and averaged 6.53%, while the periods over
which such rates are to be paid ranged from one to ten years and averaged
approximately seven years. The Company has distribution arrangements to sell its
individual annuity products with approximately 1,350 national and regional
broker-dealers and approximately 450 banks. Management believes that it has
established a strong distribution franchise through its long-standing
relationships with the members of its bank and broker-dealer network and is
committed both to expanding sales through these established channels of
distribution and promoting new distributors for all its products and services.
Individual Life Insurance net income has grown at a compound annual rate of
27%, from $17 million in 1992 to $44 million in 1996. This segment, which
focuses on the high-end estate and business planning markets, sells a variety of
individual life insurance products, including VARIABLE LIFE and UNIVERSAL LIFE
INSURANCE policies. The Company believes that it is one of the leading
competitors in the high-end estate and business planning markets as indicated by
its relatively high average face value per POLICY. The Company has distribution
arrangements to sell its individual life insurance products in the United States
with approximately 137,000 licensed life insurance agents.
Employee Benefits net income has grown at a compound annual rate of 21%,
from $36 million in 1992 to $78 million in 1996. This segment sells group
insurance products, including group life and group disability insurance and
corporate-owned life insurance ("COLI"), and engages in certain international
operations. As indicated above, the Company is the largest writer of group
short-term disability benefit plans and the second largest writer of group
long-term disability insurance, as well as the fourth largest writer of group
life insurance, based on full-year 1995 new premiums and premium equivalents
(according to information reported to the Employee Benefits Plan Review
("EBPR")). Management believes that, as a result of the Company's name
recognition, the value-added nature of its managed disability products and its
effective claims administration, it is one of the leading sellers in the "large
case" group market (companies with over 1,000 employees) and that further growth
opportunities exist in the "small" and "medium case" group markets. The Company
uses an experienced group of employees to distribute its Employee Benefits
products through a variety of distribution outlets, including insurance agents,
brokers, associations and THIRD-PARTY ADMINISTRATORS.
Guaranteed Investment Contracts net income has declined from net income of
$21 million in 1992 to a net loss of $225 million in 1996. The results of this
segment have been primarily affected by prepayments substantially in excess of
assumed and historical levels of mortgage-backed securities ("MBSS") and
collateralized mortgage obligations ("CMOS") supporting a block of traditional
general account GRC written by the Company prior to 1995 ("Closed Book GRC").
The Company substantially withdrew from the general account GRC business in 1995
and now writes a limited amount of such business primarily as an accommodation
to customers. For example, in the first quarter of 1997 the Company wrote $13
million of general account GRC (most of which was renewals to existing
customers), representing an expected annual net income of less than $30,000. In
1996, the Company initiated certain asset sales and hedging transactions to
insulate itself from any ongoing income or loss associated with the Closed Book
GRC investment portfolio. The Company expects no material income or loss from
the Guaranteed Investment Contracts segment in the future. For a discussion of
Closed Book GRC and the risk of future losses, see "Risk Factors --
5
<PAGE> 181
Interest Rate Risk" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations for the Years Ended
December 31, 1994, 1995 and 1996 -- Comparison of Guaranteed Investment
Contracts Segment Results -- Closed Book GRC".
The Company maintains a Corporate Operation through which it reports items
that are not directly allocable to any of its business segments. The Corporate
Operation includes (i) unallocated income and expense, (ii) the Company's group
medical business, which it exited in 1993, and (iii) certain other items not
directly allocable to any business segment such as items related to the ITT
Spin-Off (as defined below).
The Company's principal insurance subsidiaries currently are rated "A+
(superior)" by A.M. Best and have claims-paying ability ratings of "AA" from
Standard and Poor's ("S&P") and "AA+" from Duff & Phelps Credit Rating Co.
("Duff & Phelps"), and one such insurance subsidiary, Hartford Life Insurance
Company ("Hartford Life"), has an insurance financial strength rating of "Aa3"
from Moody's Investors Service, Inc. ("Moody's").
The Company is a direct subsidiary of Hartford Accident and Indemnity
Company ("Hartford Accident and Indemnity") and an indirect subsidiary of The
Hartford Financial Services Group, Inc. (formerly known as ITT Hartford Group,
Inc.) ("The Hartford"). The Hartford is among the largest domestic and
international providers of commercial property-casualty insurance,
property-casualty REINSURANCE and personal lines (including homeowners and auto)
coverages. On December 19, 1995, ITT Industries, Inc. (formerly ITT Corporation)
("ITT") distributed all of the outstanding shares of capital stock of The
Hartford to ITT stockholders of record on such date (the transactions relating
to such distribution are referred to herein as the "ITT Spin-Off"). As a result
of the ITT Spin-Off, The Hartford became an independent, publicly traded
company.
The Company's principal offices are located at 200 Hopmeadow Street,
Simsbury, Connecticut 06089. The Company's telephone number is (860) 843-7716.
BUSINESS STRATEGY
Management believes that its corporate strategies will maintain and enhance
its position as a market leader within the financial services industry and will
maximize stockholder value. In addition, the Company's strong positions in each
of its businesses, coupled with the growth potential management believes exists
in its markets, provide opportunities to increase sales of its 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. Management has
established the following strategic priorities for the Company:
LEVERAGE THE COMPANY'S MULTIPLE CHANNEL DISTRIBUTION NETWORK. Management
believes that the Company's multiple channel distribution network provides a
distinct competitive advantage in selling its products and services to a broad
cross-section of customers throughout varying economic and market cycles. The
Company has access to a variety of distribution outlets through which it sells
its products and services, including approximately 1,350 national and regional
broker-dealers, approximately 450 banks (including 21 of the 25 largest banks in
the United States), 137,000 licensed life insurance agents, 2,900 insurance
brokers, 244 third-party administrators and 165 associations. In particular, the
Company believes that the bank and broker-dealer network employed by its Annuity
segment is among the largest in the insurance industry. Management believes that
this extensive distribution system generally provides the Company with greater
opportunities to access its customer base than its competitors and allows the
Company to introduce new products and services quickly through this established
distribution network as well as new channels of distribution. For example, the
Company sells fixed MVA annuities, variable annuities, mutual funds, SINGLE
PREMIUM VARIABLE LIFE INSURANCE and Section 401(k) plan services through its
broker-dealer and bank distribution systems.
OFFER DIVERSE AND INNOVATIVE PRODUCTS. The Company provides its customers
a diverse mix of products and services aimed at serving their needs throughout
the different stages of their lives and during varying economic cycles. The
Company offers a variety of variable and fixed MVA annuity products with funds
managed both internally and by outside money managers such as Wellington
Management Company, LLP ("Wellington"), Putnam Financial Services, Inc.
("Putnam") and Dean Witter InterCapital, Inc. ("Dean Witter"). The Company also
regularly develops and brings to market innovative products and services. For
example, the Company was the first major seller of individual annuities to
successfully develop and market fixed annuities with an MVA feature which
protects the Company from losses due to higher interest rates in the event of
early surrender. The Company also was a leader in introducing the "managed
disability" approach to the group disability
6
<PAGE> 182
insurance market. This approach focuses on early claimant intervention in an
effort to facilitate a claimant's return to work and to contain costs.
CAPITALIZE ON ECONOMIES OF SCALE, CUSTOMER SERVICE AND TECHNOLOGY. As a
result of its growth and attention to maintaining low expenses, the Company
believes it has achieved advantageous economies of scale and operating
efficiencies in its businesses which together enable the Company to
competitively price its products for its distribution network and policyholders.
For example, as noted above, the Company is the eighth largest consolidated life
insurance company based on statutory assets as of December 31, 1995, with a
ratio (as of such date) of general insurance expenses to statutory assets that
is less than half the average ratio for the fifty largest U.S. life insurers. In
addition, the Company has reduced its individual annuity expenses as a
percentage of total individual annuity account value to 28 BASIS POINTS in 1996
from 43 basis points in 1992. In addition, the Company believes that it
maintains high-quality service for its customers and 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. In 1996, the Company received one of the
five Quality Tested Service Seals awarded by DALBAR Inc. ("DALBAR"), a
recognized independent research organization, for its achievement of the highest
tier of customer service in the variable annuity industry.
CONTINUE PRUDENT RISK MANAGEMENT. The Company's product designs, prudent
underwriting standards and risk management techniques protect it against
DISINTERMEDIATION risk and greater than expected MORTALITY and MORBIDITY. As of
December 31, 1996, 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, 1996. The Company also enforces disciplined claims management to
protect the Company against greater than expected mortality and morbidity. The
Company regularly monitors its underwriting, mortality and morbidity assumptions
to determine whether its experience remains consistent with these assumptions
and to ensure that the Company's product pricing remains appropriate.
BUILD ON BRAND NAME AND FINANCIAL STRENGTH. Management believes that the
combined effect of the above-mentioned strengths, The Hartford's 187-year
history and customer recognition of the Stag Logo have produced a distinguished
brand name for the Company. The Company's financial strength, characterized by
sound ratings and a balance sheet of well-protected liabilities and highly rated
assets, also has enhanced the Company's brand name within the financial services
industry. Management believes that brand awareness, an established reputation
and financial strength will continue to be important factors in maintaining
distribution relationships, enhancing investment advisory alliances and
generating new sales with customers.
RELATIONSHIP BETWEEN THE COMPANY AND THE HARTFORD
Following the completion of the Equity Offerings, The Hartford will
continue to be the controlling stockholder of the Company and will beneficially
own 100% of the outstanding Class B Common Stock, par value $.01 per share (the
"Class B Common Stock" and, together with the Class A Common Stock, the "Common
Stock"), which will represent approximately 96.1% of the combined voting power
of all the outstanding Common Stock and approximately 83.2% of the economic
interest in the Company (or approximately 95.6% and 81.4%, respectively, if the
over-allotment options of the Underwriters are exercised in full). The Hartford
has advised the Company that its current intention is to continue to hold all
the shares of Class B Common Stock it beneficially owns. However, The Hartford
has no contractual obligation to retain its shares of Class B Common Stock,
except for a limited period described in "Underwriting".
Promptly following the completion of the Equity Offerings, The Hartford and
the Company expect to elect two additional directors of the Company who will be
persons not currently or formerly associated with The Hartford or the Company.
The Board of Directors of the Company (the "Board of Directors") will then
consist of ten members, including eight who are directors and/or officers of The
Hartford. See "Management -- Directors". The Hartford will have the ability to
change the size and composition of the Company's Board of Directors.
For additional information concerning the Company's relationship with The
Hartford following the Equity Offerings, see "Risk Factors -- Control by and
Relationship with The Hartford" and "Certain Relationships and Transactions".
7
<PAGE> 183
COMPANY FINANCING PLAN
Historically, for financial reporting purposes, The Hartford internally
allocated a portion of its third-party indebtedness (referred to as the
"Allocated Advances") to the Company's life insurance subsidiaries. Cash was
contributed to the life insurance subsidiaries in connection with certain of
such Allocated Advances. In February 1997, the Company (i) declared a dividend
of $1.184 billion payable to Hartford Accident and Indemnity, (ii) obtained a
line of credit from a syndicate of four banks (the "Line of Credit") in the
amount of $1.3 billion, (iii) borrowed $1.084 billion under the Line of Credit
and (iv) paid to Hartford Accident and Indemnity the $1.184 billion dividend,
which consisted of the $1.084 billion in cash borrowed under the Line of Credit
and $100 million in the form of a promissory note executed by the Company for
the benefit of Hartford Accident and Indemnity (the "$100 Million Promissory
Note"). $893 million of such dividend constituted a repayment of the Allocated
Advances. In addition, on April 4, 1997, the Company declared and paid a
dividend of $25 million to Hartford Accident and Indemnity in the form of a
promissory note executed by the Company for the benefit of Hartford Accident and
Indemnity (the "$25 Million Promissory Note" and, together with the $100 Million
Promissory Note, the "Promissory Notes"). The Line of Credit and the Promissory
Notes are hereinafter referred to as the "Pre-Offering Indebtedness".
The Company will use the net proceeds from the Equity Offerings to make a
capital contribution of at least $150 million to its life insurance
subsidiaries, to reduce the Pre-Offering Indebtedness and for other general
corporate purposes.
Promptly following the Equity Offerings, subject to market conditions, the
Company plans to offer approximately $650 million of debt securities (the "Debt
Securities") in one or more offerings (the "Debt Offering") pursuant to a shelf
registration statement. The completion of the Equity Offerings will not be
conditioned on the completion of the Debt Offering. The Company will use the net
proceeds from the Debt Offering to further reduce the Pre-Offering Indebtedness.
For a description of certain transactions effected prior to the Equity Offerings
and the actions to be taken concurrently with or promptly after the Equity
Offerings, see "Company Financing Plan".
THE EQUITY OFFERINGS
<TABLE>
<S> <C> <C>
Class A Common Stock offered(1):
United States Offering..... 18,400,000 shares
International Offering..... 4,600,000 shares
------------
Total................. 23,000,000 shares
Common Stock to be outstanding
after the Equity
Offerings(1)(2):
Class A Common Stock....... 23,000,000 shares
Class B Common Stock....... 114,000,000 shares
------------
Total................. 137,000,000 shares
</TABLE>
- ---------------
(1) Assumes the Underwriters' over-allotment options are not exercised. See
"Underwriting". If the Underwriters exercise such over-allotment options in
full, the number of shares of Class A Common Stock sold in the U.S. Offering
and the International Offering will be 20,800,000 and 5,200,000,
respectively.
(2) Does not include shares reserved for issuance pursuant to the Company's
benefit plans and its restricted stock plan for non-employee directors.
8
<PAGE> 184
Dividend Policy............ The holders of Class A Common Stock and Class B
Common Stock will share ratably on a per share
basis in all dividends and other distributions
declared by the Board of Directors. The Board of
Directors currently intends to declare quarterly
dividends on the Common Stock and expects that the
first quarterly dividend payment will be $.09 per
share, with the initial dividend to be declared and
paid in the third quarter of 1997. For a discussion
of the tax treatment of such dividends, see
"Dividend Policy". For a discussion of the factors
that affect the determination by the Board of
Directors to declare dividends, as well as certain
other matters concerning the Company's dividend
policy, see "Dividend Policy" and "Risk
Factors -- Holding Company Structure; Restrictions
on Dividends".
Voting Rights.............. On all matters submitted to a vote of stockholders,
holders of Class A Common Stock are entitled to one
vote per share and holders of Class B Common Stock
are entitled to five votes per share. The Class A
Common Stock and Class B Common Stock generally
will vote together as a single class on all
matters, except as otherwise required by law. See
"Description of Capital Stock -- Class A Common
Stock and Class B Common Stock -- Voting Rights".
Conversion................. Under certain circumstances, shares of Class B
Common Stock will convert or are convertible into
an equivalent number of shares of Class A Common
Stock. See "Description of Capital Stock -- Class A
Common Stock and Class B Common Stock --
Conversion".
Use of Proceeds............ Based upon an initial public offering price of
$28.25 per share, the net proceeds to the Company
from the Equity Offerings are estimated to be
$607.5 million (or $687.4 million if the
Underwriters' over-allotment options are exercised
in full), after deducting the underwriting
discounts and estimated expenses for the Equity
Offerings payable by the Company. The Company will
use the net proceeds of the Equity Offerings to
make a capital contribution of at least $150
million to its life insurance subsidiaries, to
reduce the Pre-Offering Indebtedness and for other
general corporate purposes. See "Use of Proceeds".
New York Stock Exchange
Listing.................. The Class A Common Stock has been approved for
listing, subject to notice of issuance, on the NYSE
under the symbol "HLI".
RISK FACTORS
Prospective investors should consider carefully, in addition to the other
information contained in this Prospectus, the matters set forth under the
caption "Risk Factors" before purchasing shares of the Class A Common Stock
offered hereby.
9
<PAGE> 185
SUMMARY FINANCIAL DATA
The summary income statement data and balance sheet data set forth below
are derived in the relevant periods from the consolidated financial statements
and the notes thereto of the Company and its subsidiaries. The Company's
consolidated financial statements have been audited by Arthur Andersen LLP,
independent public accountants, as of December 31, 1995 and 1996, and for each
of the three years in the period ended December 31, 1996, and are included
elsewhere in this Prospectus, together with the report of Arthur Andersen LLP
thereon. The Company's consolidated financial statements as of December 31,
1992, 1993 and 1994 and for the years ended December 31, 1992 and 1993 were
derived from audited consolidated financial statements of certain of the
Company's subsidiaries and The Hartford and include all adjustments that
management considers necessary for a fair presentation of the data for such
periods. The summary income statement data and balance sheet data for the three
months ended March 31, 1996 and 1997, presented below, were derived from the
Company's unaudited consolidated financial statements that are included
elsewhere in this Prospectus and include, in the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the financial information for such periods. The results of
operations for the three months ended March 31, 1997 are not necessarily
indicative of the results of operations to be expected for the full fiscal year.
This summary financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations", the
Company's consolidated financial statements, the notes thereto and the other
financial information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF OR FOR
THE THREE MONTHS
AS OF OR FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------------------- ------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
(IN MILLIONS) (IN MILLIONS,
UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenues:
Premiums and other considerations............... $ 1,273 $ 1,755 $ 2,139 $ 2,643 $ 3,069 $ 941 $ 679
Net investment income........................... 1,038 1,160 1,403 1,451 1,534 362 375
Net realized capital gains (losses)............. 10 7 1 (4) (219) -- 1
------- ------- ------- ------- ------- ------- -------
Total revenues................................ 2,321 2,922 3,543 4,090 4,384 1,303 1,055
------- ------- ------- ------- ------- ------- -------
Benefits, claims and expenses:
Benefits, claims and claim adjustment
expenses...................................... 1,663 1,903 2,254 2,395 2,727 651 659
Amortization of deferred policy acquisition
costs......................................... 74 188 149 205 241 66 83
Dividends to policyholders(1)................... 48 228 419 675 635 286 54
Interest expense(2)............................. 26 25 29 35 55 11 16
Other insurance expense......................... 360 377 469 554 695 230 143
------- ------- ------- ------- ------- ------- -------
Total benefits, claims and expenses........... 2,171 2,721 3,320 3,864 4,353 1,244 955
------- ------- ------- ------- ------- ------- -------
Income before income tax expense.................. 150 201 223 226 31 59 100
Income tax expense................................ 49 71 72 76 7 20 37
Income before cumulative effect of changes in
accounting principles........................... 101 130 151 150 24 39 63
Cumulative effect of changes in accounting
principles(3)................................... (47) -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net income.................................... $ 54 $ 130 $ 151 $ 150 $ 24 $ 39 $ 63
======= ======= ======= ======= ======= ======= =======
BALANCE SHEET DATA
General account invested assets................... $13,514 $15,866 $18,078 $20,072 $19,830 $19,593
SEPARATE ACCOUNT assets(4)........................ 8,550 16,314 22,847 36,296 49,770 51,413
All other assets.................................. 1,430 7,454 9,324 9,594 10,333 10,496
======= ======= ======= ======= ======= =======
Total assets.................................... $23,494 $39,634 $50,249 $65,962 $79,933 $81,502
------- ------- ------- ------- ------- -------
Policy liabilities................................ $13,040 $20,863 $25,208 $26,318 $26,239 $25,817
Separate account liabilities(4)................... 8,550 16,314 22,847 36,296 49,770 51,413
Allocated Advances from parent(2)(5).............. 375 425 525 732 893 --
All other liabilities............................. 802 1,107 1,283 1,439 1,757 3,348
------- ------- ------- ------- ------- -------
Total liabilities............................... $22,767 $38,709 $49,863 $64,785 $78,659 $80,578
======= ======= ======= ======= ======= =======
Stockholder's equity(5)(6)........................ $ 727 $ 925 $ 386 $ 1,177 $ 1,274 $ 924
======= ======= ======= ======= ======= =======
Stockholder's equity, excluding net unrealized
capital gains (losses), net of tax(5)........... $ 727 $ 931 $ 1,116 $ 1,221 $ 1,245 $ 1,017
======= ======= ======= ======= ======= =======
</TABLE>
10
<PAGE> 186
<TABLE>
<CAPTION>
As of or for the
Three Months
As of or for the Year Ended December 31, Ended March 31,
----------------------------------------------- ------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
(in millions,
(in millions) unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA (AFTER TAX)
Analysis of Net Income:
Annuity........................................ $ 35 $ 54 $ 84 $ 113 $ 145 $ 33 $ 43
Individual Life Insurance...................... 17 21 27 37 44 9 11
Employee Benefits.............................. 36 48 53 67 78 16 18
Guaranteed Investment Contracts................ 21 30 1 (67) (225) (15) --
Corporate Operation(7)......................... (16) (28) (14) 3 (18) (4) (10)
Unallocated net realized capital gains
(losses)(8).................................. 8 5 -- (3) -- -- 1
Cumulative effect of changes in accounting
principles(3)................................ (47) -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net income............................... $ 54 $ 130 $ 151 $ 150 $ 24 $ 39 $ 63
======= ======= ======= ======= ======= ======= =======
SELECTED SEGMENT DATA
Annuity:
Individual annuity sales....................... $ 2,212 $ 4,232 $ 7,005 $ 6,947 $ 9,841 $ 2,240 $ 2,572
Group annuity sales............................ 326 370 366 495 634 90 165
ACCOUNT VALUE
General account.............................. 3,779 4,767 5,499 6,892 7,411 6,950 7,522
GUARANTEED SEPARATE ACCOUNT(9)............... 2,663 3,989 7,026 8,996 9,130 8,790 9,189
Non-guaranteed separate account(10).......... 5,451 11,003 14,282 21,970 34,219 24,996 36,007
------- ------- ------- ------- ------- ------- -------
Total account value...................... $11,893 $19,759 $26,807 $37,858 $50,760 $40,736 $52,718
======= ======= ======= ======= ======= ======= =======
Individual Life Insurance:
Individual life sales.......................... $ 90 $ 96 $ 94 $ 107 $ 130 $ 22 $ 24
Account value
General account.............................. 816 1,127 1,456 1,579 1,998 1,622 2,023
Separate account............................. -- 736 836 979 1,238 1,034 1,307
------- ------- ------- ------- ------- ------- -------
Total account value...................... $ 816 $ 1,863 $ 2,292 $ 2,558 $ 3,236 $ 2,656 $ 3,330
======= ======= ======= ======= ======= ======= =======
Employee Benefits:
Group insurance premiums....................... $ 841 $ 856 $ 974 $ 1,103 $ 1,329 $ 290 $ 362
Group insurance RESERVES....................... 1,056 1,224 1,412 1,633 1,934 1,684 1,991
Total group insurance invested assets.......... 1,046 1,212 1,400 1,617 1,917 1,668 1,973
COLI account value
General account.............................. 864 1,549 2,308 3,566 4,028 3,923 3,853
Separate account............................. -- -- 897 3,484 4,441 3,537 4,352
------- ------- ------- ------- ------- ------- -------
Total COLI account value................. $ 864 $ 1,549 $ 3,205 $ 7,050 $ 8,469 $ 7,460 $ 8,205
======= ======= ======= ======= ======= ======= =======
Guaranteed Investment Contracts:
Guaranteed investment contract sales........... $ 1,608 $ 1,730 $ 1,732 $ 893 $ 169 $ 70 $ 41
Account value
General account.............................. 5,673 6,216 7,257 5,722 4,124 5,318 3,758
Guaranteed separate account.................. 182 193 124 346 408 415 428
------- ------- ------- ------- ------- ------- -------
Total account value...................... $ 5,855 $ 6,409 $ 7,381 $ 6,068 $ 4,532 $ 5,733 $ 4,186
======= ======= ======= ======= ======= ======= =======
STATUTORY DATA(11)
Gains from operations............................ $ 59 $ 61 $ 45 $ 175 $ 148
Gains (losses)................................... 70 10 29 (62) 23
------- ------- ------- ------- -------
Net income....................................... $ 129 $ 71 $ 74 $ 113 $ 171
======= ======= ======= ======= =======
Capital and surplus.............................. $ 824 $ 956 $ 1,088 $ 1,224 $ 1,320
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS
ADJUSTED
FOR EQUITY
HISTORICAL PRO FORMA(12) OFFERINGS
---------- ---------------- ----------
(IN MILLIONS, EXCEPT PER SHARE DATA, UNAUDITED)
<S> <C> <C> <C>
CAPITALIZATION DATA AS OF MARCH 31, 1997
Borrowings under Line of Credit................................... $1,084 $1,084 $ 693
Short-term debt due parent........................................ 100 125 82
Stockholder's equity(5)(6)........................................ 924 899 1,507
PRO FORMA PER SHARE DATA(13)
As of or for the Three Months Ended March 31, 1997:
Net income(14).................................................. $ 0.51 $ 0.51
Book value(15).................................................. 7.89 11.00
As of or for the Year Ended December 31, 1996:
Net income(14).................................................. $ 0.19 $ 0.23
Book value(15).................................................. 8.40 11.43
</TABLE>
11
<PAGE> 187
(1) Growth in dividends to policyholders is a result of the November 1992
acquisition from Mutual Benefit Life Insurance Company ("Mutual Benefit")
of a block of participating leveraged COLI business and the subsequent
growth in the leveraged COLI business from 1993 to 1995. Policyholder
dividends are expected to decline in the future since sales of new
leveraged COLI policies have been terminated as a result of the Health
Insurance Portability and Accountability Act of 1996 (the "HIPA Act of
1996").
(2) For financial reporting purposes, the Company has treated certain amounts
previously allocated by The Hartford to the Company's life insurance
subsidiaries as Allocated Advances from parent. Such Allocated Advances
were not treated as liabilities or indebtedness for tax and statutory
accounting purposes. Cash received in respect of Allocated Advances from
parent was used to support the growth of the life insurance subsidiaries
and was treated as surplus for statutory accounting purposes. Interest
expense prior to December 31, 1996 represents the expense internally
allocated to the Company with respect to the Allocated Advances based on
The Hartford's actual (third party) external borrowing costs. Such interest
expense paid was treated as dividends for tax and statutory accounting
purposes. The increase in Allocated Advances from parent in 1995 was
attributable to the ITT Spin-Off.
(3) Reflects the cumulative effect of adoption of SFAS No. 106, Employers'
Accounting for Postretirement Benefits Other Than Pensions, and SFAS No.
112, Employers' Accounting for Postemployment Benefits.
(4) Includes both non-guaranteed and guaranteed separate accounts.
(5) The Company has received capital contributions and paid or accrued
dividends to its stockholder for the five-year period ended December 31,
1996 and for the three months ended March 31, 1996 and 1997, as set forth
in the table below. The capital contributions described below exclude those
amounts classified as Allocated Advances from parent. Dividends exclude
those amounts classified as interest expense with respect to the Allocated
Advances from parent and paid to The Hartford as described in note (2)
above.
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------------- ----------------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ---- -----
(IN MILLIONS,
(IN MILLIONS) UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Capital contributions............... $ -- $100 $ 50 $180 $ -- $ -- $ --
Dividends........................... -- 24 17 226 -- -- 291
---- ---- ---- ---- ---- ----- -----
Net contributions............... $ -- $ 76 $ 33 $(46) $ -- $ -- $(291)
==== ==== ==== ==== ==== ===== =====
</TABLE>
(6) Stockholder's equity beginning December 31, 1994 reflects the adoption of
SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities. See Note 2 of notes to consolidated financial statements
included elsewhere in this Prospectus.
(7) The Company maintains a Corporate Operation through which it reports items
that are not directly allocable to any of its business segments. Included
in the Corporate Operation are: (i) unallocated income and expense, (ii)
the Company's group medical business, which it exited in 1993, and (iii)
certain other items not directly allocable to any business segment such as
ITT Spin-Off related items. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Results of Operations for
the Years Ended December 31, 1994, 1995 and 1996 -- Corporate Operation".
The following table details the components of the Corporate Operation:
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------------- ---------------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ---- ----
(IN MILLIONS) (IN MILLIONS,
UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Unallocated income and expense....... $(11) $ (3) $ (7) $(14) $(18) $ (4) $(10)
Group medical business............... (5) (25) (7) (1) 1 -- --
ITT Spin-Off related items and
other.............................. -- -- -- 18 (1) -- --
---- ---- ---- ---- ---- ---- ----
Total Corporate Operation........ $(16) $(28) $(14) $ 3 $(18) $ (4) $(10)
==== ==== ==== ==== ==== ==== ====
</TABLE>
(8) Represents net realized capital gains (losses) that are not allocable to
any of the Company's business segments.
(9) Guaranteed separate accounts represent policyholder funds that are
segregated from the general account of the Company and on which the Company
contractually guarantees a minimum return, subject, in most cases, to an
MVA feature if the relevant product is surrendered prior to the end of the
applicable guarantee period.
(10) Non-guaranteed separate accounts represent policyholder funds that are
segregated from the general account of the Company and as to which the
Company does not guarantee a minimum return.
(11) Statutory data has been derived from Annual Statements of Hartford Life and
Accident Insurance Company ("Hartford Life and Accident"), Hartford Life
and ITT Hartford Life and Annuity Insurance Company ("ITT Hartford Life and
Annuity") filed with insurance regulatory authorities, each in accordance
with statutory accounting practices. Gains (losses) are net of IMR and
taxes.
12
<PAGE> 188
(12) The pro forma data as of or for the three months ended March 31, 1997
reflects the Pre-Offering Transactions (as defined in "Capitalization"), as
if such transactions had occurred as of such date. The pro forma data as of
or for the year ended December 31, 1996 reflects the borrowing of $1.084
billion under the Line of Credit, the execution of the $100 Million
Promissory Note, the payment of $1.184 billion as a dividend to Hartford
Accident and Indemnity ($893 million of such dividend constituting a
repayment of the Allocated Advances from parent) and the Pre-Offering
Transactions, as if such transactions had occurred as of such date.
(13) Pro forma per share data is calculated based upon the 114 million shares of
Class B Common Stock owned by The Hartford immediately prior to the Equity
Offerings plus an assumed issuance of 8.67 million shares (for the three
months ended March 31, 1997) and 11.06 million shares (for the year ended
December 31, 1996), as applicable, of Class A Common Stock in the Equity
Offerings (the number of shares which, based on the initial public offering
price set forth on the cover page of this Prospectus and the underwriting
discounts and estimated expenses payable by the Company, would result in
estimated net proceeds equal to the excess of the amount of the February
and April 1997 dividends over, with respect to the March 31, 1997 data, the
earnings for the year ended December 31, 1996 and the three months ended
March 31, 1997 and the Allocated Advances from parent and, with respect to
the December 31, 1996 data, the earnings for the year ended December 31,
1996 and the Allocated Advances from parent, as applicable). Pro forma net
income per share (unaudited) of $.19 for the year ended December 31, 1996
and $.51 for the three months ended March 31, 1997, as included in the
Company's consolidated financial statements and condensed consolidated
financial statements, respectively (each included elsewhere in this
Prospectus), were determined on the basis of an assumed initial public
offering price of $25.50 per share.
(14) As adjusted net income per share is calculated based upon the 114 million
shares of Class B Common Stock owned by The Hartford immediately prior to
the Equity Offerings, an assumed issuance of 8.67 million shares (for the
three months ended March 31, 1997) and 11.06 million shares (for the year
ended December 31, 1996), as applicable, of Class A Common Stock in the
Equity Offerings (as discussed in note (13) above) and an additional
assumed issuance of 4.47 million shares of Class A Common Stock (the number
of shares which, based on the initial public offering price set forth on
the cover page of this Prospectus and the underwriting discounts and
estimated expenses payable by the Company, would result in a reduction of
the Pre-Offering Indebtedness and Allocated Advances from parent by $118
million). As adjusted net income per share is based upon historical amounts
adjusted to reflect a reduction in interest expense, net of tax, from
historical levels that would result from the completion of the Equity
Offerings. The foregoing assumes that the Company does not cancel any
portion of the Promissory Notes. See "Company Financing Plan".
(15) As adjusted book value per share, as of March 31, 1997, represents total
stockholder's equity, as of such date, together with the effect of the
Pre-Offering Transactions and the $607.5 million of estimated net proceeds
from the issuance and sale of 23 million shares of Class A Common Stock. As
adjusted book value per share, as of December 31, 1996, represents total
stockholder's equity, as of such date, together with the effect of the
borrowing of $1.084 billion under the Line of Credit, the execution of the
$100 Million Promissory Note, the payment of $1.184 billion as a dividend
to Hartford Accident and Indemnity ($893 million of such dividend
constituting a repayment of the Allocated Advances from parent), the
Pre-Offering Transactions and the $607.5 million of estimated net proceeds
from the issuance and sale of 23 million shares of Class A Common Stock.
The foregoing assumes that the Company does not cancel any portion of the
Promissory Notes. See "Company Financing Plan".
13
<PAGE> 189
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing shares of the Class A Common Stock offered hereby.
CONTROL BY AND RELATIONSHIP WITH THE HARTFORD
CONTROLLING STOCKHOLDER
The Hartford is currently the beneficial owner of all the capital stock of
the Company. Following the completion of the Equity Offerings, The Hartford will
continue to be the controlling stockholder of the Company and will beneficially
own 100% of the outstanding Class B Common Stock, which will represent
approximately 96.1% of the combined voting power of all the outstanding Common
Stock and approximately 83.2% of the economic interest in the Company (or
approximately 95.6% and 81.4%, respectively, if the Underwriters' over-allotment
options are exercised in full). For as long as The Hartford continues to
beneficially own shares of Common Stock representing more than 50% of the
combined voting power of the outstanding Common Stock, it generally will be able
to approve any matter submitted to a vote of the stockholders, including, among
other things, the election of the entire Board of Directors and the amendment of
the Restated Certificate of Incorporation (the "Certificate of Incorporation")
and By-laws of the Company, without the consent of the other stockholders of the
Company. In addition, through its controlling beneficial ownership (as well as
certain provisions of a master intercompany agreement between the Company, The
Hartford and, with respect to certain sections, Hartford Fire Insurance Company
("Hartford Fire") (the "Master Intercompany Agreement") described under "Certain
Relationships and Transactions -- Intercompany Arrangements -- Master
Intercompany Agreement"), The Hartford will be able to exercise a controlling
influence over the business and affairs of the Company, including determinations
with respect to mergers or other business combinations involving the Company,
the acquisition or disposition of assets by the Company, the Company's access to
the capital markets, the payment of dividends and any change of control of the
Company. In the foregoing situations or otherwise, various conflicts of interest
or areas of competition between the Company and The Hartford could arise.
Furthermore, ownership interests of directors or officers of the Company in
common stock of The Hartford or service as a director or officer of both the
Company and The Hartford could create, or appear to create, potential conflicts
of interest when directors and officers are faced with decisions that could have
different implications for the Company and The Hartford. See "Certain
Relationships and Transactions -- General".
Promptly following the completion of the Equity Offerings, The Hartford and
the Company expect to elect two additional directors of the Company who will be
persons not currently or formerly associated with The Hartford or the Company.
The Board of Directors will then consist of ten members, including eight who are
directors and/or officers of The Hartford. Members of the Board of Directors
will be divided into three classes and serve staggered three-year terms. See
"Management -- Directors". The Hartford will have the ability to change the size
and composition of the Company's Board of Directors.
INTERCOMPANY ARRANGEMENTS
The Company's relationship with The Hartford will be governed by, among
other things, certain agreements to be entered into in connection with the
Equity Offerings and possibly in the future, including the Master Intercompany
Agreement, certain investment management agreements (the "Investment Management
Agreements"), a tax sharing agreement (the "Tax Sharing Agreement") and the
sublease of the Company's headquarters (the "Simsbury Sublease"). See "Certain
Relationships and Transactions -- Intercompany Arrangements". The agreements
entered into in connection with the Equity Offerings generally will maintain the
relationship between the Company and The Hartford in a manner consistent in all
material respects with past practice. Under applicable insurance holding company
laws, agreements between the Company's insurance subsidiaries and The Hartford
or its affiliates must be fair and reasonable and may be subject to the approval
of applicable state insurance commissioners. However, none of these agreements,
nor any agree-
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<PAGE> 190
ments entered into in the future between the Company and The Hartford or their
respective subsidiaries (for so long as The Hartford maintains its controlling
beneficial ownership in the Company), will result from arm's-length negotiations
and, as a result, the terms of certain of such agreements may be less favorable
to the Company than could be obtained from an independent third party.
MASTER INTERCOMPANY AGREEMENT. The Master Intercompany Agreement will
identify the services that will be provided by The Hartford to the Company and
by the Company to The Hartford following the completion of the Equity Offerings,
specify certain significant corporate activities that the Company only may
undertake upon the prior written consent of The Hartford and provide for the
assumption of liabilities and cross-indemnities allocating liabilities between
the Company and The Hartford. The Company also will agree to use its best
efforts, pursuant to the Master Intercompany Agreement, to effect the
registration under the applicable federal and state securities laws of any of
the shares of Common Stock beneficially owned by The Hartford or any transferee
in respect of at least 5% of the then outstanding Common Stock (together, the
"Rights Holders").
Pursuant to the Master Intercompany Agreement, Hartford Fire, the principal
subsidiary of The Hartford, will grant to the Company a non-exclusive right and
license (the "Hartford License") (and the right to grant sublicenses (the
"Hartford Sublicenses") to certain qualified subsidiaries) to use the "Hartford"
name, various versions of the Stag Logo and certain other trademarks and service
marks in connection with the products and services sold through the Company's
Annuity, Individual Life Insurance and Employee Benefits segments on a worldwide
basis, and any property-casualty products offered outside the United States and
Canada by the Company in the future, subject to customary usage restrictions.
The Hartford License and any Hartford Sublicenses will be perpetual, except
that, in the event that The Hartford reduces its beneficial ownership below 50%
of the combined voting power of the Company's then outstanding securities
eligible to vote in the election of directors of the Company (other than
securities having such power only upon the occurrence of a default or any other
extraordinary contingency) (the "Voting Stock"), Hartford Fire may revoke the
Hartford License and/or any Hartford Sublicenses upon the later of the fifth
anniversary of the date of consummation of the Equity Offerings or one year
after receipt by the Company of written notice of Hartford Fire's intention to
revoke the Hartford License and/or any Hartford Sublicenses. In addition, the
Hartford License and/or any Hartford Sublicenses may be revoked immediately in
certain other limited, customary circumstances. Subject to the terms of the
Master Intercompany Agreement, upon the revocation of any such licenses, the
Company and any of its subsidiaries affected thereby will change their name to
exclude "Hartford" and will discontinue the use of the Stag Logo and the other
licensed trademarks and service marks. The revocation of the Hartford License
and/or any Hartford Sublicenses, in whole or in part, could have a material
adverse effect on the Company's ability to conduct its business. See "Certain
Relationships and Transactions -- Intercompany Arrangements -- Master
Intercompany Agreement -- License and Sublicense".
TAX SHARING AGREEMENT. Pursuant to the Tax Sharing Agreement, the Company,
its subsidiaries and The Hartford will make payments between them such that,
with respect to any period, the amount of taxes to be paid by the Company,
subject to certain adjustments, generally will be determined as though the
Company were to file separate federal, state and local income tax returns
(including, except as provided below, any amounts determined to be due as a
result of a redetermination of the tax liability of The Hartford arising from an
audit or otherwise). With respect to certain tax items, however, such as foreign
tax credits, alternative minimum tax credits, net operating losses and net
capital losses, the Company's right to reimbursement will be determined based on
the usage of such credits or losses by the consolidated group. In addition, The
Hartford will control all the tax decisions of the Company, as is presently the
case, by virtue of its controlling beneficial ownership of the Company and the
terms of the Tax Sharing Agreement. This arrangement may result in conflicts of
interest between the Company and The Hartford. See "Certain Relationships and
Transactions -- Intercompany Arrangements -- Tax Sharing Agreement and Tax
Consolidation".
Provided that The Hartford continues to beneficially own, directly or
indirectly, at least 80% of the combined voting power and 80% of the value of
the outstanding capital stock of the Company,
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the Company will be included for federal income tax purposes in the consolidated
group of which The Hartford is the common parent. Each member of a consolidated
group for federal income tax purposes is jointly and severally liable for the
federal income tax liability of each other member of the consolidated group.
Accordingly, the Company could be liable for the federal income tax liability of
any other member of The Hartford consolidated group in the event any such
liability is incurred, and not discharged, by such other member. Similar
principles apply with respect to members of a combined group for state tax
purposes. In addition, provided that The Hartford continues to beneficially own
at least 80% of the combined voting power or the value of the outstanding
capital stock of the Company, the Company will be included for federal income
tax purposes in the controlled group of which The Hartford is the common parent.
Each member of a controlled group is jointly and severally liable for pension
funding and pension termination liabilities of each other member of the
controlled group, as well as certain benefit plan taxes. Accordingly, the
Company could be liable for pension funding, pension termination liabilities and
certain other pension-related excise taxes, as well as other taxes, of another
member of The Hartford controlled group in the event any such liability is
incurred, and not discharged, by such other member.
INVESTMENT MANAGEMENT AGREEMENTS. Management of the Company's general
accounts and certain of its separate accounts has been, prior to the Equity
Offerings, and will be, following the completion of the Equity Offerings,
conducted by the Company. The Company's investment strategy group is responsible
for determining investment allocations for its general account and guaranteed
separate account investment portfolios. The Investment Management Agreements
will provide that the investment staff of The Hartford will implement (e.g.,
selection, purchase and sale of securities) the investment strategies determined
by the investment strategy group of the Company and act as advisor to certain of
the Company's non-guaranteed separate accounts and mutual funds. The Investment
Management Agreements also will provide that the Company will pay a fee designed
to reflect the actual costs of providing such services. In addition, the
Investment Management Agreements generally will provide that, prior to April 1,
2000, The Hartford may not terminate such Agreements, and the Company may only
terminate such Agreements, upon six months' written notice, based on The
Hartford's failure to satisfy performance benchmarks agreed to by the parties.
Further, the Investment Management Agreements generally will provide that from
and after April 1, 2000, the Investment Management Agreements will continue
unless 180 days' prior written notice of termination is provided on or after
October 1, 1999 by one party to the other. The Investment Management Agreements
for the Company's mutual funds will be terminable by the mutual funds' boards of
directors at any time. See "Certain Relationships and
Transactions -- Intercompany Arrangements -- Investment Management Agreements".
HARTFORD FIRE GUARANTEE. Pursuant to a guarantee agreement between
Hartford Fire, Hartford Life and Accident Insurance Company ("Hartford Life and
Accident") and Hartford Life (the "Guarantee Agreement"), Hartford Fire has
provided to Hartford Life and Accident and Hartford Life an unconditional
guarantee since 1990, on behalf of and for the benefit of such subsidiaries and
the owners of the life, disability and other insurance and annuity contracts
issued by either such subsidiary, in respect of contractual claims made under
such contracts by the beneficiaries thereof. Upon the completion of the Equity
Offerings, Hartford Fire will terminate such guarantee; however, the guarantee
will remain in full force and effect with respect to any outstanding contracts
at the time of such termination. Although management does not believe the
termination of the Guarantee Agreement will have an adverse impact on sales, it
is possible that future sales of some of the Company's products could be
adversely affected as a result of the absence of the marketing benefit
associated with such guarantee.
IMPORTANCE OF COMPANY RATINGS
Ratings are an important factor in establishing the competitive position of
insurance companies. Insurers compete with other insurance companies, financial
intermediaries and other financial institutions on the basis of a number of
factors, including the ratings assigned by nationally recognized statistical
rating organizations. In September 1996, S&P announced that it reduced the
claims-paying ability ratings of The Hartford group of companies from "AA+" to
"AA" and, in
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January 1997, Moody's announced that it downgraded various ratings of The
Hartford and its subsidiaries, including the insurance financial strength
ratings of The Hartford's insurance subsidiaries, from Aa2 to Aa3. Taken
together, S&P and Moody's expressed concern with, among other things, the
overall strength of The Hartford's consolidated capital, the recent charges it
had taken relating to the environmental and asbestos reserves of The Hartford's
property-casualty insurance operations (which are not part of the Company's
operations) and Closed Book GRC and the competitive nature of the business in
which The Hartford and its subsidiaries operate. Further ratings downgrades (or
the potential for such downgrades) of the Company could, among other things,
materially increase surrender levels, adversely affect relationships with
broker-dealers, banks, agents, wholesalers and other distributors of the
Company's products and services, negatively impact PERSISTENCY, adversely affect
the Company's ability to compete and thereby materially and adversely affect the
Company's business, financial condition and results of operations.
Moreover, for so long as The Hartford maintains a controlling interest in
the Company, a deterioration in the financial condition or significant insured
losses from a catastrophic event or other unforeseen occurrence that materially
affects the financial results of The Hartford and results in a downgrade of The
Hartford's ratings could adversely impact the ratings of the Company.
Claims-paying ability or insurance financial strength ratings reflect a
rating agency's opinion of the Company's principal life insurance subsidiaries'
financial strength, operating performance and ability to meet their respective
obligations to policyholders and are not evaluations directed toward the
protection of investors.
For more information on the ratings of the Company, see
"Business -- Ratings".
RISKS ASSOCIATED WITH CERTAIN ECONOMIC AND MARKET FACTORS
The Company's results of operations are affected by certain economic and
market factors, including the level of volatility in the markets in which the
Company invests and the overall investment returns provided thereby. In
particular, significant growth in the retirement-oriented investment market and
uncommonly strong stock and bond market appreciation have been material factors
in the growth of the Company's assets and its ability to generate new sales in
recent years. There can be no assurance, however, that these economic and market
trends will continue. While management believes that the Company operates in
growing markets and that its business strategy will foster continued asset
growth, adverse economic conditions and other factors, including a protracted
and/or precipitous decline in the stock market and other economic factors that
affect the popularity of the Company's products and services, may negatively
impact the Company's business, financial condition and results of operations.
Accordingly, no assurance can be given that the Company's historic growth of net
income, revenues and assets will continue.
INTEREST RATE RISK
Changes in interest rates can have significant effects on the Company's
profitability. Under certain circumstances of interest rate volatility, the
Company is exposed to disintermediation risk and reduction in net interest
spread or profit margins. The Company's investment portfolio primarily consists
of investment-grade, fixed maturity securities, including MBSs and CMOs. The
fair value of these and the Company's other invested assets fluctuates depending
on market and other general economic conditions as well as the interest rate
environment. During periods of declining interest rates, MBSs and CMOs prepay
faster as the underlying mortgages are prepaid and refinanced at lower interest
rates. In addition, during such periods, the Company generally will not be able
to reinvest the proceeds of any such prepayments at comparable yields.
Conversely, during periods of rising interest rates, the rate of prepayments
generally slows.
Management believes that its asset/liability management strategies minimize
the effects of such interest rate volatility, including product design (e.g.,
the use of surrender charges or MVA features in certain products), the use of
certain hedging techniques, the purchase of securities structured to protect
against prepayments and consistent monitoring of the pricing of the Company's
products. See "Business -- Investment Operations -- Asset/Liability Management
Strate-
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gies". No assurance can be given, however, that management will successfully
implement such strategies. Any such failure could have a material adverse impact
on the Company's business, financial condition and results of operations.
During the early 1990s, the Closed Book GRC investment portfolio, which was
principally composed of MBSs and CMOs, was materially and adversely affected by
lower investment rates and earnings due to prepayments substantially in excess
of assumed and historical levels, as well as the interest rate rise in 1994,
which caused a mismatch in the DURATION of such assets and the associated
liabilities. As a result, the Company's net income fell to $150 million in 1995
and $24 million in 1996. Management expects that the net income or loss from
Closed Book GRC in the years subsequent to 1996 will be immaterial based on the
Company's current projections for the performance of the assets and liabilities
associated with Closed Book GRC, the Company's expectations regarding future
sales of assets from the Closed Book GRC investment portfolio from time to time
in order to make the necessary payments on maturing Closed Book GRC liabilities
and the stabilizing effect of certain hedge transactions. To date, such asset
sales have been consistent with the Company's expectations. However, no
assurance can be given that, under certain unanticipated economic circumstances
which result in the Company's assumptions proving incorrect, further losses in
respect of Closed Book GRC will not occur in the future. For more information on
Closed Book GRC, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations for the Years Ended
December 31, 1994, 1995 and 1996 -- Comparison of Guaranteed Investment
Contracts Segment Results -- Closed Book GRC".
In response to the losses associated with the Closed Book GRC investment
portfolio, the Company instituted an improved risk management process during
1995 and 1996. In addition, the Company recently enhanced its computerized
analytical systems to allow for more effective management of its portfolio
positions and potential exposures in an effort to identify possible
asset/liability mismatches earlier. As a result, all material portfolios,
including Closed Book GRC, are now reviewed on a monthly basis to determine if
the net economic sensitivity of the assets and the related liabilities to
interest rate changes are within a pre-determined range. For a further
discussion of the Company's risk management process, see "Business -- Investment
Operations". Nonetheless, there can be no assurance that such improvements will
eliminate the possibility that asset/liability mismatches may occur in the
future.
INVESTMENT PORTFOLIO EXPOSURE
The Company's investment portfolio consists primarily of investment-grade
debt securities. The market value of these investments varies depending on
general economic and market conditions and the interest rate environment. In
general, the market value of the fixed maturity securities held by the Company
increases or decreases in inverse relationship with fluctuations in interest
rates. For a further discussion of the effect of interest rates on the Company's
investment portfolio, particularly its MBSs and CMOs, and the related risk to
its results of operations, see "-- Interest Rate Risk".
The Company is also subject to credit risk relating to the uncertainty
associated with the continued ability of an issuer to make timely payments of
principal and interest. Although almost all fixed maturity securities held by
the Company in its portfolio are investment grade and the Company believes that
it maintains prudent issuer diversification, no assurance can be given that,
under certain unanticipated economic circumstances, issuer defaults would not
have a material adverse effect on the business, financial condition and results
of operations of the Company. See "Business -- Investment Operations".
DEPENDENCE ON CERTAIN THIRD-PARTY RELATIONSHIPS
The Company distributes its annuity and life insurance products through a
variety of distribution channels, including broker-dealers, banks, wholesalers,
its own internal sales force and other third-party marketing organizations. In
connection with the distribution or investment management of these products,
certain third-party service providers have materially contributed to the growth
of the Company, particularly in its individual annuity business. The Company
periodically negotiates renewal terms for these relationships and there can be
no assurance that such renewal terms will
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remain acceptable to the Company or such service providers. An interruption in
the Company's continuing relationship with certain of these third parties or the
impairment of their reputation or creditworthiness could materially and
adversely affect the Company's ability to market its products. There can be no
assurance that the Company would be able to find alternate sources of
distribution in a timely manner. See "Business -- Annuity -- Marketing and
Distribution".
ADVERSE EFFECT OF LEGISLATION AND REGULATORY ACTIONS
The insurance business of the Company is subject to comprehensive state and
federal regulation and supervision throughout the United States. The purpose of
such regulation is primarily to provide safeguards for policyholders rather than
to protect the interests of stockholders. The laws of the various state
jurisdictions establish supervisory agencies with broad administrative powers
with respect to, among other things, licensing to transact business, licensing
agents, admittance of assets, regulating premium rates, approving policy forms,
regulating unfair trade and claims practices, establishing reserve requirements
and solvency standards, fixing maximum interest rates on life insurance policy
loans and minimum rates for accumulation of surrender values, restricting
certain transactions between affiliates and regulating the type, amounts and
valuation of investments permitted. State insurance regulators and the National
Association of Insurance Commissioners (the "NAIC") continually re-examine
existing laws and regulations. It is impossible to predict the future impact of
potential state and federal regulations on the Company's operations, and there
can be no assurance that future insurance-related laws and regulations, or the
interpretation thereof, will not have an adverse effect on the operations of the
Company's business.
Although the United States federal government does not directly regulate
the insurance business, federal legislation and administrative policies in
several areas, including pension regulation, financial services regulation and
federal taxation, can significantly and adversely affect the insurance industry
and thus the Company. For example, Congress has from time to time considered
legislation relating to the deferral of taxation on the accretion of value
within certain annuities and life insurance products, the removal of barriers
preventing banks from engaging in the insurance business, changes in regulations
for the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
the alteration of the federal income tax structure and the availability of
Section 401(k) or individual retirement accounts. In particular, Congress is
currently considering enacting legislation that would reduce the tax rate
applicable to long-term capital gains. This may result in alternative financial
products becoming less tax disadvantaged versus variable annuities. It is not
possible to predict whether future legislation or regulation adversely affecting
the insurance industry may be enacted or, if enacted, the extent to which such
legislation or regulation would have an effect on the Company and its
competitors.
The Health Insurance Portability and Accountability Act of 1996 (the "HIPA
Act of 1996") phases out the deductibility of interest on policy loans under
COLI by 1998, thus eliminating all future sales of leveraged COLI. The Company's
leveraged COLI product has been an important contributor to its profitability in
recent years. During 1994, 1995 and 1996, leveraged COLI sales generated
revenues of $892 million, $1.226 billion and $1.298 billion, respectively, which
represented 25%, 30% and 30% of the Company's total revenues. Leveraged COLI
will continue to contribute to the profitability of the Company (although such
contribution will be reduced in the future due to the effects of this
legislation). As a result, net income contributed by COLI may be lower in the
future (particularly during 1999 and later years) due to the elimination of
leveraged COLI sales.
For additional information on other laws and regulations that affect the
Company's operations, see "Business -- Insurance Regulation".
HOLDING COMPANY STRUCTURE; RESTRICTIONS ON DIVIDENDS
As a holding company with no significant business operations of its own,
the Company relies on dividends from its subsidiaries, which are primarily
domiciled in the State of Connecticut, as the principal source of cash to meet
its obligations, including the payment of principal and interest on debt
obligations of the Company and the payment of dividends to holders of its
capital stock. The payment of dividends by Connecticut-domiciled insurers is
limited under the insurance holding company laws of Connecticut which require
notice to and approval by the Connecticut Insurance
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Commissioner for the declaration or payment of any dividend that, together with
other dividends or distributions made within the preceding twelve months,
exceeds the greater of (i) 10% of the insurer's policyholder surplus as of
December 31 of the preceding year or (ii) net gain from operations for the
twelve-month period ending on the December 31 last preceding, in each case
determined under statutory insurance accounting practices. In addition, if any
dividend of a Connecticut-domiciled insurer exceeds the insurer's earned
surplus, it requires the approval of the Connecticut Insurance Commissioner.
Based on these limitations and statutory results, as of December 31, 1996, the
Company would be able to receive $132 million in dividends in 1997 from Hartford
Life and Accident, the Company's direct subsidiary, without obtaining the
approval of the Connecticut Insurance Commissioner. There can be no assurance
that dividends will be declared by the Company in the future or if declared that
it will obtain any required approvals from the applicable state insurance
commissioners. See "Dividend Policy".
As discussed under "Certain Relationships and Transactions -- Intercompany
Arrangements -- Master Intercompany Agreement -- Approval of Corporate
Activities", the Company must obtain The Hartford's approval for the declaration
or payment of dividends other than dividends on the Common Stock which are
consistent with the Company's dividend policy then in effect. In addition, for
so long as the Line of Credit remains outstanding, its provisions limit the
payment of cash dividends by the Company following the Equity Offerings to,
among other things, the aggregate amount of cash dividends and distributions
received by the Company from its insurance subsidiaries.
From time to time, the NAIC and various state insurance regulators have
considered, and may in the future consider, proposals to further restrict
dividend payments that may be made by an insurance company without regulatory
approval. No assurance can be given that there will not be any further
regulatory action restricting the ability of the Company's insurance
subsidiaries to pay dividends. Inability to pay dividends to the Company in an
amount sufficient to enable the Company to meet its debt service and other cash
requirements (including dividend payments on the Common Stock) could have a
material adverse effect on the Company's business, financial condition and
results of operations.
POTENTIAL NEW ACCOUNTING POLICY FOR DERIVATIVES
In June 1996, the Financial Accounting Standards Board ("FASB") issued an
exposure draft of an accounting standard entitled "Accounting for Derivative and
Similar Financial Instruments and for Hedging Activities". This exposure draft,
if adopted in the form in which it was issued, would require companies to report
derivatives on the balance sheet at fair value with changes in fair value
recorded in income or equity. The exposure draft also would change the
accounting for derivatives used in hedging strategies from traditional deferral
accounting to a current recognition approach which could impact a company's
income statement and balance sheet and expand the definition of a derivative
instrument to include certain structured securities currently accounted for as
fixed maturities. Management expects that this accounting standard, in whatever
form, will not be effective until 1999. FASB's Rules of Procedure require that,
prior to approving a new accounting standard, extensive "due process" be
followed. FASB requests written comments from interested parties on an exposure
draft and also may hold public hearings. This exposure draft has drawn
widespread criticism primarily because the required accounting treatment would
not match the perceived economic effect of such hedging strategies. As a result
of, among other things, the concerns and criticisms in comment letters and at
public hearings held on this exposure draft, FASB continued to deliberate with
regard to this exposure draft during the first quarter of 1997 and has
emphasized that a final decision has not been reached. FASB has stated that it
expects to conclude its review of this matter in the second quarter of 1997. The
Company is unable to predict the form that the final accounting standard, if
adopted, may take and believes it would be inappropriate to speculate on the
effects of any such adoption at this time. However, the Company believes the
adoption of a new accounting standard similar to this exposure draft could cause
substantial volatility in the Company's reported net income if certain of the
Company's current derivatives and hedging strategies were continued after the
adoption of such accounting standard. Were the
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Company to continue to employ its current derivatives strategies, the Company's
reported net income as a general matter would, in the short-term, be adversely
affected as interest rates rise and positively affected as interest rates
decline. In addition, if adopted in its present form, the Company would be
required to make a cumulative effect adjustment to its net income and/or
stockholder's equity, which adjustment would vary based on its then current
holdings of derivatives and the economic and market circumstances present at the
time such adjustment was implemented. For a discussion of the Company's use of
derivatives, see "Business -- Investment Operations -- Asset/Liability
Management Strategies".
COMPETITION
The Company competes with over 2,000 life insurance companies in the United
States, as well as certain banks, securities brokerage firms, investment
advisors and other financial intermediaries marketing insurance products,
annuities, mutual funds and other retirement-oriented investments. Some of these
competitors have greater financial resources and currently have higher financial
strength and claims-paying ability ratings from major rating agencies than the
Company. National banks, in particular, may become more significant competitors
in the future for the Company as a result of certain recent court decisions and
regulatory actions discussed under "Business -- Insurance
Regulation -- Regulation at Federal Level". Although the effect of these recent
developments on the Company and its competitors is uncertain, both the
persistency of the Company's existing products and the Company's ability to sell
products could be materially impacted in the future. Also, several proposals to
repeal or modify the Glass-Steagall Act of 1933, as amended (the "Glass-Steagall
Act"), and the Bank Holding Company Act of 1956, as amended (the "Bank Holding
Company Act"), have been made by members of Congress and the Executive Branch.
Certain of these proposals would repeal or modify the current restrictions that
prevent banks from being affiliated with insurance companies. None of these
proposals has yet been enacted, and it is not possible to predict whether any of
these proposals will be enacted or, if enacted, what their potential effect on
the Company or its competitors would be.
The Company also competes for distributors of its products such as banks,
broker-dealers and wholesalers. Since the Company does not have a career agency
force, it must compete with other insurers and financial services providers to
attract and maintain productive independent distributors to sell its products.
Moreover, the Company does not have exclusive agency agreements with many of its
distributors and believes that certain of them sell products similar to those
marketed by the Company for other insurance companies. The Company's ability to
attract distributors of its products could be adversely affected if for any
reason the Company's products became less competitive or concerns arose
regarding the Company's asset quality or ratings.
In addition, the investment performance of investment managers chosen by
the Company to manage the assets related to its products may vary and
non-competitive investment performance could adversely affect the Company's
ability to market its products.
For additional information on the competitive forces affecting the Company,
see "Business -- Competition".
CERTAIN LITIGATION
Companies in the life insurance industry historically have been subject to
substantial litigation resulting from claims disputes and other matters. Most
recently, such companies have faced extensive claims, including class-action
lawsuits, alleging improper sales practices relating to sales of certain life
insurance products. Negotiated settlements of such class-action lawsuits have
had a material adverse effect on the business, financial condition and results
of operations of certain of these companies. The Company is not and has not been
a defendant in any such class-action lawsuit alleging improper sales practices.
No assurance can be given that such class-action lawsuits or other litigation
against the Company would not materially and adversely affect the Company's
business, financial condition or results of operations.
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NO PRIOR MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF COMMON STOCK PRICE AND
THE SECURITIES MARKETS
Prior to the Equity Offerings, there has been no public market for the
Class A Common Stock. The Class A Common Stock has been approved for listing,
subject to notice of issuance, on the NYSE. The initial public offering price of
the Class A Common Stock was determined through negotiations between the Company
and the representatives of the Underwriters. There can be no assurance that the
initial public offering price will correspond to the price at which the Class A
Common Stock will trade in the public market subsequent to the Equity Offerings
or that an active trading market for the Class A Common Stock will develop and
continue after the completion of the Equity Offerings. See "Underwriting". In
addition, the market price of the Class A Common Stock upon the completion of
the Equity Offerings could be subject to significant fluctuations in response to
variations in the Company's quarterly financial results or other developments,
such as announcements of new products by the Company or the Company's
competitors, enactment of legislation or regulation affecting the insurance
industry, interest rate movements or general economic conditions.
POSSIBLE FUTURE SALES OF COMMON STOCK BY THE HARTFORD
Subject to applicable federal and state securities laws and the
restrictions set forth below, after completion of the Equity Offerings, The
Hartford may sell any and all of the shares of Common Stock it beneficially owns
or distribute any or all of such shares of Common Stock to its stockholders.
Sales or distributions by The Hartford of substantial amounts of Common Stock in
the public market or to its stockholders, or the perception that such sales or
distributions could occur, could adversely affect prevailing market prices for
the shares of Class A Common Stock.
The Hartford has advised the Company that its current intention is to
continue to hold all the Common Stock it beneficially owns. However, The
Hartford has no contractual obligation to retain its shares of Common Stock,
except for a limited period described in "Underwriting". Each share of Class B
Common Stock is convertible into one share of Class A Common Stock at any time
and is convertible automatically in certain circumstances. See "Description of
Capital Stock -- Class A Common Stock and Class B Common Stock -- Conversion".
There can be no assurance that shares of Class B Common Stock will not be
converted into Class A Common Stock or that The Hartford or any other Rights
Holder would not seek to sell their shares of Common Stock following the Equity
Offerings pursuant to registration rights or otherwise. In addition, the Company
has agreed that it will, upon the request of The Hartford or any other Rights
Holder and pursuant to the terms of the Master Intercompany Agreement, except
for a limited period described in "Underwriting", use its best efforts to effect
the registration under applicable federal and state securities laws of any
shares of the Company's Common Stock held by The Hartford or any other such
Rights Holder, as applicable, or any of its affiliates (with such rights to be
assignable by The Hartford or any other Rights Holder under certain
circumstances), which would facilitate any future disposition. See "Certain
Relationships and Transactions -- Intercompany Arrangements -- Master
Intercompany Agreement -- Registration Rights" and "Shares Eligible for Future
Sale".
IMMEDIATE AND SIGNIFICANT DILUTION
Based on an initial public offering price of $28.25 per share and assuming
no exercise of the Underwriters' over-allotment options, the Company's net
tangible book value as of March 31, 1997, after giving effect to the
transactions set forth in "Capitalization", would be $10.80 per share of Common
Stock. Accordingly, purchasers of Class A Common Stock offered hereby would
suffer an immediate dilution in net tangible book value of $17.45 per share. See
"Dilution".
ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Certificate of Incorporation and
By-laws may be deemed to have anti-takeover effects and, although of little
practical significance for so long as The Hartford maintains controlling
beneficial ownership of the Company, may, under certain circumstances,
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<PAGE> 198
delay, defer or prevent a takeover attempt or the removal of the present
management of the Company which a stockholder might consider to be in its best
interest. Such provisions also may adversely affect prevailing market prices for
the Class A Common Stock. These provisions include (i) the availability of
50,000,000 shares of preferred stock, par value $.01 per share (the "Preferred
Stock"), for issuance from time to time at the discretion of the Board of
Directors; (ii) prohibitions against stockholders calling a special meeting of
stockholders or acting by written consent in lieu of a meeting; (iii) the
classification of the Board of Directors into three classes, each of which will
serve for different three-year periods; (iv) a requirement, pursuant to Section
141 of the General Corporation Law of the State of Delaware (the "DGCL"), that,
due to the classification of the Board of Directors, directors of the Company
may only be removed for cause; (v) a requirement that certain provisions of the
Certificate of Incorporation may be amended only with the approval of the
holders of at least 80% of the combined voting power of the Common Stock then
outstanding; (vi) requirements for advance notice for raising business or making
nominations at stockholders' meetings; and (vii) the ability of the Board of
Directors to increase the size of the board and to appoint directors to fill
newly created directorships. See "Certain Provisions of the Certificate of
Incorporation and By-Laws of the Company -- Potential Limits on Change of
Control".
23
<PAGE> 199
COMPANY FINANCING PLAN
The Company was formed in December 1996 to serve as the holding company for
Hartford Life and Accident and its subsidiaries. In connection with such
formation, Hartford Accident and Indemnity contributed its ownership of all the
outstanding capital stock of Hartford Life and Accident to the Company and the
Company issued to Hartford Accident and Indemnity all the outstanding shares of
capital stock of the Company. Subsequent to the initial capitalization of the
Company, the following transactions took place or will take place:
(1) Historically, for financial reporting purposes, The Hartford internally
allocated the Allocated Advances to the Company's life insurance subsidiaries.
Cash was contributed to the life insurance subsidiaries in connection with
certain of such Allocated Advances. In February 1997, the Company (i) declared a
dividend of $1.184 billion payable to Hartford Accident and Indemnity, (ii)
obtained the $1.3 billion Line of Credit, (iii) borrowed $1.084 billion under
the Line of Credit and (iv) paid to Hartford Accident and Indemnity the $1.184
billion dividend, which consisted of the $1.084 billion in cash borrowed under
the Line of Credit and the $100 Million Promissory Note. $893 million of such
dividend constituted a repayment of the Allocated Advances. In addition, on
April 4, 1997, the Company declared and paid a dividend of $25 million to
Hartford Accident and Indemnity in the form of the $25 Million Promissory Note.
(2) The Company will use the net proceeds of the Equity Offerings to make a
capital contribution of at least $150 million to its life insurance
subsidiaries, to reduce the Pre-Offering Indebtedness and for other general
corporate purposes.
(3) Promptly following the Equity Offerings, subject to market conditions,
the Company plans to offer approximately $650 million of the Debt Securities in
the Debt Offering pursuant to a shelf registration statement. The completion of
the Equity Offerings will not be conditioned on the completion of the Debt
Offering. The Company will use the net proceeds of the Debt Offering to further
reduce the Pre-Offering Indebtedness.
If the Underwriters' over-allotment options in respect of the Equity
Offerings are exercised in full, the Company intends to use the additional
proceeds to make an additional capital contribution to its life insurance
subsidiaries and/or to further reduce the Pre-Offering Indebtedness. To the
extent that the Debt Offering is not consummated, indebtedness that otherwise
would have been repaid from the net proceeds of the Debt Offering will remain
outstanding. Assuming the sale of $650 million of the Debt Securities, the
Company will have $350 million of debt securities and/or preferred stock
remaining available for sale in the public markets pursuant to the shelf
registration statement, which may be issued at any time following the Equity
Offerings. See "Use of Proceeds", "Capitalization" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources".
Upon completion of the Equity Offerings, Hartford Accident and Indemnity
may cancel a portion of the then outstanding Promissory Notes in light of the
Company's capital structure and its ability to access the capital markets.
However, Hartford Accident and Indemnity is not legally obligated to effect any
such cancellation in whole or in part.
24
<PAGE> 200
CAPITALIZATION
The table below sets forth the capitalization of the Company as of March
31, 1997 under the following circumstances: (i) on a historical basis (which
includes the borrowing of $1.084 billion under the Line of Credit and the
payment of a $1.184 billion dividend to Hartford Accident and Indemnity,
consisting of the $1.084 billion in cash borrowed under the Line of Credit and
the $100 Million Promissory Note, with $893 million of such dividend
constituting a repayment of the Allocated Advances); (ii) on a pro forma basis
to give effect to the reclassification of the 1,000 shares of authorized common
stock of the Company into Class B Common Stock and the authorization of the
Class A Common Stock and the declaration and payment to Hartford Accident and
Indemnity of a $25 million dividend in the form of the $25 Million Promissory
Note (together, the "Pre-Offering Transactions"); (iii) on an as adjusted basis
to give effect to the issuance and sale in the Equity Offerings of 23 million
shares of Class A Common Stock at an initial public offering price of $28.25 per
share and the application of the estimated net proceeds of $607.5 million to
make a capital contribution to the Company's insurance subsidiaries, to reduce
the Pre-Offering Indebtedness and for other general corporate purposes; and (iv)
as further adjusted to give effect to the completion of the Debt Offering
promptly following the Equity Offerings and the application of the estimated net
proceeds therefrom to further reduce the Pre-Offering Indebtedness. As of March
31, 1997, the pro forma ratio of total debt to total capital, excluding net
unrealized losses on investments, net of tax, of $93 million and after giving
effect to the completion of the Debt Offering following the Equity Offerings,
would be 32.6% (or 29.6% if the Underwriters' over-allotment options are
exercised in full). See "Use of Proceeds". To the extent the Debt Offering is
not consummated, the Pre-Offering Indebtedness of the Company that would
otherwise have been repaid from the net proceeds of the Debt Offering will
remain outstanding.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1997
---------------------------------------------------------------
PRO FORMA
FOR AS ADJUSTED AS FURTHER
PRE-OFFERING FOR EQUITY ADJUSTED FOR
HISTORICAL TRANSACTIONS OFFERINGS DEBT OFFERING
---------- ------------- ----------- -----------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Borrowings under Line of Credit(1)............................. $1,084 $ 1,084 $ 693 $ 43
Short-term debt due parent(2).................................. 100 125 82 82
Long-term debt:
Debt Offering................................................ -- -- -- 650
------ ------ ------ ------
Total debt................................................... $1,184 $ 1,209 $ 775 $ 775
------ ------ ------ ------
Stockholder's equity:
Preferred Stock, par value $.01 per share; 50,000,000 shares
authorized; no shares issued and outstanding............... -- -- -- --
Common stock, par value $.01 per share; 1,000 shares
authorized; 100 shares issued and outstanding,
historical................................................. -- -- -- --
Class A Common Stock, par value $.01 per share; 600,000,000
shares authorized; no shares issued and outstanding;
23,000,000 shares issued and outstanding, as adjusted and
as further adjusted........................................ -- -- -- --
Class B Common Stock, par value $.01 per share; 600,000,000
shares authorized; 114,000,000 shares issued and
outstanding, pro forma, as adjusted and as further
adjusted................................................... -- 1 1 1
Capital surplus.............................................. 585 584 1,192 1,192
Net unrealized capital gains (losses) on investments, net of
tax........................................................ (93) (93) (93) (93)
Retained earnings............................................ 432 407 407 407
------ ------ ------ ------
Total stockholder's equity................................. 924 899 1,507 1,507
------ ------ ------ ------
Total capitalization................................... $2,108 $ 2,108 $ 2,282 $ 2,282
====== ====== ====== ======
</TABLE>
- ---------------
(1) Represents $1.084 billion borrowed under the Line of Credit on February 18,
1997, with interest payable at the two-month Eurodollar rate, determined as
described below, plus 15 basis points (5.65% at the inception of the
borrowing) and principal payable on or before February 9, 1998. The
Eurodollar rate is determined by taking the average one, two, three or
six-month rate (based upon the applicable interest period selected by the
Company) at which deposits in U.S. dollars are offered by each of the four
participating lenders in London, England to prime banks in the London
interbank market, plus an applicable margin (based upon the Company's
current public debt ratings).
(2) Represents (i) the $100 Million Promissory Note executed by the Company for
the benefit of Hartford Accident and Indemnity, with interest payable at the
two-month Eurodollar rate, determined as described above with respect to the
Line of Credit, plus 15 basis points (initially 5.60% upon the execution of
the $100 Million Promissory Note) and principal payable on February 19,
1998, and (ii) the $25 Million Promissory Note executed by the Company for
the benefit of Hartford Accident and Indemnity, with interest payable at the
one-month Eurodollar rate, determined as described above with respect to the
Line of Credit, plus 15 basis points (initially 5.84% upon the execution of
the $25 Million Promissory Note) and principal payable on April 3, 1998.
25
<PAGE> 201
USE OF PROCEEDS
Based upon an initial public offering price of $28.25 per share, the net
proceeds to the Company from the sale of the Class A Common Stock in the Equity
Offerings are estimated to be $607.5 million (or $687.4 million if the
Underwriters' over-allotment options are exercised in full), after deducting the
underwriting discounts and estimated expenses for the Equity Offerings payable
by the Company. The Company will use the net proceeds to make a capital
contribution of at least $150 million to its life insurance subsidiaries, to
reduce the Pre-Offering Indebtedness by approximately $434 million and for other
general corporate purposes.
If the Underwriters' over-allotment options in respect of the Equity
Offerings are exercised in full, the Company intends to use the additional
proceeds to make an additional capital contribution to its life insurance
subsidiaries and/or to further reduce the Pre-Offering Indebtedness. To the
extent that the Debt Offering is not consummated, Pre-Offering Indebtedness that
otherwise would have been repaid from the proceeds of the Debt Offering will
remain outstanding. Assuming the sale of $650 million of the Debt Securities,
the Company will have $350 million of debt securities and/or preferred stock
remaining available for sale in the public markets pursuant to the shelf
registration statement, which may be issued at any time following the Equity
Offerings. See "Capitalization" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources".
DIVIDEND POLICY
The holders of Class A Common Stock and Class B Common Stock will share
ratably on a per share basis in all dividends and other distributions declared
by the Board of Directors. The Board of Directors currently intends to declare
quarterly dividends on the Common Stock and expects that the first quarterly
dividend payment will be $.09 per share (a rate of $.36 annually), with the
initial dividend to be declared and paid in the third quarter of 1997. The
Company expects that any dividends paid in 1997 will consist primarily of a
return of basis for U.S. federal income tax purposes. To the extent that any
such dividends in fact consist of a return of basis for U.S. federal income tax
purposes, such dividends will be ineligible for the dividends received deduction
otherwise available to certain corporate holders and will reduce a holder's
adjusted tax basis with respect to their shares of either Class A Common Stock
or Class B Common Stock, as the case may be. The Company further expects that
any dividends paid in 1998 and future years will constitute primarily taxable
dividends for U.S. federal income tax purposes and generally will be eligible
for the dividends received deduction available to certain corporate holders. See
"Certain United States Federal Tax Consequences to Non-United States Holders of
Class A Common Stock -- Dividends" for a discussion of certain tax consequences
related to dividends paid to Non-United States Holders (as defined therein).The
declaration and payment of dividends by the Company are subject to the
discretion of the Board of Directors. The determination to pay dividends will
depend upon, among other things, general business conditions, the Company's
financial results, contractual, legal and regulatory restrictions on the payment
of dividends by the Company's subsidiaries, the effect on claims-paying ability
and debt ratings of the Company and its subsidiaries and such other factors as
the Board of Directors may consider to be relevant. In addition, until The
Hartford and its affiliates no longer own at least 50% of the combined voting
power of all the outstanding Voting Stock, the approval of The Hartford,
pursuant to the Master Intercompany Agreement, is required for the payment by
the Company of dividends that are not consistent with the Company's then current
dividend policy. See "Certain Relationships and Transactions -- Intercompany
Arrangements -- Master Intercompany Agreements". Although there can be no
assurance that any dividends will be paid by the Company, management believes
that the Company's cash flows after the completion of the Equity Offerings
should be sufficiently strong such that, barring unforeseen circumstances, the
initial dividend rate can be maintained for the foreseeable future. See "Risk
Factors -- Holding Company Structure; Restrictions on Dividends" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources".
26
<PAGE> 202
DILUTION
At March 31, 1997, the pro forma net tangible book value of the Company
(after giving effect to the Pre-Offering Transactions) was approximately $872
million, or approximately $7.65 per share of Common Stock. "Net tangible book
value" per share of Common Stock represents the amount of the Company's total
tangible assets minus total liabilities, divided by the 114 million shares of
Common Stock outstanding. After giving effect to the sale by the Company of 23
million shares of Class A Common Stock in the Equity Offerings at an initial
public offering price of $28.25 per share and after deducting the underwriting
discounts and estimated expenses payable by the Company, the pro forma net
tangible book value of the Company at March 31, 1997 would have been
approximately $1.480 billion, or approximately $10.80 per share of Common Stock.
This represents an immediate increase in net tangible book value of $3.15 per
share of Class B Common Stock to The Hartford and an immediate dilution in net
tangible book value of $17.45 per share to new investors purchasing shares of
Class A Common Stock at the initial public offering price. The following table
illustrates this dilution on a per share basis:
<TABLE>
<S> <C>
Initial public offering price per share of Class A Common Stock............. $28.25
Pro forma net tangible book value per share before the Equity Offerings
(1)....................................................................... 7.65
Increase in net tangible book value per share attributable to the sale of
Class A Common Stock in the Equity Offerings (2).......................... 3.15
Pro forma net tangible book value per share after giving effect to the
Equity Offerings.......................................................... 10.80
------
Dilution in net tangible book value per share to the purchasers of Class A
Common Stock offered hereby (3)........................................... $17.45
======
</TABLE>
- ---------------
(1) The Company's intangible assets are $27 million of goodwill, equivalent to
$0.24 per share of Common Stock (after giving effect to the Pre-Offering
Transactions).
(2) After deducting the underwriting discounts and estimated expenses for the
Equity Offerings payable by the Company.
(3) Dilution is determined by subtracting pro forma net tangible book value per
share after giving effect to the Equity Offerings, from the initial public
offering price paid by a new investor for a share of Class A Common Stock.
27
<PAGE> 203
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated income statement data and balance sheet data set
forth below are derived in the relevant periods from the consolidated financial
statements and the notes thereto of the Company and its subsidiaries. The
Company's consolidated financial statements have been audited by Arthur Andersen
LLP, independent public accountants, as of December 31, 1995 and 1996, and for
each of the three years in the period ended December 31, 1996 and are included
elsewhere in this Prospectus, together with the report of Arthur Andersen LLP
thereon. The Company's consolidated financial statements as of December 31,
1992, 1993 and 1994 and for the years ended December 31, 1992 and 1993 were
derived from audited consolidated financial statements of certain of the
Company's subsidiaries and The Hartford and include all adjustments that
management considers necessary for a fair presentation of the data for such
periods. The selected consolidated income statement data and balance sheet data
for the three months ended March 31, 1996 and 1997, presented below, were
derived from the Company's unaudited consolidated financial statements that are
included elsewhere in this Prospectus and include, in the opinion of management,
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of the financial information for such periods. The results
of operations for the three months ended March 31, 1997 are not necessarily
indicative of the results of operations to be expected for the full fiscal year.
This selected consolidated financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", the Company's consolidated financial statements, the notes thereto
and the other financial information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF OR FOR THE
THREE MONTHS
AS OF OR FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
(IN MILLIONS,
(IN MILLIONS) UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenues:
Premiums and other considerations................ $ 1,273 $ 1,755 $ 2,139 $ 2,643 $ 3,069 $ 941 $ 679
Net investment income............................ 1,038 1,160 1,403 1,451 1,534 362 375
Net realized capital gains (losses).............. 10 7 1 (4) (219) -- 1
------- ------- ------- ------- ------- ------- -------
Total revenues................................. 2,321 2,922 3,543 4,090 4,384 1,303 1,055
------- ------- ------- ------- ------- ------- -------
Benefits, claims and expenses:
Benefits, claims and claim adjustment expenses... 1,663 1,903 2,254 2,395 2,727 651 659
Amortization of deferred policy acquisition
costs.......................................... 74 188 149 205 241 66 83
Dividends to policyholders(1).................... 48 228 419 675 635 286 54
Interest expense(2).............................. 26 25 29 35 55 11 16
Other insurance expense.......................... 360 377 469 554 695 230 143
------- ------- ------- ------- ------- ------- -------
Total benefits, claims and expenses............ 2,171 2,721 3,320 3,864 4,353 1,244 955
------- ------- ------- ------- ------- ------- -------
Income before income tax expense................... 150 201 223 226 31 59 100
Income tax expense................................. 49 71 72 76 7 20 37
Income before cumulative effect of changes in
accounting principles............................ 101 130 151 150 24 39 63
Cumulative effect of changes in accounting
principles(3).................................... (47) -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net income..................................... $ 54 $ 130 $ 151 $ 150 $ 24 $ 39 $ 63
======== ======== ======== ======== ======== ======== ========
BALANCE SHEET DATA
General account invested assets.................... $13,514 $15,866 $18,078 $20,072 $19,830 $19,593
Separate account assets(4)......................... 8,550 16,314 22,847 36,296 49,770 51,413
All other assets................................... 1,430 7,454 9,324 9,594 10,333 10,496
------- ------- ------- ------- ------- -------
Total assets..................................... $23,494 $39,634 $50,249 $65,962 $79,933 $81,502
======== ======== ======== ======== ======== ========
Policy liabilities................................. $13,040 $20,863 $25,208 $26,318 $26,239 $25,817
Separate account liabilities(4).................... 8,550 16,314 22,847 36,296 49,770 51,413
Allocated Advances from parent(2)(5)............... 375 425 525 732 893 --
All other liabilities.............................. 802 1,107 1,283 1,439 1,757 3,348
------- ------- ------- ------- ------- -------
Total liabilities................................ $22,767 $38,709 $49,863 $64,785 $78,659 $80,578
======== ======== ======== ======== ======== ========
Stockholder's equity(5)(6)......................... $ 727 $ 925 $ 386 $ 1,177 $ 1,274 $ 924
======== ======== ======== ======== ======== ========
Stockholder's equity, excluding net unrealized
capital gains (losses), net of tax(5)............ $ 727 $ 931 $ 1,116 $ 1,221 $ 1,245 $ 1,017
======== ======== ======== ======== ======== ========
</TABLE>
28
<PAGE> 204
<TABLE>
<CAPTION>
As of or for the
Three Months
As of or for the Year Ended December 31, Ended March 31,
--------------------------------------------------- ------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
(in millions,
(in millions) unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA (AFTER TAX)
Analysis of Net Income:
Annuity.................................... $ 35 $ 54 $ 84 $ 113 $ 145 $ 33 $ 43
Individual Life Insurance.................. 17 21 27 37 44 9 11
Employee Benefits.......................... 36 48 53 67 78 16 18
Guaranteed Investment Contracts............ 21 30 1 (67) (225) (15) --
Corporate Operation(7)..................... (16) (28) (14) 3 (18) (4) (10)
Unallocated net realized capital gains
(losses)(8).............................. 8 5 -- (3) -- -- 1
Cumulative effect of changes in accounting
principles(3)............................ (47) -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net income............................. $ 54 $ 130 $ 151 $ 150 $ 24 $ 39 $ 63
======= ======= ======= ======= ======= ======= =======
SELECTED SEGMENT DATA
Annuity:
Individual annuity sales................... $ 2,212 $ 4,232 $ 7,005 $ 6,947 $ 9,841 $ 2,240 $ 2,572
Group annuity sales........................ 326 370 366 495 634 90 165
Account value
General account.......................... 3,779 4,767 5,499 6,892 7,411 6,950 7,522
Guaranteed separate account(9)........... 2,663 3,989 7,026 8,996 9,130 8,790 9,189
Non-guaranteed separate account(10)...... 5,451 11,003 14,282 21,970 34,219 24,996 36,007
------- ------- ------- ------- ------- ------- -------
Total account value.................. $11,893 $19,759 $26,807 $37,858 50,760 $40,736 $52,718
======= ======= ======= ======= ======= ======= =======
Individual Life Insurance:
Individual life sales...................... $ 90 $ 96 $ 94 $ 107 $ 130 $ 22 $ 24
Account value
General account.......................... 816 1,127 1,456 1,579 1,998 1,622 2,023
Separate account......................... -- 736 836 979 1,238 1,034 1,307
------- ------- ------- ------- ------- ------- -------
Total account value.................. $ 816 $ 1,863 $ 2,292 $ 2,558 $ 3,236 $ 2,656 $ 3,330
======= ======= ======= ======= ======= ======= =======
Employee Benefits:
Group insurance premiums................... $ 841 $ 856 $ 974 $ 1,103 $ 1,329 $ 290 $ 362
Group insurance reserves................... 1,056 1,224 1,412 1,633 1,934 1,684 1,991
Total group insurance invested assets...... 1,046 1,212 1,400 1,617 1,917 1,668 1,973
COLI account value
General account.......................... 864 1,549 2,308 3,566 4,028 3,923 3,853
Separate account......................... -- -- 897 3,484 4,441 3,537 4,352
------- ------- ------- ------- ------- ------- -------
Total COLI account value............. $ 864 $ 1,549 $ 3,205 $ 7,050 $ 8,469 $ 7,460 $ 8,205
======= ======= ======= ======= ======= ======= =======
Guaranteed Investment Contracts:
Guaranteed investment contract sales....... $ 1,608 $ 1,730 $ 1,732 $ 893 $ 169 $ 70 $ 41
Account value
General account.......................... 5,673 6,216 7,257 5,722 4,124 5,318 3,758
Guaranteed separate account.............. 182 193 124 346 408 415 428
------- ------- ------- ------- ------- ------- -------
Total account value.................. $ 5,855 $ 6,409 $ 7,381 $ 6,068 $ 4,532 $ 5,733 $ 4,186
======= ======= ======= ======= ======= ======= =======
STATUTORY DATA(11)
Gains from operations........................ $ 59 $ 61 $ 45 $ 175 $ 148
Gains (losses)............................... 70 10 29 (62) 23
------- ------- ------- ------- -------
Net income................................... $ 129 $ 71 $ 74 $ 113 $ 171
======= ======= ======= ======= =======
Capital and surplus.......................... $ 824 $ 956 $ 1,088 $ 1,224 $ 1,320
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS
ADJUSTED
FOR EQUITY
HISTORICAL PRO FORMA(12) OFFERINGS
---------- ---------------- ----------
(IN MILLIONS, EXCEPT PER SHARE DATA, UNAUDITED)
<S> <C> <C> <C>
CAPITALIZATION DATA AS OF MARCH 31, 1997
Borrowings under Line of Credit............................... $1,084 $1,084 $ 693
Short-term debt due parent.................................... 100 125 82
Stockholder's equity(5)(6).................................... 924 899 1,507
PRO FORMA PER SHARE DATA(13)
As of or for the Three Months Ended March 31, 1997:
Net income(14)............................................ $ 0.51 $ 0.51
Book value(15)............................................ 7.89 11.00
As of or for the Year Ended December 31, 1996:
Net income(14)............................................ $ 0.19 $ 0.23
Book value(15)............................................ 8.40 11.43
</TABLE>
29
<PAGE> 205
(1) Growth in dividends to policyholders is a result of the November 1992
acquisition from Mutual Benefit of a block of participating leveraged COLI
business and the subsequent growth in the leveraged COLI business from 1993
to 1995. Policyholder dividends are expected to decline in the future since
sales of new leveraged COLI policies have been terminated as a result of
the HIPA Act of 1996.
(2) For financial reporting purposes, the Company has treated certain amounts
previously allocated by The Hartford to the Company's life insurance
subsidiaries as Allocated Advances from parent. Such Allocated Advances
were not treated as liabilities or indebtedness for tax and statutory
accounting purposes. Cash received in respect of Allocated Advances from
parent was used to support the growth of the life insurance subsidiaries
and was treated as surplus for statutory accounting purposes. Interest
expense prior to December 31, 1996 represents the expense internally
allocated to the Company with respect to the Allocated Advances based on
The Hartford's actual (third party) external borrowing costs. Such interest
expense paid was treated as dividends for tax and statutory accounting
purposes. The increase in Allocated Advances from parent in 1995 was
attributable to the ITT Spin-Off.
(3) Reflects the cumulative effect of adoption of SFAS No. 106, Employers'
Accounting for Postretirement Benefits Other Than Pensions, and SFAS No.
112, Employers' Accounting for Postemployment Benefits.
(4) Includes both non-guaranteed and guaranteed separate accounts.
(5) The Company has received capital contributions and paid or accrued
dividends to its stockholder for the five-year period ended December 31,
1996 and for the three months ended March 31, 1996 and 1997, as set forth
in the table below. The capital contributions described below exclude those
amounts classified as Allocated Advances from parent. Dividends exclude
those amounts classified as interest expense with respect to the Allocated
Advances from parent and paid to The Hartford as described in note (2)
above.
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------------- ---------------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ---- -----
(IN MILLIONS,
(IN MILLIONS) UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Capital contributions............... $ -- $100 $ 50 $180 $ -- $ -- $ --
Dividends........................... -- 24 17 226 -- -- 291
---- ---- ---- ---- ----- ----- -----
Net contributions............... $ -- $ 76 $ 33 $(46) $ -- $ -- $(291)
==== ==== ==== ==== ===== ===== =====
</TABLE>
(6) Stockholder's equity beginning December 31, 1994 reflects the adoption of
SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities. See Note 2 of notes to consolidated financial statements
included elsewhere in this Prospectus.
(7) The Company maintains a Corporate Operation through which it reports items
that are not directly allocable to any of its business segments. Included
in the Corporate Operation are: (i) unallocated income and expense, (ii)
the Company's group medical business, which it exited in 1993, and (iii)
certain other items not directly allocable to any business segment such as
ITT Spin-Off related items. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Results of Operations for
the Years Ended December 31, 1994, 1995 and 1996 -- Corporate Operation".
The following table details the components of the Corporate Operation:
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------------- ---------------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ---- ----
(IN MILLIONS,
(IN MILLIONS) UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Unallocated income and expense....... $(11) $ (3) $ (7) $(14) $(18) $ (4) $(10)
Group medical business............... (5) (25) (7) (1) 1 -- --
ITT Spin-Off related items and
other.............................. -- -- -- 18 (1) -- --
---- ---- ---- ---- ---- ---- ----
Total Corporate Operation........ $(16) $(28) $(14) $ 3 $(18) $ (4) $(10)
===== ===== ===== ===== ===== ===== =====
</TABLE>
(8) Represents net realized capital gains (losses) that are not allocable to
any of the Company's business segments.
(9) Guaranteed separate accounts represent policyholder funds that are
segregated from the general account of the Company and on which the Company
contractually guarantees a minimum return, subject, in most cases, to an
MVA feature if the relevant product is surrendered prior to the end of the
applicable guarantee period.
(10) Non-guaranteed separate accounts represent policyholder funds that are
segregated from the general account of the Company and as to which the
Company does not guarantee a minimum return.
(11) Statutory data has been derived from Annual Statements of Hartford Life and
Accident, Hartford Life and ITT Hartford Life and Annuity filed with
insurance regulatory authorities, each in accordance with statutory
accounting practices. Gains (losses) are net of IMR and taxes.
30
<PAGE> 206
(12) The pro forma data as of or for the three months ended March 31, 1997
reflects the Pre-Offering Transactions, as if such transactions had
occurred as of such date. The pro forma data as of or for the year ended
December 31, 1996 reflects the borrowing of $1.084 billion under the Line
of Credit, the execution of the $100 Million Promissory Note, the payment
of $1.184 billion as a dividend to Hartford Accident and Indemnity ($893
million of such dividend constituting a repayment of the Allocated Advances
from parent) and the Pre-Offering Transactions, as if such transactions had
occurred as of such date.
(13) Pro forma per share data is calculated based upon the 114 million shares of
Class B Common Stock owned by The Hartford immediately prior to the Equity
Offerings plus an assumed issuance of 8.67 million shares (for the three
months ended March 31, 1997) and 11.06 million shares (for the year ended
December 31, 1996), as applicable, of Class A Common Stock in the Equity
Offerings (the number of shares which, based on the initial public offering
price set forth on the cover page of this Prospectus and the underwriting
discounts and estimated expenses payable by the Company, would result in
estimated net proceeds equal to the excess of the amount of the February
and April 1997 dividends over, with respect to the March 31, 1997 data, the
earnings for the year ended December 31, 1996 and the three months ended
March 31, 1997 and the Allocated Advances from parent and, with respect to
the December 31, 1996 data, the earnings for the year ended December 31,
1996 and the Allocated Advances from parent, as applicable). Pro forma net
income per share (unaudited) of $.19 for the year ended December 31, 1996
and $.51 for the three months ended March 31, 1997, as included in the
Company's consolidated financial statements and condensed consolidated
financial statements, respectively (each included elsewhere in this
Prospectus), were determined on the basis of an assumed initial public
offering price of $25.50 per share.
(14) As adjusted net income per share is calculated based upon the 114 million
shares of Class B Common Stock owned by The Hartford immediately prior to
the Equity Offerings, an assumed issuance of 8.67 million shares (for the
three months ended March 31, 1997) and 11.06 million shares (for the year
ended December 31, 1996), as applicable, of Class A Common Stock in the
Equity Offerings (as discussed in note (13) above) and an additional
assumed issuance of 4.47 million shares of Class A Common Stock (the number
of shares which, based on the initial public offering price set forth on
the cover page of this Prospectus and the underwriting discounts and
estimated expenses payable by the Company, would result in a reduction of
the Pre-Offering Indebtedness and Allocated Advances from parent by $118
million). As adjusted net income per share is based upon historical amounts
adjusted to reflect a reduction in interest expense, net of tax, from
historical levels that would result from the completion of the Equity
Offerings. The foregoing assumes that the Company does not cancel any
portion of the Promissory Notes. See "Company Financing Plan".
(15) As adjusted book value per share, as of March 31, 1997, represents total
stockholder's equity, as of such date, together with the effect of the
Pre-Offering Transactions and the $607.5 million of estimated net proceeds
from the issuance and sale of 23 million shares of Class A Common Stock. As
adjusted book value per share, as of December 31, 1996, represents total
stockholder's equity, as of such date, together with the effect of the
borrowing of $1.084 billion under the Line of Credit, the execution of the
$100 Million Promissory Note, the payment of $1.184 billion as a dividend
to Hartford Accident and Indemnity ($893 million of such dividend
constituting a repayment of the Allocated Advances from parent), the
Pre-Offering Transactions and the $607.5 million of estimated net proceeds
from the issuance and sale of 23 million shares of Class A Common Stock.
The foregoing assumes that the Company does not cancel any portion of the
Promissory Notes. See "Company Financing Plan".
31
<PAGE> 207
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations of the Company is prepared as if the Company were a separate entity
for all periods presented and should be read in conjunction with the "Selected
Consolidated Financial Data", the Company's consolidated financial statements,
the notes thereto and the other financial information included elsewhere in this
Prospectus.
GENERAL
The Company is a leading insurance and financial services company that
provides pre-retirement savings, estate planning and employee benefit products.
The Company offers variable and fixed annuities, retirement plan services,
mutual funds and life and disability insurance on both an individual and group
basis. Prior to the completion of the Equity Offerings, the Company operated its
businesses as part of The Hartford.
The Company attempts to attain a pre-determined return on stockholder's
equity for each of its business segments. Management facilitates this
"bottom-line" approach by operating the Company as a series of micro-enterprises
within each of its business segments. These micro-enterprises are managed by
individuals with accountability for the profit or loss of the specific
operation. The Company assigns capital to each micro-enterprise based on
internal formulae and each of the managers is expected to earn the Company's
targeted return on the assigned capital.
The Company derives its revenues principally from (i) asset management fees
and mortality and expense fees on separate accounts, (ii) premiums, (iii) net
investment income on general account assets, including the general account
portion of variable annuities, and (iv) certain other fees earned by the
Company. The Company generates investment and mortality and expense fees
primarily from the separate account assets deposited with the Company through
the sale of individual annuities and variable life products. Premium revenues
are derived primarily from the sale of individual life, group life and group
disability insurance and COLI. The Company's operating expenses consist of
insurance benefits provided, interest credited on general account liabilities,
the cost of selling and servicing the various products sold by the Company,
including commissions to the various sales representatives (net of any
deferrals), and general business expenses.
The Company's profitability depends in large part upon (i) the amount of
its assets, (ii) the adequacy of its product pricing (which is primarily a
function of competitive conditions, management's ability to assess and manage
trends in mortality and morbidity experience as compared to the level of benefit
payments and its ability to maintain expenses within pricing assumptions), (iii)
the maintenance of the Company's target spreads between its customer CREDITED
RATES and its earned investment rates and (iv) the persistency of its policies
and premiums (which determines the recoverability of the costs incurred in
selling a policy). External factors, such as the impact of legislation on the
Company's products, also affect the Company's profitability.
From time to time, the Company has acquired certain COLI and individual
life insurance and annuity blocks of businesses from distressed carriers. These
acquisitions have contributed to the Company's growth in assets. The Company
assumed COLI blocks of business of approximately $5.6 billion in 1992 and $300
million in 1993 from Mutual Benefit Life Insurance Company ("Mutual Benefit")
and individual life insurance and annuity policies of $3.2 billion in 1993 from
Fidelity Bankers Life Insurance Company ("Fidelity Bankers"), $434 million in
1994 from Pacific Standard Life Insurance Company ("Pacific Standard") and $77
million in 1996 from Investors Equity Life Insurance Company of Hawaii
("Investors Equity").
The Company's income prior to the cumulative effect of changes in the
Company's accounting principles grew from $101 million in 1992 to $151 million
in 1994, a compound annual growth rate of 22%, due in part to internal growth
and the acquisitions discussed above. In 1995 and 1996, the
32
<PAGE> 208
Company's net income fell to $150 million and $24 million, respectively, mainly
due to losses within the Guaranteed Investment Contracts segment. Because the
Company does not expect any material income or loss from the Guaranteed
Investment Contracts segment in the years subsequent to 1996, management
believes that future earnings will be dependent on income from the Annuity,
Individual Life Insurance and Employee Benefits segments, net of the Corporate
Operation. Net income of these segments, net of the Corporate Operation, was
$150 million, $217 million and $249 million in 1994, 1995 and 1996,
respectively, representing a compound annual growth rate over such period of
29%.
The results of the Guaranteed Investment Contracts segment were materially
and adversely affected by lower investment rates and earnings in the investment
portfolio supporting such segment due to prepayments on MBSs and CMOs
substantially in excess of assumed and historical levels, as well as the
interest rate rise in 1994, which caused a mismatch in the duration of such
assets and liabilities. In 1995, the Company substantially withdrew from the
general account GRC business. In 1996, the Company initiated certain asset sales
and hedging transactions to insulate itself from any ongoing income or loss
associated with the Closed Book GRC investment portfolio. As a result, due to
the foregoing actions, management expects that the net income (loss) from this
segment in the years subsequent to 1996 will be immaterial. See "Risk
Factors -- Interest Rate Risk" and "-- Results of Operations for the Years Ended
December 31, 1994, 1995 and 1996 -- Comparison of Guaranteed Investment
Contracts Segment Results -- Closed Book GRC".
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
COMPARISON OF CONSOLIDATED RESULTS
The following table details the Company's consolidated net income for the
three months ended March 31, 1996 and 1997.
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS
ENDED MARCH 31,
----------------
1996 1997
------ ------
(IN MILLIONS,
UNAUDITED)
<S> <C> <C>
Revenues:
Premiums and other considerations....................................... $ 941 $ 679
Net investment income................................................... 362 375
Net realized capital gains (losses)..................................... -- 1
------ ------
Total revenues....................................................... 1,303 1,055
------ ------
Benefits, claims and expenses:
Benefits, claims and claim adjustment expenses.......................... 651 659
Amortization of deferred policy acquisition costs....................... 66 83
Dividends to policyholders.............................................. 286 54
Interest expense(1)..................................................... 11 16
Other insurance expense................................................. 230 143
------ ------
Total benefits, claims and expenses.................................. 1,244 955
------ ------
Income before income tax expense.......................................... 59 100
Income tax expense........................................................ 20 37
------ ------
Net income........................................................... $ 39 $ 63
====== ======
</TABLE>
- ---------------
(1) For financial reporting purposes, the Company has treated certain amounts
previously allocated by The Hartford to the Company's life insurance
subsidiaries as Allocated Advances from parent. Such Allocated Advances were
not treated as liabilities or indebtedness for tax and statutory accounting
purposes. Cash received in respect of Allocated Advances from parent was
used to support the growth of the life insurance subsidiaries and was
treated as surplus for statutory accounting purposes. Interest expense prior
to December 31, 1996 represents the expense internally allocated to the
Company with respect to the Allocated Advances based on The Hartford's
actual (third party) external borrowing costs. Such interest expense paid
was treated as dividends for tax and statutory accounting purposes.
33
<PAGE> 209
Revenues decreased $248 million, or 19%, to $1.055 billion in the first
quarter of 1997 from $1.303 billion in the first quarter of 1996 due to a
decrease in revenues from COLI of $365 million primarily due to significantly
less premiums from leveraged COLI as a result of the HIPA Act of 1996. This
legislation phases out the deductibility of interest on policy loans under COLI
by 1998, thus eliminating all future sales of leveraged COLI. Leveraged COLI
will continue to contribute to the profitability of the Company (although such
contribution will be reduced in the future due to the effects of this
legislation). As a result, net income contributed by COLI may be lower in the
future (particularly during 1999 and later years). The decrease in COLI revenues
was partially offset by an increase in revenues of $117 million, or 15%, in the
Company's other operations, primarily due to a $79 million increase in group
insurance revenues and a $47 million increase in revenues from the Annuity
segment. Similar factors caused benefits, claims and expenses to decrease by
$289 million, or 23%, to $955 million in the first quarter of 1997 from $1.244
billion in the first quarter of 1996.
Net income increased $24 million, or 62%, to $63 million in the first
quarter of 1997 from $39 million in the first quarter of 1996 due to growth in
the Annuity, Individual Life Insurance and Employee Benefits segments of 30%,
22% and 13%, respectively, and the elimination of losses in the Guaranteed
Investment Contracts segment, partially offset by higher unallocated expense in
the Corporate Operation primarily due to an increase in interest expense of $5
million to $16 million in the first quarter of 1997 from $11 million in the
first quarter of 1996. This increase was primarily related to the Pre-Offering
Indebtedness.
COMPARISON OF SEGMENT RESULTS
The following table details the Company's net income by segment for the
three months ended March 31, 1996 and 1997.
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS
ENDED MARCH
31,
-------------
1996 1997
---- ----
(IN MILLIONS,
UNAUDITED)
<S> <C> <C>
Annuity...................................................................... $ 33 $ 43
Individual Life Insurance.................................................... 9 11
Employee Benefits............................................................ 16 18
Guaranteed Investment Contracts(1)........................................... (15) --
Corporate Operation(2)....................................................... (4) (10)
Unallocated net realized capital gains (losses)(3)........................... -- 1
--- ----
Net income................................................................. $ 39 $ 63
=== ====
</TABLE>
- ---------------
(1) The Company substantially withdrew from the general account GRC business in
1995. Management expects no material income or loss from the Guaranteed
Investment Contracts segment in the future as described herein.
(2) The Company maintains a Corporate Operation through which it reports items
that are not directly allocable to any of its business segments. Included in
the Corporate Operation are: (i) unallocated income and expense, (ii) the
Company's group medical business, which it exited in 1993, and (iii) certain
other items not directly allocable to any segment such as items related to
the ITT Spin-Off. For a discussion of the Corporate Operation, see
"-- Results of Operations for the Years Ended December 31, 1994, 1995 and
1996 -- Corporate Operation".
(3) Represents net realized capital gains (losses) that are not allocable to any
of the Company's business segments.
34
<PAGE> 210
The following tables detail the Annuity segment's sales, account value and
individual annuity sales by distribution channel as of or for the three months
ended March 31, 1996 and 1997.
<TABLE>
<CAPTION>
AS OF OR FOR THE
THREE MONTHS
ENDED MARCH 31,
-----------------
1996 1997
------- -------
(IN MILLIONS,
UNAUDITED)
<S> <C> <C>
ANNUITY
Quarterly sales by product
Individual variable annuities....................................... $ 2,200 $ 2,452
Fixed MVA/Other individual annuities................................ 40 120
Mutual funds........................................................ -- 88
Group annuities..................................................... 90 165
Account value
Individual annuities
General account................................................... $ 2,576 $ 2,924
Guaranteed separate account....................................... 8,790 9,024
Non-guaranteed separate account................................... 21,259 31,666
------- -------
Total account value............................................ $32,625 $43,614
======= =======
Group annuities
Total account value............................................ $ 8,111 $ 9,104
Individual variable annuity total account value
Beginning total account value, January 1............................ $20,691 $32,397
Sales and other deposits.......................................... 2,200 2,457
Acquisitions...................................................... -- --
Market appreciation............................................... 842 (155)
Surrenders........................................................ (210) (444)
------- -------
Ending total account value, March 31................................ $23,523 $34,255
======= =======
Individual annuity sales by distribution channel
Broker-dealers...................................................... $ 1,509 $ 1,703
Banks............................................................... 731 869
------- -------
Total.......................................................... $ 2,240 $ 2,572
======= =======
</TABLE>
The following tables detail the Individual Life Insurance segment's sales,
account value, insurance in force and revenues excluding a block of business
acquired from Investors Equity as of or for the three months ended March 31,
1996 and 1997.
<TABLE>
<CAPTION>
AS OF OR FOR THE
THREE MONTHS
ENDED MARCH 31,
-----------------
1996 1997
------- -------
(IN MILLIONS,
UNAUDITED)
<S> <C> <C>
INDIVIDUAL LIFE
Quarterly sales by product
Variable life....................................................... $ 10 $ 15
Universal life/Interest-sensitive WHOLE LIFE........................ 11 8
TERM LIFE........................................................... 1 1
Other............................................................... -- --
------- -------
Total.......................................................... $ 22 $ 24
======= =======
Total account value.................................................... $ 2,656 $ 3,330
Total IN FORCE......................................................... $48,567 $52,277
Revenues excluding block of business acquisition from Investors
Equity.............................................................. $ 113 $ 118
</TABLE>
35
<PAGE> 211
The following tables detail the Employee Benefits segment's group insurance
premiums, group insurance reserves and COLI account value as of or for the three
months ended March 31, 1996 and 1997.
<TABLE>
<CAPTION>
AS OF OR FOR THE
THREE MONTHS
ENDED MARCH 31,
-----------------
1996 1997
------- -------
(IN MILLIONS,
UNAUDITED)
<S> <C> <C>
EMPLOYEE BENEFITS
Group insurance premiums
Group disability.................................................... $ 106 $ 152
Group life.......................................................... 101 118
Other............................................................... 83 92
------- -------
Total.......................................................... $ 290 $ 362
======= =======
Group insurance reserves
Group disability.................................................... $ 1,048 $ 1,296
Group life.......................................................... 328 409
Other............................................................... 308 286
------- -------
Total.......................................................... $ 1,684 $ 1,991
======= =======
COLI account value
General account..................................................... $ 3,923 $ 3,853
Separate account.................................................... 3,537 4,352
------- -------
Total.......................................................... $ 7,460 $ 8,205
======= =======
</TABLE>
The following tables detail the Guaranteed Investment Contracts segment's
sales and account value as of or for the three months ended March 31, 1996 and
1997.
<TABLE>
<CAPTION>
AS OF OR FOR THE
THREE MONTHS
ENDED MARCH 31,
-----------------
1996 1997
------- -------
(IN MILLIONS,
UNAUDITED)
<S> <C> <C>
GUARANTEED INVESTMENT CONTRACTS
Guaranteed investment contract sales
General account..................................................... $ 28 $ 13
Separate account.................................................... 42 28
------- -------
Total.......................................................... $ 70 $ 41
======= =======
Account value
General account..................................................... $ 5,318 $ 3,758
Guaranteed separate account......................................... 415 428
------- -------
Total.......................................................... $ 5,733 $ 4,186
======= =======
</TABLE>
36
<PAGE> 212
COMPARISON OF ANNUITY SEGMENT RESULTS
The following table details the Annuity segment's net income for the three
months ended March 31, 1996 and 1997.
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS
ENDED MARCH 31,
---------------
1996 1997
---- ----
(IN MILLIONS,
UNAUDITED)
<S> <C> <C>
Revenues:
Premiums and other considerations...................................... $126 $164
Net investment income.................................................. 109 118
Net realized capital gains (losses).................................... -- --
---- ----
Total revenues...................................................... 235 282
---- ----
Benefits, claims and expenses:
Benefits, claims and claim adjustment expenses......................... 105 118
Amortization of deferred policy acquisition costs...................... 44 55
Dividends to policyholders............................................. -- --
Other insurance expense................................................ 35 42
---- ----
Total benefits, claims and expenses................................. 184 215
---- ----
Income before income tax expense......................................... 51 67
Income tax expense....................................................... 18 24
---- ----
Net income.......................................................... $ 33 $ 43
==== ====
</TABLE>
Revenues increased $47 million, or 20%, to $282 million in the first
quarter of 1997 from $235 million in the first quarter of 1996 primarily as a
result of an increase in individual annuity account value, particularly
individual variable annuity account value, which generated significantly higher
fee income. As of March 31, 1997, individual annuity account value increased by
$11.0 billion, or 34%, to $43.6 billion from $32.6 billion as of March 31, 1996.
The growth in account value was the result of strong sales over the past twelve
months, coupled with growth in the Company's separate accounts due to the rise
in the stock market in the fourth quarter of 1996. Annuity sales were $2.57
billion in the first quarter of 1997, as compared with $2.24 billion for the
first quarter of 1996, with variable annuities comprising $2.45 billion, or 96%,
of such amount. Similar factors resulted in an increase in benefits, claims and
expenses of $31 million, or 17%, to $215 million in the first quarter of 1997
from $184 million in the first quarter of 1996.
Net income increased $10 million, or 30%, to $43 million in the first
quarter of 1997 from $33 million in the first quarter of 1996 as the total
average account value for this segment increased $12.4 billion, or 32%, to $51.7
billion in the first quarter of 1997 from $39.3 billion in the first quarter of
1996.
37
<PAGE> 213
COMPARISON OF INDIVIDUAL LIFE INSURANCE SEGMENT RESULTS
The following table details the Individual Life Insurance segment's net
income for the three months ended March 31, 1996 and 1997.
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS
ENDED MARCH 31,
---------------
1996 1997
---- ----
(IN MILLIONS,
UNAUDITED)
<S> <C> <C>
Revenues:
Premiums and other considerations........................................ $ 88 $ 78
Net investment income.................................................... 34 40
Net realized capital gains (losses)...................................... -- --
---- ----
Total revenues........................................................ 122 118
---- ----
Benefits, claims and expenses:
Benefits, claims and claim adjustment expenses........................... 70 55
Amortization of deferred policy acquisition costs........................ 21 26
Dividends to policyholders............................................... -- --
Other insurance expense.................................................. 18 20
---- ----
Total benefits, claims and expenses................................... 109 101
---- ----
Income before income tax expense........................................... 13 17
Income tax expense......................................................... 4 6
---- ----
Net income............................................................ $ 9 $ 11
==== ====
</TABLE>
Revenues decreased $4 million, or 3%, to $118 million in the first quarter
of 1997 from $122 million in the first quarter of 1996 primarily as a result of
an assumption of a block of business from Investors Equity, which increased
revenues by $9 million in the first quarter of 1996, and a shift in the
Company's mix of business towards variable universal life insurance, which
generates less revenues than traditional life insurance. Similar factors
resulted in benefits, claims and expenses decreasing by $8 million, or 7%, to
$101 million in the first quarter of 1997 from $109 million in the first quarter
of 1996.
Net income increased $2 million, or 22%, to $11 million in the first
quarter of 1997 from $9 million in the first quarter of 1996 primarily due to
strong sales over the past twelve months, which increased the amount of
individual life insurance in force, and favorable mortality experience.
Individual life insurance sales were $24.4 million in the first quarter of 1997,
as compared with $22.5 million in the first quarter of 1996.
38
<PAGE> 214
COMPARISON OF EMPLOYEE BENEFITS SEGMENT RESULTS
The following table details the Employee Benefits segment's net income for
the three months ended March 31, 1996 and 1997.
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS
ENDED MARCH 31,
---------------
1996 1997
---- ----
(IN MILLIONS,
UNAUDITED)
<S> <C> <C>
Revenues:
Premiums and other considerations........................................ $727 $435
Net investment income.................................................... 137 143
Net realized capital gains (losses)...................................... -- --
---- ----
Total revenues........................................................ 864 578
---- ----
Benefits, claims and expenses:
Benefits, claims and claim adjustment expenses........................... 376 416
Amortization of deferred policy acquisition costs........................ 1 2
Dividends to policyholders............................................... 286 54
Other insurance expense.................................................. 176 76
---- ----
Total benefits, claims and expenses................................... 839 548
---- ----
Income before income tax expense........................................... 25 30
Income tax expense......................................................... 9 12
---- ----
Net income............................................................ $ 16 $ 18
==== ====
</TABLE>
Revenues decreased $286 million, or 33%, to $578 million in the first
quarter of 1997 from $864 million in the first quarter of 1996 due to a decrease
in revenues from COLI of $365 million. The decrease in COLI revenues resulted
from significantly less leveraged COLI premiums as a result of the HIPA Act of
1996. Such decrease was partially offset by a $79 million increase, or 25%, in
group insurance revenues. Similar factors resulted in benefits, claims and
expenses decreasing by $291 million, or 35%, to $548 million in the first
quarter of 1997 from $839 million in the first quarter of 1996.
Net income increased $2 million, or 13%, to $18 million in the first
quarter of 1997 from $16 million in the first quarter of 1996 primarily due to
growth in group insurance premiums and favorable morbidity experience. Premiums
from group insurance were $362 million in the first quarter of 1997, as compared
with $290 million in the first quarter of 1996.
39
<PAGE> 215
COMPARISON OF GUARANTEED INVESTMENT CONTRACTS SEGMENT RESULTS
The following table details the Guaranteed Investment Contracts segment's
net loss for the three months ended March 31, 1996 and 1997.
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
MARCH 31,
----------------
1996 1997
----- ----
(IN MILLIONS,
UNAUDITED)
<S> <C> <C>
Revenues:
Premiums and other considerations........................................ $ 1 $ 1
Net investment income.................................................... 72 71
Net realized capital gains (losses)...................................... -- --
----- ----
Total revenues........................................................ 73 72
----- ----
Benefits, claims and expenses:
Benefits, claims and claim adjustment expenses........................... 93 70
Amortization of deferred policy acquisition costs........................ 1 --
Dividends to policyholders............................................... -- --
Other insurance expense.................................................. 2 2
----- ----
Total benefits, claims and expenses................................... 96 72
----- ----
Loss before income tax expense............................................. (23) --
Income tax benefit......................................................... (8) --
----- ----
Net loss.............................................................. $ (15) $--
====== ====
</TABLE>
This segment had no net income in the first quarter of 1997, as compared
with a $15 million loss in the first quarter of 1996, consistent with
management's expectations that net income (loss) from Closed Book GRC in the
years subsequent to 1996 will be immaterial based on the Company's current
projections for the performance of the assets and liabilities associated with
Closed Book GRC.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
SEGMENT DISCUSSION
The following table details the Company's net income by segment for the
five-year period ended December 31, 1996.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- -----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Annuity............................................... $ 35 $ 54 $ 84 $113 $ 145
Individual Life Insurance............................. 17 21 27 37 44
Employee Benefits..................................... 36 48 53 67 78
Guaranteed Investment Contracts....................... 21 30 1 (67) (225)
Corporate Operation(1)................................ (16) (28) (14) 3 (18)
Unallocated net realized capital gains (losses)(2).... 8 5 -- (3) --
Cumulative effect of changes in accounting
principles(3)....................................... (47) -- -- -- --
---- ---- ---- ---- -----
Net Income....................................... $ 54 $130 $151 $150 $ 24
===== ===== ===== ===== ======
</TABLE>
- ---------------
(1) The Company maintains a Corporate Operation through which it reports items
that are not directly allocable to any of its business segments. Included in
the Corporate Operation are: (i) unallocated income and expense, (ii) the
Company's group medical business, which it exited in 1993, and (iii) certain
other items not directly allocable to any business segment such as ITT
Spin-Off related items. See "-- Results of Operations for the Years Ended
December 31, 1994, 1995 and 1996 -- Corporate Operation".
(2) Represents net realized capital gains (losses) that are not allocable to any
of the Company's business segments.
(3) Reflects the cumulative effect of adoption of SFAS No. 106, Employers'
Accounting for Postretirement Benefits Other Than Pensions, and SFAS No.
112, Employers' Accounting for Postemployment Benefits.
40
<PAGE> 216
The Annuity segment focuses on the savings and retirement needs of the
growing number of individuals who are preparing for retirement or have already
retired. The variety of products sold within this segment reflects the diverse
nature of the market. These products include individual variable annuities,
fixed MVA annuities, deferred compensation and retirement plan services for
municipal governments and corporations, STRUCTURED SETTLEMENT CONTRACTS and
other special purpose annuity contracts, investment management contracts and
mutual funds. The Annuity segment distributes its products primarily through
broker-dealers and financial institutions for individual sales, and through
employees of the Company for institutional sales. Account value in this segment
has grown from $12 billion in 1992 to $51 billion in 1996, which, along with
favorable expense trends, has resulted in an increase in this segment's net
income from $35 million in 1992 to $145 million in 1996, a compound annual
growth rate of 43%.
The Individual Life Insurance segment focuses on individuals' needs
regarding the transfer of wealth between generations, as well as the protection
of individuals and their families against lost earnings resulting from death.
The chief products sold in this market include both variable and fixed universal
life insurance-type contracts (including interest-sensitive whole life
insurance), as well as single premium variable life and term life insurance
products. The Individual Life Insurance segment distributes its products through
insurance agents, broker-dealers and financial institutions, typically assisted
by a dedicated group of Company employees. Life insurance in force has increased
from $29 billion in 1992 to $52 billion in 1996, of which $4.4 billion was
derived from acquisitions. The Company's growth in insurance in force, together
with favorable mortality results and a declining expense ratio, has resulted in
an increase in this segment's net income from $17 million in 1992 to $44 million
in 1996, a compound annual growth rate of 27%.
The Employee Benefits segment focuses on the needs of employers and
associations to purchase group insurance products. A significant amount of the
revenue and net income in this segment is derived from the sale of group life
insurance and group long-term and short-term disability products. This segment
also contains specialty businesses such as COLI, life/health reinsurance and
several international operations of the Company. The Employee Benefits segment
distributes its products through insurance agents and brokers, usually assisted
by a dedicated group of Company employees. Group insurance premiums have
increased from $841 million in 1992 to $1.329 billion in 1996, which, along with
favorable underwriting results, disciplined claims and expense management and
sales of COLI, have resulted in an increase in this segment's net income from
$36 million in 1992 to $78 million in 1996, a compound annual growth rate of
21%.
The Guaranteed Investment Contracts segment consists of GRC that are
supported by assets held in either the Company's general account or a guaranteed
separate account and includes Closed Book GRC. Historically, a significant
majority of these contracts were sold as general account GRC with fixed rates
and fixed maturities. The Company decided in 1995, after a thorough review of
its GRC business, that it would significantly de-emphasize general account GRC,
choosing to focus its distribution efforts on other products sold through other
segments. As a result, the Company has substantially withdrawn from the general
account GRC business. As discussed in "-- Results of Operations for the Years
Ended December 31, 1994, 1995 and 1996 -- Comparison of Guaranteed Investment
Contracts Segment Results", this segment has reported significant losses in
recent years. Management expects no material income or loss from the Guaranteed
Investment Contracts segment in the future.
The Company also maintains a Corporate Operation through which it reports
items that are not directly allocable to any of its business segments. Included
in the Corporate Operation are: (i) unallocated income and expense, (ii) the
Company's group medical business, which it exited in 1993, and (iii) certain
other items not directly allocable to any business segment such as ITT Spin-Off
related items. For a further discussion of the Corporate Operation, see
"-- Results of Operations for the Years Ended December 31, 1994, 1995 and
1996 -- Corporate Operation".
41
<PAGE> 217
COMPARISON OF CONSOLIDATED RESULTS
The following table details the Company's consolidated net income for the
three-year period ended December 31, 1996.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER
31,
----------------------------
1994 1995 1996
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Revenues:
Premiums and other considerations............................ $2,139 $2,643 $3,069
Net investment income........................................ 1,403 1,451 1,534
Net realized capital gains (losses).......................... 1 (4) (219)
------ ------ ------
Total revenues............................................ 3,543 4,090 4,384
------ ------ ------
Benefits, claims and expenses:
Benefits, claims and claim adjustment expenses............... 2,254 2,395 2,727
Amortization of deferred policy acquisitions costs........... 149 205 241
Dividends to policyholders(1)................................ 419 675 635
Interest expense(2).......................................... 29 35 55
Other insurance expense...................................... 469 554 695
------ ------ ------
Total benefits, claims and expenses....................... 3,320 3,864 4,353
------ ------ ------
Income before income tax expense............................... 223 226 31
Income tax expense............................................. 72 76 7
------ ------ ------
Net income................................................ $ 151 $ 150 $ 24
====== ====== ======
</TABLE>
- ---------------
(1) Growth in dividends to policyholders is a result of the November 1992
acquisition from Mutual Benefit of a block of participating leveraged COLI
business and the subsequent growth in the leveraged COLI business from 1993
to 1995. Policyholder dividends are expected to decline in the future since
sales of new leveraged COLI policies have been terminated as a result of the
HIPA Act of 1996.
(2) For financial reporting purposes, the Company has treated certain amounts
previously allocated by The Hartford to the Company's life insurance
subsidiaries as Allocated Advances from parent. Such Allocated Advances were
not treated as liabilities or indebtedness for tax and statutory accounting
purposes. Cash received in respect of Allocated Advances from parent was
used to support the growth of the life insurance subsidiaries and was
treated as surplus for statutory accounting purposes. Interest expense prior
to December 31, 1996 represents the expense internally allocated to the
Company with respect to the Allocated Advances based on The Hartford's
actual (third party) external borrowing costs. Such interest expense paid
was treated as dividends for tax and statutory accounting purposes.
PREMIUMS AND OTHER CONSIDERATIONS. Premiums and other considerations
(including maintenance and expenses fees, COST OF INSURANCE charges and premiums
on traditional life, group life and group disability contracts) increased $426
million, or 16%, to $3.069 billion in 1996 from $2.643 billion in 1995. This
increase was principally the result of (i) a $216 million increase in the
Annuity segment due to a substantial increase in aggregate fees earned on a
larger block of separate account assets stemming from strong annuity sales and
market appreciation and (ii) a $167 million increase in the Employee Benefits
segment driven by an increase in group insurance premiums of $226 million in
1996 from strong group disability sales and renewals, partially offset by a
decline in COLI premiums from 1995 levels primarily due to the enactment of the
HIPA Act of 1996.
Premiums and other considerations increased $504 million, or 24%, to $2.643
billion in 1995 from $2.139 billion in 1994. This increase primarily reflects a
$505 million increase in the Employee Benefits segment, of which $376 million
was due to growth in the COLI business and the remainder of which was due to
increased group insurance premiums from strong group disability sales and
renewals.
NET INVESTMENT INCOME. Net investment income increased $83 million, or 6%,
to $1.534 billion in 1996 from $1.451 billion in 1995 due to growth in general
account assets, other than Closed Book GRC. Net investment income in Closed Book
GRC declined by $130 million as the average assets supporting Closed Book GRC
declined to $4.4 billion in 1996 from $6.2 billion in 1995. Excluding
42
<PAGE> 218
Closed Book GRC, net investment income increased $213 million, or 19%, to $1.327
billion in 1996 from $1.114 billion in 1995.
Net investment income increased $48 million, or 3%, to $1.451 billion in
1995 from $1.403 billion in 1994 also due to growth in general account assets,
other than Closed Book GRC. Net investment income in Closed Book GRC declined by
$144 million as the average assets supporting Closed Book GRC declined to $6.2
billion in 1995 from $6.7 billion in 1994. Excluding Closed Book GRC, net
investment income increased $192 million, or 21%, to $1.114 billion in 1995 from
$922 million in 1994.
NET REALIZED CAPITAL GAINS (LOSSES). In 1996, the Company's net realized
capital losses were $219 million due to Closed Book GRC. For additional
information on the losses related to Closed Book GRC, see "-- Comparison of
Guaranteed Investment Contracts Segment Results -- Closed Book GRC". The
Company's net realized capital losses in 1995 and net realized capital gains in
1994 were immaterial.
BENEFITS, CLAIMS AND CLAIM ADJUSTMENT EXPENSES. Benefits, claims and claim
adjustment expenses increased $332 million, or 14%, to $2.727 billion in 1996
from $2.395 billion in 1995. This increase was caused primarily by (i) a $311
million increase in the Employee Benefits segment chiefly due to increased
blocks of group disability and COLI business and (ii) a $99 million increase in
the Annuity segment principally due to increased interest credited on general
account liabilities, including the general account portion of the individual
variable annuity products, partially offset by a decline of $124 million in
Closed Book GRC as the average assets supporting Closed Book GRC declined to
$4.4 billion in 1996 from $6.2 billion in 1995.
Benefits, claims and claim adjustment expenses increased $141 million, or
6%, to $2.395 billion in 1995 from $2.254 billion in 1994. This increase
principally reflects (i) a $173 million increase in the Employee Benefits
segment primarily due to an increase in the COLI block of business to $7.1
billion in 1995 from $3.2 billion in 1994 and (ii) a $27 million increase in the
Annuity segment due to increased interest credited on the growth in general
account liabilities, including the general account portion of the individual
variable annuity products, partially offset by (iii) the one-time effect of the
reserves assumed in connection with the Pacific Standard acquisition in 1994,
thereby creating a one-time increase in such expenses in 1994, and (iv) a
decline of $50 million in Closed Book GRC as the average assets supporting
Closed Book GRC declined to $6.2 billion in 1995 from $6.7 billion in 1994.
AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS. In connection with the
sale of individual life and annuity contracts, the Company defers certain policy
acquisition costs ("DPAC"), records such costs as assets and amortizes such
costs against earnings over the estimated life of the contracts. The
amortization of DPAC increased $36 million, or 18%, to $241 million in 1996 from
$205 million in 1995 primarily due to increased sales and total account value in
the Annuity segment. In 1996, approximately 70% of the Company's DPAC related to
its individual annuity business. The amortization of DPAC increased $56 million,
or 38%, to $205 million in 1995 from $149 million in 1994 primarily due to an
increase in assets in the Annuity segment and an increase in the individual life
insurance in force.
DIVIDENDS TO POLICYHOLDERS. The Company's dividends to policyholders arise
out of the Company's leveraged COLI business, a substantial portion of which was
written on a participating basis. Dividends to policyholders decreased $40
million, or 6%, to $635 million in 1996 from $675 million primarily due to the
elimination of sales of leveraged COLI as a result of the enactment of the HIPA
Act of 1996. Dividends to policyholders increased $256 million, or 61%, to $675
million in 1995 from $419 million in 1994 primarily due to the substantial
growth of the COLI block of business from 1994.
INTEREST EXPENSE. Interest expense increased $20 million, or 57%, to $55
million in 1996 from $35 million in 1995 primarily due to an increase in
Allocated Advances from parent of $207 million at December 31, 1995 and $75
million at June 30, 1996. Interest expense increased $6 million, or 21%,
43
<PAGE> 219
to $35 million in 1995 from $29 million in 1994 mainly due to an increase in
Allocated Advances from parent of $100 million in 1994. The increase in
Allocated Advances from parent in June 1996 was in respect of a capital
contribution by The Hartford to support the Company's business growth. Allocated
Advances from parent increased in 1995 as a result of the increase of
indebtedness of The Hartford associated with transactions in connection with the
ITT Spin-Off, a portion of which indebtedness was allocated internally by The
Hartford to the Company as Allocated Advances.
OTHER INSURANCE EXPENSE. Other insurance expense, including premium taxes,
commissions and other general expenses, net of deferral, increased $141 million,
or 25%, to $695 million in 1996 from $554 million in 1995, primarily reflecting
increased blocks of group disability and COLI and strong individual annuity and
individual life insurance sales.
Other insurance expense increased $85 million, or 18%, to $554 million in
1995 from $469 million in 1994 primarily reflecting factors largely similar to
those described in the preceding paragraph as well as additional growth in the
Individual Life Insurance segment due to the Pacific Standard acquisition in
1994.
INCOME TAX EXPENSE. Income tax expense decreased $69 million in 1996 to $7
million in 1996 from $76 million in 1995 as a result of the charges associated
with Closed Book GRC. See "-- Comparison of Guaranteed Investment Contracts
Segment Results -- Closed Book GRC". Income tax expense increased $4 million to
$76 million in 1995 from $72 million in 1994 due to higher pre-tax income in the
Annuity, Individual Life Insurance and Employee Benefits segments, partially
offset by a decline in Closed Book GRC within the Guaranteed Investment
Contracts segment. The Company's effective tax rate is below the statutory tax
rate of 35% primarily due to the availability of the corporate dividends
received deduction.
NET INCOME. Net income decreased $126 million to $24 million in 1996 from
$150 million in 1995, chiefly reflecting a $158 million decrease owing to the
Guaranteed Investment Contracts segment, partially offset by growth in the
Company's three other business segments. Net income was essentially unchanged in
1995 at $150 million from $151 million in 1994 primarily due to a $68 million
decrease in the Guaranteed Investment Contracts segment, essentially offset by
growth in the Company's three other business segments.
44
<PAGE> 220
COMPARISON OF ANNUITY SEGMENT RESULTS
The following table details the Annuity segment's net income for the
three-year period ended December 31, 1996.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
------------------------
1994 1995 1996
---- ---- ------
(IN MILLIONS)
<S> <C> <C> <C>
Revenues:
Premiums and other considerations................................ $264 $323 $ 539
Net investment income............................................ 330 397 434
Net realized capital gains (losses).............................. -- -- --
----- ----- -----
Total revenues................................................ 594 720 973
----- ----- -----
Benefits, claims and expenses:
Benefits, claims and claim adjustment expenses................... 290 317 416
Amortization of deferred policy acquisition costs................ 90 117 174
Dividends to policyholders....................................... -- -- --
Other insurance expense.......................................... 85 118 159
----- ----- -----
Total benefits, claims and expenses........................... 465 552 749
----- ----- -----
Income before income tax expense................................... 129 168 224
Income tax expense................................................. 45 55 79
----- ----- -----
Net income.................................................... $ 84 $113 $ 145
===== ===== =====
</TABLE>
Revenues increased $253 million, or 35%, to $973 million in 1996 from $720
million in 1995. This increase was principally the result of a $216 million
increase in premiums and other considerations, reflecting a substantial increase
in aggregate fees earned due to the Company's growing block of separate account
assets. The average separate account assets of this segment increased to $37.2
billion in 1996 from $26.1 billion in 1995 primarily due to sales of individual
annuities of approximately $10 billion in 1996 and $7 billion in 1995, as well
as strong market appreciation in both 1996 and 1995. In addition, the average
general account invested assets of this segment increased to $7.2 billion in
1996 from $6.2 billion in 1995 largely as a result of growth in the general
account portion of the individual variable annuity products of the Company. The
growth in this segment in 1996 also resulted in an increase in total benefits,
claims and expenses of $197 million, or 36%, to $749 million in 1996 from $552
million in 1995. The 37% growth in average account value in 1996, coupled with
an overall reduction in individual annuity expenses as a percentage of total
individual annuity account value to 28 basis points in 1996 from 31 basis points
in 1995, has contributed to the growth in net income of $32 million, or 28%, to
$145 million in 1996 from $113 million in 1995. Similar factors generated an
increase in 1995, as compared with 1994, in revenues of $126 million, or 21%,
average general account invested assets of $1.1 billion, or 21%, average
separate account assets of $8.0 billion, or 44%, total benefits, claims and
expenses of $87 million, or 19%, net income of $29 million, or 35%, and a
reduction in individual annuity expenses as a percentage of total individual
annuity account value to 31 basis points in 1995 from 35 basis points in 1994.
45
<PAGE> 221
COMPARISON OF INDIVIDUAL LIFE INSURANCE SEGMENT RESULTS
The following table details the Individual Life Insurance segment's net
income for the three-year period ended December 31, 1996.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
---------------------------
1994 1995 1996
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Revenues:
Premiums and other considerations................................ $ 277 $ 266 $ 313
Net investment income............................................ 113 142 159
Net realized capital gains (losses).............................. 1 -- --
---- ---- ----
Total revenues................................................ 391 408 472
---- ---- ----
Benefits, claims and expenses:
Benefits, claims and claim adjustment expenses................... 252 217 266
Amortization of deferred policy acquisition costs................ 52 72 63
Dividends to policyholders....................................... -- -- 1
Other insurance expense.......................................... 47 61 74
---- ---- ----
Total benefits, claims and expenses........................... 351 350 404
---- ---- ----
Income before income tax expense................................... 40 58 68
Income tax expense................................................. 13 21 24
---- ---- ----
Net income.................................................... $ 27 $ 37 $ 44
==== ==== ====
</TABLE>
Revenues increased $64 million, or 16%, to $472 million in 1996 from $408
million in 1995. This increase was chiefly due to a $47 million increase in
premiums and other considerations, reflecting the cost of insurance charges and
variable life insurance fees applied to a larger block of business as insurance
in force increased to $52 billion in 1996 from $48 billion in 1995. Total
benefits, claims and expenses increased $54 million, or 15%, to $404 million in
1996 from $350 million in 1995. This increase also reflects the increase in the
block of individual life insurance business. Additionally, in recent years,
mortality results have been favorable. The combination of growth of the
Company's business and favorable mortality experience resulted in an increase in
net income in this segment of $7 million, or 19%, to $44 million in 1996 from
$37 million in 1995.
In addition, two other events, along with those mentioned above, influenced
the results of 1995 as compared with 1994. In 1994, the Company assumed $218
million of individual life insurance reserves from Pacific Standard. This
affected both revenues and total benefits, claims and expenses for 1994.
Expenses were also positively influenced by the consolidation of the
professional functions previously performed in Minneapolis, Minnesota into the
Company's Simsbury, Connecticut operations. The combination of this acquisition,
internal Company growth, expense management and favorable mortality experience
caused net income in this segment to increase $10 million, or 37%, to $37
million in 1995 from $27 million in 1994.
46
<PAGE> 222
COMPARISON OF EMPLOYEE BENEFITS SEGMENT RESULTS
The following table details the Employee Benefits segment's net income for
the three-year period ended December 31, 1996.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
----------------------------
1994 1995 1996
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Revenues:
Premiums and other considerations............................ $1,543 $2,048 $2,215
Net investment income........................................ 443 467 618
Net realized capital gains (losses).......................... -- -- --
------ ------ ------
Total revenues............................................ 1,986 2,515 2,833
------ ------ ------
Benefits, claims and expenses:
Benefits, claims and claim adjustment expenses............... 1,200 1,373 1,684
Amortization of deferred policy acquisition costs............ 3 4 4
Dividends to policyholders(1)................................ 419 675 634
Other insurance expense...................................... 283 362 396
------ ------ ------
Total benefits, claims and expenses....................... 1,905 2,414 2,718
------ ------ ------
Income before income tax expense............................... 81 101 115
Income tax expense............................................. 28 34 37
------ ------ ------
Net income................................................ $ 53 $ 67 $ 78
====== ====== ======
</TABLE>
- ---------------
(1) Growth in dividends to policyholders is a result of the November 1992
acquisition from Mutual Benefit of a block of participating leveraged COLI
business and the subsequent growth in the leveraged COLI business from 1993
to 1995. Policyholder dividends are expected to decline in the future since
sales of new leveraged COLI policies have been terminated as a result of the
HIPA Act of 1996.
Revenues increased $318 million, or 13%, to $2.833 billion in 1996 from
$2.515 billion in 1995. This increase was largely the result of (i) a $167
million increase in premiums and other considerations, reflecting a $226 million
increase in group insurance premiums from strong group disability sales and
renewals, partially offset by a decline in leveraged COLI premiums primarily due
to the enactment of the HIPA Act of 1996, and (ii) a $151 million increase in
net investment income primarily due to an increase in the Company's COLI account
value. Total benefits, claims and expenses increased $304 million, or 13%, to
$2.718 billion in 1996 from $2.414 billion in 1995. This increase generally
reflected an increased block of group disability business and other group
insurance and an increase in the Company's COLI block of business, partially
offset by a $41 million decrease in dividends to policyholders primarily due to
the elimination of sales of leveraged COLI as a result of the enactment of the
HIPA Act of 1996. This legislation phases out the deductibility of interest on
policy loans under COLI by 1998, thus eliminating all future sales of leveraged
COLI. Leveraged COLI will continue to contribute to the profitability of the
Company (although such contribution will be reduced in the future due to the
effects of this legislation). As a result, net income contributed by COLI may be
lower in the future (particularly during 1999 and later years). In addition,
expenses in the group insurance business, as a percentage of premiums, have
declined over the past several years. This trend, along with favorable mortality
and morbidity experience, as well as the factors mentioned above, resulted in an
increase in net income in this segment of $11 million, or 16%, to $78 million in
1996 from $67 million in 1995.
The Company had $306 million and $867 million of leveraged COLI sales in
1994 and 1995, respectively, which significantly affected the results of 1995
compared with 1994. Revenues increased $529 million, or 27%, in 1995 primarily
due to a $353 million increase related to COLI premiums. Total benefits, claims
and expenses increased $509 million, or 27%, in 1995 of which $344 million
related to COLI. The additional growth in COLI, coupled with factors similar to
those discussed above for 1996 compared with 1995, caused net income in this
segment to increase $14 million, or 26%, to $67 million in 1995 from $53 million
in 1994.
47
<PAGE> 223
In general, the growth in COLI account value has been a significant
component of earnings for the Employee Benefits segment over the past three
years, representing $26 million, or 33%, in 1996, $22 million, or 33%, in 1995
and $16 million, or 30%, in 1994 of this segment's total earnings.
COMPARISON OF GUARANTEED INVESTMENT CONTRACTS SEGMENT RESULTS
GENERAL. The following table details the Guaranteed Investment Contracts
segment's net income (loss) for the three-year period ended December 31, 1996.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
------------------------
1994 1995 1996
---- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Revenues:
Premiums and other considerations............................... $ -- $ 1 $ 2
Net investment income........................................... 481 377 251
Net realized capital losses..................................... -- -- (219)
----- ------ ------
Total revenues............................................... 481 378 34
----- ------ ------
Benefits, claims and expenses:
Benefits, claims and claim adjustment expenses.................. 467 453 332
Amortization of deferred policy acquisition costs............... 4 12 1
Dividends to policyholders...................................... -- -- --
Other insurance expense......................................... 8 16 47
----- ------ ------
Total benefits, claims, and expenses......................... 479 481 380
----- ------ ------
Income (loss) before income tax expense (benefit)................. 2 (103) (346)
Income tax expense (benefit)...................................... 1 (36) (121)
----- ------ ------
Net income (loss)............................................ $ 1 $ (67) $(225)
====== ====== ======
</TABLE>
The results of this segment have been materially and adversely affected by
lower investment rates and earnings from the investment portfolio supporting
Closed Book GRC due to prepayments on MBSs and CMOs substantially in excess of
assumed and historical levels. Closed Book GRC also was negatively affected by
an interest rate rise in 1994 which caused a mismatch in the duration of the
related assets and liabilities.
In 1995, the Company substantially withdrew from the general account GRC
business and now writes a limited amount of such business primarily as an
accommodation to customers. In 1996, the Company initiated certain asset sales
and hedging transactions to insulate itself from any ongoing income or loss
associated with the Closed Book GRC investment portfolio. As a result of the
foregoing actions, management expects that the net income (loss) from this
segment will be immaterial in the years subsequent to 1996.
Revenues decreased $344 million to $34 million in 1996 from $378 million in
1995 due to $219 million in net realized capital losses and a decline in net
investment income of $126 million. The net realized capital losses were the
result of asset sales and an other than temporary impairment charge in respect
of certain assets within the Closed Book GRC investment portfolio which
contributed $84 million and $135 million, respectively, of net realized capital
losses. Net investment income declined as the assets of this segment declined to
$4.5 billion in 1996 from $6.1 billion in 1995. This decline in assets also was
the principal cause of the decrease in benefits, claims and expenses of $101
million to $380 million in 1996 from $481 million in 1995. In addition,
amortization of DPAC was lower in 1996 because the unamortized DPAC asset for
all policies sold prior to January 1995 was fully amortized in 1995.
Revenues decreased $103 million to $378 million in 1995 from $481 million
in 1994 primarily due to lower net investment income on the assets supporting
this segment as result of the MBS and CMO prepayments discussed above. Benefits,
claims and expenses of $481 million in 1995 were
48
<PAGE> 224
essentially flat as compared with 1994 as a decline in assets to $6.1 billion in
1995 from $7.3 billion in 1994 was offset by higher credited rates on policies
sold in 1994 due to the rise in the general level of interest rates, higher
expenses and the DPAC amortization discussed above.
CLOSED BOOK GRC. Closed Book GRC contains a segregated portfolio of assets
monitored and managed by the Company on a liquidating basis; however, such
designation as a "segregated" portfolio is only for internal management purposes
and has no legal or regulatory effect. As of December 31, 1996, Closed Book GRC
had general account assets of $3.6 billion and general account liabilities of
$3.6 billion. Closed Book GRC assets consisted of $2.7 billion of fixed maturity
securities (including $21 million of MBSs and $1.03 billion of CMOs), a $471
million market-neutral portfolio based on London interbank offered quotations
for U.S. dollar deposits ("LIBOR") and $432 million of cash or short-term
instruments. Of the $3.6 billion in Closed Book GRC liabilities remaining as of
December 31, 1996, the scheduled maturity is as follows: $1.2 billion, or 33%,
in 1997, $1.1 billion, or 31%, in 1998, $0.8 billion, or 22%, in 1999 and $0.5
billion, or 14%, thereafter.
Although the Closed Book GRC asset portfolio as a whole is duration matched
with its liabilities, certain investments continue to have a longer maturity
than their corresponding liabilities and will need to be liquidated prior to
maturity in order to meet the specific liability commitments. To protect the
existing value of these investments, the Company entered into various interest
rate swap, cap and floor transactions in late September 1996 with the objective
of offsetting the market price sensitivity of hedged assets to changes in
interest rates. The interest rate swap transactions primarily require the
Company to pay fixed rates and receive variable rates. The swaps mature between
1997 and 2003. The interest rate caps mature between 1997 and 2000 and have a
weighted average strike price of 7.49% (ranging from 4.5% to 8.8%). The interest
rate floors mature between 1997 and 2001 and have a weighted average strike
price of 5.62% (ranging from 3.7% to 6.75%). The caps and floors were entered
into to support certain portfolio assets that are subject to prepayment or
payment extension risk. As a result of the hedges, the Company substantially
eliminated further fluctuation in the fair value of these investments due to
interest rate changes, thereby substantially reducing the likelihood of any
further loss on the assets due to such changes.
During 1996, Closed Book GRC incurred a $51 million after-tax loss from
operations as a result of negative interest spread, as compared with an
after-tax loss from operations of $68 million in 1995. With the initiation of
the hedge transactions discussed above, which eliminated the possibility that
the fair value of Closed Book GRC investments would recover to their current
amortized cost prior to sale, an other than temporary impairment loss of $82
million, after tax, was determined to have occurred and was recorded in
September 1996. An additional other than temporary impairment loss of $6
million, after tax, occurred in the fourth quarter of 1996 bringing the total
1996 impairment to $88 million. Also, during the third quarter of 1996, Closed
Book GRC had asset sales resulting in proceeds of approximately $500 million and
a realized loss of $55 million, after tax. The asset sales were undertaken as a
result of liquidity needs and favorable market conditions for certain
securities. Other charges of $32 million, after tax, which primarily reflect an
interest accrual on potential tax assessments, also were recorded in the third
quarter of 1996. The interest accrual reflects the Company's assessment of the
probable outcome of a United States Internal Revenue Service (the "Internal
Revenue Service") examination of the tax treatment of certain hedges employed in
respect of the products included in Closed Book GRC.
In response to the losses associated with Closed Book GRC, the Company
instituted an improved risk management process. The Company, among other
actions, established a separate risk management unit and increased the frequency
with which its material portfolios are reviewed. See "Business -- Investment
Operations -- General". Management expects that the net income (loss) from
Closed Book GRC in the years subsequent to 1996 will be immaterial based on the
Company's current projections for the performance of the assets and liabilities
associated with Closed Book GRC, the Company's expectations regarding future
sales of assets from the Closed Book GRC investment portfolio from time to time
in order to make the necessary payments on maturing Closed Book GRC liabilities
and the stabilizing effect of the hedge transactions. To date, such asset sales
have been consistent with the Company's expectations. There are no legal or
49
<PAGE> 225
regulatory restrictions that affect the Company's ability to sell any of its
general account assets to satisfy any obligations in respect of Closed Book GRC
liabilities. In determining the projected Closed Book GRC net income in years
subsequent to 1996, the Company assumed that yield spreads implicit in market
values would be consistent with historic trends. In addition, the Company
assumed that there would be no material credit losses in respect of assets
supporting Closed Book GRC. However, no assurance can be given that, under
certain unanticipated economic circumstances which result in the Company's
assumptions proving inaccurate, further losses in respect of Closed Book GRC
will not occur in the future.
CORPORATE OPERATION
GENERAL. The Corporate Operation includes (i) unallocated income and
expense, (ii) the Company's group medical business, which it exited in 1993, and
(iii) certain other items not directly allocable to any business segment such as
ITT Spin-Off related items.
The following table details the components of the Corporate Operation
(after tax) for the three-year period ended December 31, 1996:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------
1994 1995 1996
---- ---- -----
(IN MILLIONS)
<S> <C> <C> <C>
Unallocated income and expense..................................... (7) (14) (18)
Group medical business............................................. (7) (1) 1
ITT Spin-Off related items and other............................... -- 18 (1)
---- ---- -----
Total Corporate Operation................................ $(14) $ 3 $ (18)
===== ===== ======
</TABLE>
UNALLOCATED INCOME AND EXPENSE. The Company includes in the Corporate
Operation net investment income on assets representing surplus not assigned to
any of its business segments, interest expense on Allocated Advances and certain
other revenues and expenses not specifically allocable to any of its business
segments. Excluding the impact of the other items described under "-- Group
Medical Business" and "-- Other", the Corporate Operation experienced a net loss
of $7 million, $14 million and $18 million in 1994, 1995, and 1996,
respectively. The increase in the net loss experienced by the unallocated income
and expense component of the Corporate Operation was principally due to the
increase in interest expense reported over 1994, 1995 and 1996, which was
partially offset by increased net investment income on capital contributions
made to the Company's life insurance subsidiaries.
In connection with the 1997 increase in the Company's indebtedness as a
result of the borrowing under the Line of Credit and the execution of the $100
Million Promissory Note and the $25 Million Promissory Note, interest expense is
expected to increase in 1997 as compared with prior years.
GROUP MEDICAL BUSINESS. The Company also previously marketed group medical
insurance to its customers. The Company exited this business in 1993. Management
had determined that the projected future return on assigned capital for the
group medical business was inadequate. This decision allowed the Company to
focus its group insurance operation on group life and group disability coverage.
All known material obligations related to the Company's exit from the group
medical business expired as of December 31, 1996. The Company's group medical
business reported a net loss of $7 million and $1 million in 1994 and 1995,
respectively, and net income of $1 million in 1996.
OTHER. In addition, the effects of an insurance guaranty fund adjustment of
$10 million in 1995 made to reflect lower than expected insolvencies in the
insurance industry and the impact of certain assets and liabilities assumed by
the Company in 1995 in connection with the ITT Spin-Off impacted the results of
the Company's Corporate Operation. Prior to 1995, as a response to certain
significant insolvencies experienced in the life insurance industry during the
late 1980s and early 1990s, the Company took an approach which incorporated an
assumption that more companies experiencing financial difficulties would be
formally determined to be insolvent, resulting in increased assessments based on
the Company's premiums. As more historical data became available from outside
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<PAGE> 226
sources such as the National Organization of Life and Health Guaranty
Associations, the Company re-estimated reserves based on specific state
assessment data and determined that $10 million of such reserves could be
released.
INTERCOMPANY ARRANGEMENTS
The Company's relationship with The Hartford generally will be governed by
a series of agreements to be entered into in connection with the Equity
Offerings. These agreements generally will maintain the relationship between the
Company and The Hartford in a manner consistent in all material respects with
past practice. As a result, management believes that none of these arrangements
will have a material impact on the results of operations and liquidity of the
Company. In general, these arrangements are intended to remain in effect for so
long as The Hartford continues to maintain controlling beneficial ownership of
the Company.
Under the terms of the Master Intercompany Agreement, the Company and The
Hartford will agree to provide to each other, after the completion of the Equity
Offerings, services largely similar to those which they provided prior to the
Equity Offerings. In addition, The Hartford will agree to license to the Company
and certain of its subsidiaries all the trade names, service marks, logos
(including the Stag Logo) and other trademarks currently used by the Company in
its domestic and international operations. Furthermore, the Master Intercompany
Agreement will (i) require the Company to obtain prior written approval from The
Hartford with respect to certain corporate activities, (ii) provide for the
assumption of liabilities and cross-indemnities allocating liabilities between
the parties and (iii) grant certain registration rights to The Hartford and any
other Rights Holder. The Master Intercompany Agreement will contain various
termination provisions, including the ability of either party to terminate the
agreement with respect to the provision of services, upon six months' written
notice, in the event that The Hartford ceases to own 50% or more of the combined
voting power of the outstanding Voting Stock. See "Certain Relationships and
Transactions -- Intercompany Arrangements -- Master Intercompany Agreement".
The Tax Sharing Agreement will provide that The Hartford and its
subsidiaries, including the Company, will file a consolidated federal income tax
return and that The Hartford will have all the rights of a parent of a
consolidated group. However, The Hartford and its subsidiaries will make
payments to each other such that the amount of taxes each such party pays
generally would be that amount it would be required to pay as a separate filer.
As the controlling beneficial owner of the Company, The Hartford will control
all the tax decisions in respect of the Company. The Tax Sharing Agreement will
terminate when the Company ceases to be a subsidiary of The Hartford. See
"Certain Relationships and Transactions -- Intercompany Arrangements -- Tax
Sharing Agreement and Tax Consolidation".
The Investment Management Agreements will provide that the investment staff
of The Hartford will implement the investment strategies of the Company and act
as advisor to certain of the Company's non-guaranteed separate accounts and
mutual funds for a fee based on the actual costs of providing such services.
During their respective initial three-year terms, the Investment Management
Agreements generally will not be terminable by The Hartford and will be
terminable by the Company, upon six months' written notice, only if The Hartford
fails to satisfy certain performance benchmarks. In general, either party may
terminate any of the Investment Management Agreements upon and after the end of
the initial three-year term, upon 180 days' prior written notice. The Investment
Management Agreements relating to the Company's mutual funds are terminable at
any time. See "Certain Relationships and Transactions -- Intercompany
Arrangements -- Investment Management Agreements".
The Company will sublease its headquarters from Hartford Fire pursuant to
the Simsbury Sublease which currently leases it from a third party pursuant to a
sale-leaseback arrangement. Hartford Fire will retain the right to purchase the
facility and the renewal option in respect of such arrangement. The rental
payments will be fixed (but not level) over the term of the lease and sublease.
See "Certain Relationships and Transactions -- Intercompany
Arrangements -- Simsbury Sublease".
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<PAGE> 227
LIQUIDITY AND CAPITAL RESOURCES
HOLDING COMPANY
Management believes that the liquidity requirements of the Company will be
met by funds from the operations of its subsidiaries. As a holding company, the
Company's principal source of funds is dividends from its operating
subsidiaries. For financial reporting purposes, the Company has treated certain
amounts previously allocated by The Hartford to the Company's life insurance
subsidiaries as Allocated Advances. Such Allocated Advances were not treated as
liabilities or indebtedness for tax and statutory accounting purposes. Cash
received in respect of Allocated Advances was used to support the growth of the
life insurance subsidiaries and was treated as surplus for statutory accounting
purposes. In return, the Company paid The Hartford certain dividends (so treated
for tax and statutory accounting purposes) based on The Hartford's actual (third
party) external borrowing costs. In general, the Company seeks to maintain a
conservative liquidity position and actively manages its capital levels,
asset/liability matching and the diversification, duration and credit quality of
its investments to ensure that it is able to meet its obligations.
Historically, The Hartford has provided capital, including the Allocated
Advances, to the Company's insurance subsidiaries. Following the Equity
Offerings, the Company intends to independently address any capital requirements
that may arise. However, for so long as The Hartford maintains a controlling
interest in the Company, any deterioration in the financial condition or ratings
of The Hartford (as well as the Company) could have the effect of increasing the
Company's borrowing costs and/or impairing its access to the capital markets. In
addition, The Hartford will have the ability, through its controlling beneficial
ownership of the Company and the terms of the Master Intercompany Agreement, to
limit or otherwise restrict the Company's ability to raise common or preferred
equity capital or incur debt. See "Risk Factors -- Control by and Relationship
with The Hartford" and "Certain Relationships and Transactions -- Intercompany
Arrangements -- Master Intercompany Agreement".
The following table sets forth the historical amounts of capital
contributed by The Hartford to the Company and the related dividends accrued or
paid or interest expense paid by the Company to The Hartford in respect thereof.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Capital contributed................................ $ -- $100 $ 50 $180 $ --
Cash received in respect of Allocated
Advances(1)...................................... -- 50 100 -- 115
Dividends accrued or paid.......................... -- 24 17 226 --
Interest accrued and paid.......................... 26 25 29 35 55
---- ---- ---- ---- ----
Net Capital................................... $(26) $101 $104 $(81) $ 60
==== ==== ==== ==== ====
</TABLE>
- ---------------
(1) Excludes non-cash Allocated Advances of $207 million in 1995 and $46 million
in 1996.
The payment of dividends to the Company from its life insurance
subsidiaries is subject to certain regulatory restrictions. The payment of
dividends by Connecticut-domiciled life insurers is limited under the insurance
holding company laws of Connecticut. The Company adheres to these laws which
require notice to and approval by the Connecticut Insurance Commissioner for the
declaration or payment of any dividend that, together with other dividends or
distributions made within the preceding twelve months, exceeds the greater of
(i) 10% of the insurer's policyholder surplus as of December 31 of the preceding
year or (ii) net gain from operations for the twelve-month period ending on the
December 31 last preceding, in each case determined under statutory insurance
accounting practices. In addition, if any dividend of a Connecticut-domiciled
insurer
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<PAGE> 228
exceeds the insurer's earned surplus, it requires the approval of the
Connecticut Insurance Commissioner. Based on these limitations and 1996
statutory results, the Company would be able to receive $132 million in
dividends in 1997 from Hartford Life and Accident, the Company's direct wholly
owned subsidiary, without obtaining the approval of the Connecticut Insurance
Commissioner. See "Risk Factors -- Holding Company Structure; Restrictions on
Dividends".
On February 20, 1997, the Company made a payment of $1.184 billion as a
dividend to Hartford Accident and Indemnity. $893 million of such dividend
constituted a repayment of the Allocated Advances. This dividend was paid with
the $1.084 billion in cash borrowed by the Company under the Line of Credit,
with interest payable at the two-month Eurodollar rate, determined as described
below, plus 15 basis points (5.65% at the inception of the borrowing) and
principal payable on or before February 9, 1998, and the $100 Million Promissory
Note, with interest payable at the two-month Eurodollar rate, determined as
described below with respect to the Line of Credit, plus 15 basis points
(initially 5.60% upon the execution of the $100 Million Promissory Note) and
principal payable on February 19, 1998. Under the terms of the Line of Credit,
the Eurodollar rate is determined by taking the average one, two, three or
six-month rate (based upon the applicable interest period selected by the
Company) at which deposits in U.S. dollars are offered by each of the four
participating lenders in London, England to prime banks in the London interbank
market, plus an applicable margin (based upon the Company's current public debt
ratings). The Line of Credit includes covenants that limit mergers, liens and
dividends, as well as financial covenants that require minimum levels of
consolidated statutory surplus, risk based capital and net worth, and certain
other terms and provisions that are normal and customary for agreements of this
type. In addition, on April 4, 1997, the Company made an additional payment of
$25 million as a dividend to Hartford Accident and Indemnity. The dividend was
paid in the form of the $25 Million Promissory Note, with interest payable at
the one-month Eurodollar rate, determined as described above with respect to the
Line of Credit, plus 15 basis points (initially 5.84% upon the execution of the
$25 Million Promissory Note) and principal payable on April 3, 1998. See
"Company Financing Plan".
Promptly following the Equity Offerings, subject to market conditions, the
Company plans to offer approximately $650 million of the Debt Securities in the
Debt Offering pursuant to a shelf registration statement. The Company expects
that the Debt Offering will involve the sale of fixed rate, multi-tranche
securities of varying maturities and may include redemption provisions. The
Company intends to use the net proceeds of the Debt Offering, as well as a
portion of the Equity Offerings, to substantially reduce the borrowing under the
Line of Credit. See "Capitalization". The Company believes that, after giving
effect to all of the foregoing transactions, it will have sufficient liquidity
to service its debt obligations. Furthermore, the Company believes that because
each of the transactions described in this and the foregoing paragraph took
place at the holding company level (i.e., at the Company), they will have no
impact on the statutory surplus of the Company's insurance subsidiaries, other
than an increase in statutory surplus to the extent of capital contributions
received from the Company in respect of the Equity Offerings.
The Company's fixed maturity investments are classified as
"available-for-sale" and, accordingly, are reflected in the Company's
consolidated financial statements at fair value with the corresponding impact
included as a component of stockholder's equity. Changes in interest rates,
accordingly, can have a significant impact on stockholder's equity. The effect
of Statement of Financial Accounting Standards ("SFAS") No. 115 on stockholder's
equity, which represents the net unrealized capital gain (loss), net of tax, on
fixed maturity investments, was a decrease of $725 million (including a
cumulative adjustment with respect to the adoption of SFAS No. 115 which
increased stockholder's equity by $103 million) as of December 31, 1994 and an
increase of $679 million and $71 million as of December 31, 1995 and 1996,
respectively.
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<PAGE> 229
Based on the Company's historic cash flow and current financial results,
management believes that the cash flow from the Company's operating activities
over the next year will provide sufficient liquidity for the operations of the
Company, as well as provide sufficient funds to enable the Company to make
dividend payments, as described in "Dividend Policy", satisfy debt service
obligations and pay other operating expenses. Management also believes that
completion of the Equity Offerings and the continued execution of its business
strategy for the Company will strengthen the financial position of the Company.
Although the Company currently anticipates that it will be able to make dividend
payments, as described in "Dividend Policy", satisfy debt service obligations
and pay other operating and capital expenses for the foreseeable future, the
Company can give no assurances as to whether the net cash provided primarily by
dividends from Hartford Life and Accident and its other subsidiaries will
provide sufficient funds for the Company to do so.
OPERATING SUBSIDIARIES
The principal sources of funds for the Company's operating subsidiaries are
premiums, net investment income and other considerations, as well as maturities
and sales of invested assets. These funds are used primarily to pay policy
benefits, dividends to policyholders, claims, operating expenses, interest,
commissions and dividends to stockholders, as well as to purchase new
investments. The Company's life insurance and group disability products involve
long-term liabilities that in general have reasonably predictable payout
patterns. However, the Company's annuity products involve liabilities that are
less certain as to payout timing and may be subject to unexpected increases in
surrenders, which would result in increased liquidity needs. Accordingly,
asset/liability management is important to maintaining appropriate liquidity for
the Company's operations. The Company's investment strategies are designed to
reasonably match the yields and estimated durations of its investments with the
contractual obligations of its policies. The Company acquires investments that
management believes will provide a predictable spread between investment
earnings and amounts credited to policyholders and contractholders and will
allow the Company to maintain sufficient liquidity in its investment portfolio
in order to adequately satisfy policy and contract commitments under a broad
range of adverse economic circumstances. In addition, the Company closely
monitors market and other economic conditions that might affect the value and
duration of its assets and the persistency of its liabilities. For a discussion
of the Company's investment operations, see "Business -- Investment Operations".
The Company maintained cash and short-term investments totaling $895
million, $1.2 billion, $837 million and $960 million as of December 31, 1994,
1995 and 1996 and March 31, 1997, respectively, and believes that its investment
policies combined with the terms of its life insurance and annuity contracts are
adequate to support its liquidity needs. Investment grade, public fixed maturity
securities (including securities sold pursuant to Rule 144A of the Securities
Act ("Rule 144A")) represented 99.5% of the Company's general account and
guaranteed separate account investment portfolios at December 31, 1996. For a
discussion of the Company's investment operations, see "Business -- Investment
Operations".
Interest rate fluctuations can affect the duration of contractual
obligations as well as the value and duration of the assets supporting these
obligations and expose the Company to disintermediation risk. See "Risk
Factors -- Interest Rate Risk". The Company can respond to interest rate
fluctuations in a number of ways, including changing investment strategies for
new cash flows, adjusting interest crediting rates (subject to policy
limitations in some instances) and adjusting the price on any new products.
In addition, the Company closely evaluates and monitors the risk of early
policyholder and contractholder surrender. Management believes that it has
minimized the potential impact of surrenders, particularly with respect to its
annuity business, by protecting approximately 99% of its insurance liabilities
as of December 31, 1996 against early surrender through the use of non-
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<PAGE> 230
guaranteed separate accounts, MVA features, policy loans, surrender charges and
non-surrenderability provisions as detailed in the following table.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
-------------------------------------------------
AMOUNT OF PERCENTAGE OF TOTAL
INSURANCE LIABILITIES INSURANCE LIABILITIES
--------------------- ---------------------
(IN BILLIONS)
<S> <C> <C>
Non-guaranteed separate accounts..................... $38.1 56%
MVA feature.......................................... 17.1 25
Policy loans(1)...................................... 4.0 6
Non-surrenderability................................. 3.9 6
----- ---
Subtotal........................................ 63.1 93
Surrender charges on remaining liabilities........... 4.2 6
----- ---
Total........................................... $67.3 99%
===== ===
</TABLE>
- ---------------
(1) Policy loans primarily relate to the Company's leveraged COLI business in
which the Company earns a stated spread on assets that are loaned to the
related policyholder.
In particular, the Company uses surrender charges to limit the ability of
individual and group annuity policyholders to withdraw from such contracts. The
following table summarizes the Company's annuity policy reserves as of December
31, 1996 and 1995 based on such policyholders' ability to withdraw funds.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------
1995 1996
---------------------- ----------------------
PERCENTAGE PERCENTAGE
POLICY OF TOTAL POLICY OF TOTAL
RESERVES RESERVES RESERVES RESERVES
------- ---------- ------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Not subject to discretionary withdrawal..... $ 1,363 3% $ 1,807 3%
Subject to discretionary withdrawal with
adjustment:
With MVA.................................. 37,445 86 48,160 89
At contract value, less surrender charge
of 5% or more.......................... 1,743 4 1,592 3
Subject to discretionary withdrawal at
contract value with no surrender charge or
surrender charge of less than 5%.......... 2,863 7 2,628 5
------- ---- ------- ----
Total annuity policy reserves.......... $43,414 100% $54,187 100%
======= ==== ======= ====
</TABLE>
Life insurance policies also are subject to surrender; however, they are
less susceptible to surrender than annuity contracts because policyholders must
generally undergo a new underwriting process and incur new policy acquisition
costs in order to obtain new life insurance policies.
Surrenders and other fund withdrawals on all insurance liabilities,
including liabilities related to Closed Book GRC, totaled $3.0 billion, $5.2
billion and $5.8 billion, and benefits totaled $1.1 billion, $1.2 billion and
$1.2 billion, in each of 1994, 1995 and 1996, respectively. Surrenders and other
fund withdrawals totaled $1.4 billion and $1.5 billion, and benefits totaled
approximately $400 million and $500 million, during the three months ended March
31, 1996 and 1997, respectively. Such surrenders and other fund withdrawals and
benefits were met with cash from operations and required no significant sale of
fixed maturity assets.
The Company's asset for DPAC reflects those portions of acquisition costs,
including commissions and certain underwriting expenses associated with
acquiring insurance products, which are deferred and amortized over the lesser
of the estimated or actual contract life. As of December 31,
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<PAGE> 231
1996, DPAC was $2.8 billion, having grown from $836 million as of December 31,
1992, principally owing to the growth in sales of the Company's annuity
products. As of March 31, 1997, DPAC was $2.9 billion. In determining its DPAC
deferral and amortization, the Company believes it sets its amortization and
lapse assumptions and other key variables at reasonable and conservative levels,
deferring only those acquisition expenses that are within pricing allowables
(which is a measure of the amount of expenses permissible for deferral
consistent with the Company's target returns over the expected life of a
product). In contrast, GAAP generally allows companies to defer recoverable
acquisition expenses independent of expected return. These assumptions and the
recoverability of the asset are periodically monitored by the Company's internal
actuarial and accounting professionals, with adjustments made, where
appropriate, in accordance with SFAS No. 60 and SFAS No. 97. Approximately 70%
of the Company's DPAC asset relates to the Company's individual annuity block of
business. The DPAC asset in respect of the individual variable and fixed MVA
annuity products has a weighted average life of less than nine years and
approximately six years, respectively, at the time of sale. By comparison, the
Company imposes surrender charges, on a declining basis, for seven years,
although its fixed MVA annuities sold with a five or six year rate guarantee may
be surrendered without penalty at the end of the guarantee period.
To date, the Company's experience has been favorable, in the aggregate,
compared with the assumptions used in its internal DPAC amortization models. The
Company believes that its product design, its relationships with its wholesalers
and retail distributors and the quality of its customer service have been
contributing factors to this positive variance. However, if lapse levels were to
substantially rise due to certain factors discussed under "Risk Factors -- Risks
Associated with Certain Economic and Market Factors" or "Risk
Factors -- Interest Rate Risk" or otherwise, the Company could determine that
accelerated DPAC amortization would be necessary.
For a discussion of potential material adverse effects to the Company's
business, financial condition and results of operations in connection with any
further downgrade in the ratings of the Company's insurance subsidiaries, see
"Risk Factors -- Importance of Company Ratings".
RECENT ACCOUNTING PRONOUNCEMENTS
For a discussion of certain enacted changes and recently proposed
accounting principles, see notes to consolidated financial statements included
elsewhere in this Prospectus and "Risk Factors -- Potential New Accounting
Policy for Derivatives".
56
<PAGE> 232
BUSINESS
GENERAL
The Company is a leading insurance and financial services company with
operations that provide (i) annuity products such as individual variable
annuities and fixed MVA annuities, deferred compensation and retirement plan
services and mutual funds for savings and retirement needs to over 1 million
customers, (ii) life insurance for income protection and estate planning to
approximately 500,000 customers and (iii) employee benefits products such as
group life and group disability insurance for the benefit of over 15 million
individuals. According to the latest publicly available data, with respect to
the United States, the Company is the largest writer of both total individual
annuities and individual variable annuities based on new sales for the year
ended December 31, 1996 (according to information compiled by LIMRA and VARDS,
respectively), the eighth largest consolidated life insurance company based on
statutory assets as of December 31, 1995, and the largest writer of group
short-term disability benefit plans and the second largest writer of group
long-term disability insurance based on full-year 1995 new premiums and premium
equivalents (according to information reported to EBPR).
The Company's assets have grown at a compound annual growth rate of 36%,
from $23 billion in 1992 to $80 billion in 1996. The Company has achieved rapid
growth of assets by pursuing a strategy of selling diverse and innovative
products through multiple 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 Stag Logo, one of the most recognized
symbols in the financial services industry. During this period, the Company has
attained strong market positions for its principal product
offerings -- annuities, individual life insurance and employee benefits. In
particular, the Company holds the leading market position in the individual
variable annuity industry based on sales for the year ended December 31, 1996.
The Company's sales of individual variable annuities grew from $1.8 billion in
1992 to $9.3 billion in 1996, and, for the year ended December 31, 1996, the
Company had a 13% market share (according to information compiled by VARDS).
During this period of growth, the Company's separate account assets, which are
generated principally by the sale of annuities, grew from 36% of total assets at
December 31, 1992 to 62% of total assets at December 31, 1996. The Company
believes that such asset growth stems from various factors including the variety
and quality of its product offerings, the performance of its products, the
effectiveness of its multiple channel distribution network, the quality of its
customer service and the overall growth of the variable annuity industry and the
stock and bond markets. However, there is no assurance that the Company's
historical growth rate will continue. See "Risk Factors -- Risks Associated with
Certain Economic and Market Factors".
Management believes the Company's substantial growth in assets, together
with management's effort to control expenses, has made the Company one of the
most efficient competitors in the insurance industry. In 1995, the Company had
the ninth lowest ratio of general insurance expenses to statutory assets, an
industry measure of operating efficiency, of the fifty largest U.S. life
insurers, based on statutory assets. The Company's ratio improved to .64% in
1996, from .72% in 1995 and 1.38% in 1992, as compared with the average ratio of
1.50% for the fifty largest U.S. life insurers for the year ended December 31,
1995, based on information compiled by A.M. Best.
The Company is a newly-organized holding company formed in December 1996,
which holds virtually all the annuity, individual life insurance and employee
benefits operations of The Hartford. In addition, The Hartford owns certain life
insurance operations internationally (through wholly owned subsidiaries in
Spain, the United Kingdom and The Netherlands) acquired in connection with the
acquisition of companies primarily engaged in property-casualty insurance. The
Company is a direct subsidiary of Hartford Accident and Indemnity and an
indirect subsidiary of Hartford Fire. Hartford Fire is a direct wholly owned
subsidiary of Nutmeg Insurance Company, which is a direct wholly owned
subsidiary of The Hartford. The Hartford is among the largest domestic and
international providers of commercial property-casualty insurance,
property-casualty reinsurance and personal lines (including homeowners and auto)
coverages. On December 19, 1995, ITT distributed all the outstanding shares of
capital stock of The Hartford to ITT stockholders of record on such date in
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<PAGE> 233
connection with the ITT Spin-Off. As a result of the ITT Spin-Off, The Hartford
became an independent, publicly traded company.
INDUSTRY OVERVIEW
The life insurance and annuity industries recently have been influenced by
certain savings trends and demographic factors. The United States Census Bureau
reports that the number of individuals aged 45 to 64, which represents the
Company's primary market, will grow from 55.7 million in 1996 to 71.1 million in
2005, making this age group the fastest growing segment of the U.S. population.
In addition, the Bureau of Labor Statistics forecasts that individuals in the
United States will live approximately 18.6 years beyond the age of their
retirement. These emerging demographic trends have significantly influenced the
growth of the Company as, in management's view, the "baby boomer" segment of the
population has become increasingly concerned about retirement and the public's
confidence in the ability of government-provided retirement benefits to meet
retirement needs diminishes. The Company also has benefited as employer-provided
defined benefit plans and other non-cash compensation have become used
increasingly as a means to facilitate savings for retirement. Moreover, as the
overall population ages, the Company believes that individuals will focus their
attention on efficiently transferring wealth between generations. As a result,
management believes that an increasing number of individuals will be attracted
to the Company's variety of savings-oriented insurance products, with
tax-advantaged status, in order to both fund their retirement years and protect
accumulated savings.
In addition, management believes that group life and group disability
insurance will continue to be an important employee benefit due to the growing
emphasis in recent years on the non-cash component of employee compensation. The
Company also believes that the continued growth of small businesses may result
in the overall growth of in force group insurance for the insurance industry.
Management expects that an increased demand for high-quality services in the
group insurance industry will result in continued growth in the Company's sales,
particularly if the Company successfully expands the range of services offered
in connection with its group disability products.
BUSINESS STRATEGY
Management believes that its corporate strategies will maintain and enhance
its position as a market leader within the financial services industry and will
maximize stockholder value. In addition, the Company's strong positions in each
of its businesses, coupled with the growth potential management believes exists
in its markets, provide opportunities to increase sales of its 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. Management has
established the following strategic priorities for the Company:
LEVERAGE THE COMPANY'S MULTIPLE CHANNEL DISTRIBUTION NETWORK. Management
believes that the Company's multiple channel distribution network provides a
distinct competitive advantage in selling its products and services to a broad
cross-section of customers throughout varying economic and market cycles. The
Company has access to a variety of distribution outlets through which it sells
its products and services, including approximately 1,350 national and regional
broker-dealers, approximately 450 banks (including 21 of the 25 largest banks in
the United States), 137,000 licensed life insurance agents, 2,900 insurance
brokers, 244 third-party administrators and 165 associations. In particular, the
Company believes that the bank and broker-dealer network employed by its Annuity
segment is among the largest in the insurance industry. Management believes that
this extensive distribution system generally provides the Company with greater
opportunities to access its customer base than its competitors and allows the
Company to introduce new products and services quickly through this established
distribution network as well as new channels of distribution. For example, the
Company sells fixed MVA annuities, variable annuities,
58
<PAGE> 234
mutual funds, single premium variable life insurance and Section 401(k) plan
services through its broker-dealer and bank distribution systems.
OFFER DIVERSE AND INNOVATIVE PRODUCTS. The Company provides its customers
a diverse mix of products and services aimed at serving their needs throughout
the different stages of their lives and during varying economic cycles. The
Company offers a variety of variable and fixed MVA annuity products with funds
managed both internally and by outside money managers such as Wellington, Putnam
and Dean Witter. The Company also regularly develops and brings to market
innovative products and services. For example, the Company was the first major
seller of individual annuities to successfully develop and market fixed
annuities with an MVA feature which protects the Company from losses due to
higher interest rates in the event of early surrender. The Company also was a
leader in introducing the "managed disability" approach to the group disability
insurance market. This approach focuses on early claimant intervention in an
effort to facilitate a claimant's return to work and to contain costs.
CAPITALIZE ON ECONOMIES OF SCALE, CUSTOMER SERVICE AND TECHNOLOGY. As a
result of its growth and attention to maintaining low expenses, the Company
believes it has achieved advantageous economies of scale and operating
efficiencies in its businesses which together enable the Company to
competitively price its products for its distribution network and policyholders.
For example, as noted above, the Company is the eighth largest consolidated life
insurance company based on statutory assets as of December 31, 1995, with a
ratio (as of such date) of general insurance expenses to statutory assets that
is less than half the average ratio for the fifty largest U.S. life insurers. In
addition, the Company has reduced its individual annuity expenses as a
percentage of total individual annuity account value to 28 basis points in 1996
from 43 basis points in 1992. In addition, the Company believes that it
maintains high-quality service for its customers and 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. In 1996, the Company received one of the
five Quality Tested Service Seals awarded by DALBAR, a recognized independent
research organization, for its achievement of the highest tier of customer
service in the variable annuity industry.
CONTINUE PRUDENT RISK MANAGEMENT. The Company's product designs, prudent
underwriting standards and risk management techniques protect it against
disintermediation risk and greater than expected mortality and morbidity. As of
December 31, 1996, 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, 1996. The Company also enforces disciplined claims
management to protect the Company against greater than expected mortality and
morbidity. The Company regularly monitors its underwriting, mortality and
morbidity assumptions to determine whether its experience remains consistent
with these assumptions and to ensure that the Company's product pricing remains
appropriate.
BUILD ON BRAND NAME AND FINANCIAL STRENGTH. Management believes that the
combined effect of the above-mentioned strengths, The Hartford's 187-year
history and customer recognition of the Stag Logo have produced a distinguished
brand name for the Company. The Company's financial strength, characterized by
sound ratings and a balance sheet of well-protected liabilities and highly rated
assets, also has enhanced the Company's brand name within the financial services
industry. Management believes that brand awareness, an established reputation
and financial strength will continue to be important factors in maintaining
distribution relationships, enhancing investment advisory alliances and
generating new sales with customers.
59
<PAGE> 235
Annuity
GENERAL
The Annuity segment focuses on the savings and retirement needs of the
growing number of individuals who are preparing for retirement or have already
retired. The Company offers fixed and variable annuities, certain deferred
compensation and retirement plan services, mutual funds, investment management
services and certain other financial products. Growth in the Company's assets
has been driven by its sale of variable annuities. Sales of individual annuities
were approximately $9.8 billion in 1996, bringing individual annuity total
account value to $41.7 billion as of December 31, 1996. Of the total individual
annuity account value, $32.4 billion relates to variable annuities and $9.0
billion relates to fixed MVA annuities held in guaranteed separate accounts. Of
the Company's $32.4 billion variable annuities in force, $29.9 billion, or 92%,
is held in non-guaranteed separate accounts, as of December 31, 1996. In
contrast, the next nine largest writers in the United States of variable
annuities held an average of 70% of their variable annuities in force in
non-guaranteed separate accounts, as of December 31, 1996, based on the
Company's analysis of information compiled by VARDS. The following table sets
forth the total account value by product and annual sales for the principal
product offerings in the Annuity segment.
Annuity Segment Account Value and Annual Sales
<TABLE>
<CAPTION>
As of or for the Year Ended December 31,
---------------------------------------------------
1992 1993 1994 1995 1996
------- -------- -------- -------- --------
(in millions)
<S> <C> <C> <C> <C> <C>
Account Value
Individual annuities
General account............................. $ 614 $ 1,255 $ 1,714 $ 2,439 $ 2,783
Guaranteed separate account(1).............. 2,663 3,989 7,026 8,996 8,960
Non-guaranteed separate account(2).......... 3,578 8,670 11,594 18,466 29,907
------ ------- ------- ------- -------
Total account value...................... $ 6,855 $ 13,914 $ 20,334 $ 29,901 $ 41,650
====== ======= ======= ======= =======
Group annuities
General account............................. $ 3,165 $ 3,512 $ 3,785 $ 4,453 $ 4,628
Guaranteed separate account(1).............. -- -- -- -- 170
Non-guaranteed separate account(2).......... 1,873 2,333 2,688 3,504 4,312
------ ------- ------- ------- -------
Total account value...................... $ 5,038 $ 5,845 $ 6,473 $ 7,957 $ 9,110
====== ======= ======= ======= =======
ANNUAL SALES BY PRODUCT(3)
Individual variable annuities................. $ 1,838 $ 4,055 $ 4,097 $ 4,868 $ 9,327
Fixed MVA/Other individual annuities.......... 374 177 2,908 2,079 514
Mutual funds.................................. -- -- -- -- 21
Group annuities............................... 326 370 366 495 634
</TABLE>
- ---------------
(1) Guaranteed separate accounts represent policyholder funds that are
segregated from the general account of the Company and on which the Company
contractually guarantees a minimum return, subject, in most cases, to an MVA
feature if the relevant product is surrendered prior to the end of the
applicable guarantee period. The assets are carried at fair value.
Investment income and net realized capital gains and losses are not included
in the Company's Consolidated Statements of Income. Revenues to the Company
from the guaranteed separate accounts consist of investment earnings in
excess of guaranteed amounts.
(2) Non-guaranteed separate accounts represent policyholder funds that are
segregated from the general account of the Company and as to which the
Company does not guarantee a minimum return. The assets are carried at fair
value. Investment income and net realized capital gains and losses accrue
directly to the policyholders and are therefore not included in the
Company's Consolidated Statements of Income. Revenues to the Company from
the separate accounts consist of mortality and expense charges and other
investment fees.
(3) Annual sales data excludes asset transfers between different products sold
by the Company.
60
<PAGE> 236
INDIVIDUAL ANNUITIES
The Company is the market leader in the annuity industry and sells both
variable and fixed products, with single and flexible premium payment options,
through a wide distribution network of broker-dealers and other financial
institutions. Of the Company's total sales of individual annuities in 1996, 95%
were variable annuities and 5% were fixed MVA and other individual annuities.
The Company believes that its variable annuities have been particularly well
received due to the Company's product offerings, fund performance, successful
utilization of external wholesaling organizations, relationships with
broker-dealers and banks and quality of customer service, as well as the
relatively low level of interest rates and strong stock and bond market
appreciation. VARDS ranked the Company the number one writer of individual
variable annuities for the year ended December 31, 1996 with a 13% market share
based on sales. At present, the Company has approximately 950,000 individual
annuity contracts in force. The Company earns fees for managing annuity assets
(based on its total account value) and maintaining policyholders' accounts.
Each policyholder has a variety of equity and fixed income fund options
within the Company's different products. Deposits of varying amounts may be made
at regular or irregular intervals. The assets underlying the Company's variable
annuities are principally managed by Wellington, Putnam, Dean Witter and the
investment staff of The Hartford. For a discussion of the Investment Management
Agreements that the Company will enter into with The Hartford, see "Certain
Relationships and Transactions -- Intercompany Arrangements -- Investment
Management Agreements". 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 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. The Company's individual annuity products,
principally consisting of variable and fixed MVA annuities, generally are priced
to earn an after-tax margin of approximately 35 to 40 basis points on average
total account value and, in each of the past five years, the Company has
achieved such earnings.
Variable annuity products have advantages for the Annuity segment in
comparison with traditional fixed annuity products. For variable annuities, 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. Management believes that the
investment performance of its separate accounts in recent years has created a
competitive advantage in the sale of its separate account products which makes
these products attractive to potential customers.
The growth of the Company's individual variable annuity account value has
been considerable for the past several years due to strong sales, acquisitions,
market appreciation and low levels of surrenders. The following table
illustrates the growth in individual variable annuity account value from the
beginning to the end of each calendar year listed below and the principal
factors that caused the increase in account value for each such year.
INDIVIDUAL VARIABLE ANNUITY TOTAL ACCOUNT VALUE
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1992 1993 1994 1995 1996
------- ------- -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Beginning Total Account Value........ $ 2,169 $ 4,096 $ 9,742 $ 13,078 $ 20,691
Sales and Other Deposits........... 1,876 4,444 4,186 5,024 9,647
Acquisitions....................... -- 827 -- -- --
Market Appreciation................ 209 724 (131) 3,440 3,406
Surrenders......................... (158) (349) (719) (851) (1,347)
------ ------ ------- ------- -------
Ending Total Account Value........... $ 4,096 $ 9,742 $ 13,078 $ 20,691 $ 32,397
====== ====== ======= ======= =======
</TABLE>
61
<PAGE> 237
The Company has made a strategic decision to align itself with a select
group of high-quality independent money managers which have an interest in the
continued growth in sales of the Company's products. Two of the four largest
variable annuities (Putnam Capital Manager Variable Annuity and The Director) in
the annuity industry, for the year ended December 31, 1996, are managed in part
by Putnam and Wellington, respectively, each of which was selected by management
as part of this strategy. The Company believes these relationships, and the name
recognition of Wellington, Putnam and the Company's other independent money
managers, greatly enhance the marketability of its annuities and strength of its
product offerings.
The following table illustrates the performance of certain of the funds
available in respect of the Putnam Capital Manager Variable Annuity and The
Director. The historical performance of these funds is not an indication of
future performance.
SEPARATE ACCOUNT PERFORMANCE(1)
<TABLE>
<CAPTION>
ONE-YEAR FIVE-YEAR
ANNUALIZED ANNUALIZED
FUND TYPE OF FUND ASSETS RETURN RETURN
- ------------------------------------ ----------------- ------------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Putnam Capital Manager Variable
Annuity
Putnam VT Growth & Income......... Growth & Income $ 5,551 21.92% 15.97%
Putnam VT Voyager................. Aggressive Growth 3,161 12.94 16.03
Putnam VT New Opportunities....... Aggressive Growth 1,486 10.17 N/A
International
Putnam VT Global Growth........... Stock 1,322 17.18 12.11
Putnam VT High Yield.............. High Yield 761 12.81 13.48
All other Putnam Capital Manager
Variable Annuity non-guaranteed
separate accounts.............. 3,143
------
Total Putnam Capital Manager
Variable Annuity non-
guaranteed separate
accounts..................... 15,424
------
The Director
Advisers.......................... Balanced 5,126 16.59% 12.09%
Capital Appreciation.............. Growth 2,773 20.70 17.89
Stock............................. Growth 2,339 24.37 15.54
International
International Opportunities....... Stock 886 12.93 10.03
Dividend and Growth............... Growth & Income 816 22.91 N/A
All other Director non-guaranteed
separate accounts.............. 1,636
------
Total Director non-guaranteed
separate accounts............ 13,576
------
All other non-guaranteed separate
account assets.................... 907
------
Total variable annuity general
account assets............... 2,490
------
Total individual variable
annuity assets............... $32,397
======
</TABLE>
- ---------------
(1) The information included herein has been compiled by the Company, as of
December 31, 1996, for the five largest mutual funds available within the
Putnam Capital Manager Variable Annuity and The Director products (the two
most popular variable annuity contracts sold by the Company).
62
<PAGE> 238
Fixed MVA annuities are fixed rate annuity contracts that guarantee that a
specific sum of money will be paid in the future, either as a lump sum or as
monthly income, to an ANNUITANT. In the event that a policyholder surrenders a
policy prior to the end of a 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 (provided that the
Company has appropriately matched its portfolio of assets supporting its fixed
MVA annuities). The amount of such payments will not fluctuate due to adverse
changes in the Company's investment return, mortality experience or expenses.
The Company's primary fixed MVA annuities are CRC(R) and The Hartford Saver(R)
and The Hartford Saver Plus(R) annuities (together, the "Saver Annuities"),
which have terms of one, three, five, six, seven, eight, nine or ten years and
an average term of approximately seven years. As of December 31, 1996, interest
rates on these contracts ranged from 3.4% to 9.3% and averaged 6.53%. CRC is a
yield-to-maturity product with guaranteed principal and interest payments and an
MVA feature (and, in general, surrender charges) triggered in the event of the
early surrender of the policy. The assets related to CRC are held in a separate
account by the Company but the guaranteed rate is supported by the general
account of the Company. The Saver Annuities are yield-to-maturity products
similar to CRC that cap the MVA feature, thereby guaranteeing a minimum rate of
return minus any surrender charge. As a result of the design of its fixed MVA
annuities, the Company allocates less capital in respect of fixed MVA annuities
than would be required for other fixed annuity products. The Company offers its
fixed MVA annuities with terms designed to provide for a spread sufficient to
meet its internal return-on-equity goals. As a result, the Company achieves a
net investment spread on its fixed MVA annuities that is generally lower than
the net investment spreads now earned by its peers for fixed annuities without
MVA features. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- General".
In 1995, the Company, in conjunction with Pacific Mutual Life Insurance
Company, formed American Maturity Life Insurance Company ("AML") (of which the
Company owns 60%) in order to enter into a ten-year exclusive arrangement with
the American Association of Retired Persons ("AARP") to sell annuities to its 33
million members through direct mail and advertising. The Company believes this
relationship improves the Company's access to the growing market of senior
Americans. The Company initially offered a fixed MVA annuity to AARP members,
but there have been only limited sales of such product by AML due to the present
interest rate environment. However, in 1997, the Company has begun to offer AARP
members a variable annuity product in an effort to better realize the benefits
of this relationship.
DEFERRED COMPENSATION AND RETIREMENT PLAN SERVICES
The Company believes that it is among the leading providers of retirement
products and services, including asset management and plan administration, to
municipalities pursuant to Section 457 of the Internal Revenue Code of 1986, as
amended (the "Internal Revenue Code"). At present, the Company administers
approximately 900 Section 457 plans for governmental entities, of which the
Company is the exclusive provider for 750 of such plans. These plans cover
approximately 200,000 individuals. Traditionally, Section 457 plan assets have
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 such Section 457 plans. Generally, the Company manages the fixed
income funds offered in Section 457 plans administered by the Company.
Wellington, Fidelity Distributors Corporation, Twentieth Century Investors
Research Corporation and certain other mutual fund companies act as advisors to
the equity funds offered in Section 457 plans administered by the Company. See
"Certain Relationships and Transactions -- Intercompany
Arrangements -- Investment Management Agreements". The Section 457 savings and
retirement plan market is a mature one in which, in the belief of management,
any future growth principally will be achieved through the
63
<PAGE> 239
acquisition of business from competing companies and through increased
contributions from existing participants and individuals eligible to be
participants.
The Company also provides products and services to plans created under
Section 401(k) and 403(b) of the Internal Revenue Code. Management believes that
opportunities exist to expand its operations by building on the Company's
distribution strength in the individual annuity and Section 457 markets. The
Company also sees opportunities to market these products and services to small
employers, which management expects to be the fastest growing area of the
market.
The deferred compensation and retirement plan services products form the
majority of the Company's group annuity account value. In 1996, the Company
earned approximately 20 basis points, after tax, on its average group annuity
account value.
MUTUAL FUNDS AND OTHER INVESTMENT MANAGEMENT SERVICES
In September 1996, the Company launched eight retail mutual funds. Six of
these funds are managed by Wellington and closely resemble the Company's
Director variable annuity equity funds managed by Wellington. The other two
funds are fixed income funds managed by the Company. See "Certain Relationships
and Transactions -- Intercompany Arrangements -- Investment Management
Agreements". The Company has entered into agreements with over 150 financial
services firms to distribute these mutual funds. However, because the Company is
a recent entrant into the mutual fund business, there can be no assurance as to
the Company's success in this business. Also, the Company manages institutional
funds and provides certain other investment management services.
STRUCTURED SETTLEMENT CONTRACTS AND OTHER SPECIAL PURPOSE ANNUITY CONTRACTS
The Company also sells structured settlement contracts. These contracts
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. Approximately 40% of the
Company's structured settlement contract sales relate to claims in respect of
policies sold by agents of The Hartford's property-casualty insurance operations
(who are paid an expense allowance). The remaining structured settlement
contract sales are made through specialty brokers. The Company also markets
other annuity contracts for special purposes such as the funding of terminated
defined benefit pension plans.
The Company reported revenues of $43.7 million, $69.2 million and $74.8
million from structured settlement and other special purpose annuity contracts,
representing 1.2%, 1.7% and 1.7% of its total revenues, in 1994, 1995 and 1996,
respectively.
MARKETING AND DISTRIBUTION
The Company's individual annuity distribution network has been developed
based on management's strategy of utilizing multiple and competing distribution
channels with variable costs in an effort to achieve the broadest distribution
possible in the geographic areas in which the Company operates. The success of
the Company's marketing and distribution system depends on its product
offerings, fund performance, successful utilization of external wholesaling
organizations, relationship with broker-dealers and banks (through which the
sale of the Company's individual annuities to customers is consummated) and
quality of customer service. See "-- Information Systems; Customer Service;
Research and Development".
64
<PAGE> 240
In general, the Company sells approximately 70% of its individual annuities
through broker-dealers and 30% of its individual annuities through banks.
Management is engaged in continuous efforts to maintain and develop strong
relationships with the broker-dealers and banks that sell the Company's
products. The following table sets forth the Company's individual annuity sales
by distribution channel for the five years ended December 31, 1996.
INDIVIDUAL ANNUITY SALES BY DISTRIBUTION CHANNEL
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
1992 1993 1994 1995 1996
------ ------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Broker-dealers..................................... $1,548 $3,124 $5,433 $5,125 $6,637
Banks(1)........................................... 664 1,108 1,572 1,822 3,204
------ ------ ------ ------ ------
Total......................................... $2,212 $4,232 $7,005 $6,947 $9,841
====== ====== ====== ====== ======
</TABLE>
- ---------------
(1) Includes sales by banks which are made through their affiliated
broker-dealers.
The Company maintains a network of approximately 1,350 broker-dealers and
approximately 450 banks (including 21 of the 25 largest banks in the United
States) through the use of wholesaling organizations, principally Planco
Financial Services, Inc. ("Planco") and Essex National Securities, Inc.
("Essex"), and strategic alliances with Putnam and Dean Witter to sell its
individual annuity products. The number of broker-dealers and banks in this
network has more than doubled since 1992. Planco, Essex, Putnam and Dean Witter
generated approximately 40%, 7%, 48% and 5%, respectively, of the Company's
total individual annuity sales in 1996. The agreements governing these
relationships have varying renewal and termination provisions but generally
provide for ongoing continuation unless one of the parties elects otherwise or
fails to reaffirm continuation on a periodic basis. The Company periodically
negotiates renewal terms for these relationships and there can be no assurance
that such renewal terms will remain acceptable to the Company or such parties.
Should one or more of these relationships terminate, on a short-term basis or
otherwise, there could be a material disruption in sales. See "Risk
Factors -- Dependence on Certain Third-Party Relationships".
The Putnam relationship commenced in 1988, Planco in 1986, Essex in 1990
and Dean Witter in 1994. Putnam is an investment management firm that sells the
Company's individual variable annuity products, which are based on
Putnam-managed funds, through broker-dealers and banks. Planco, a privately held
independent wholesaling organization, distributes certain of the Company's
products to broker-dealers and banks. Essex, a registered broker-dealer,
wholesales a number of the Company's products to banks and other financial
institutions. Dean Witter sells a proprietary variable annuity created by the
Company based on Dean Witter-managed funds through its own network of
broker-dealers, as well as the Company's CRC product.
The Company also uses this distribution network to sell products other than
individual annuities. Putnam and Planco sell single premium variable life
products through broker-dealers and Planco sells Section 401(k) plan services
and is the exclusive broker-dealer wholesaler for the Company's family of mutual
funds. In addition to Planco, the Annuity segment 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. Structured settlements are sold through The
Hartford's property-casualty insurance operations and certain specialty brokers
using a small group of internal personnel. Special purpose annuity contracts are
sold through different organizations and distribution mechanisms depending on
the ultimate use of the annuity contract.
65
<PAGE> 241
INDIVIDUAL LIFE INSURANCE
GENERAL
The Individual Life Insurance segment sells a variety of individual life
insurance products. The Company's in force life insurance consists of a variety
of variable life, universal life, interest-sensitive whole life and term life
insurance policies. The Company's business also includes traditional whole life,
which was sold in prior years, and modified guaranteed life, which was acquired
in the Fidelity Bankers and Pacific Standard acquisitions. The Company presently
has policies in force for approximately 500,000 customers. The Company focuses
in this segment particularly on the high-end estate and business planning
markets and believes it is one of the leading competitors in these markets based
on its relatively high average face value per policy. NEW ANNUALIZED WEIGHTED
PREMIUMS of individual insurance life policies reached $130 million in 1996, $75
million of which was variable life, $46 million of which was universal life,
traditional or interest-sensitive whole life and $7 million of which was term
life. The Company also has recently begun to develop its single premium variable
life business, which accounted for $20 million of the $75 million of variable
life sales in 1996. In addition, through this segment the Company sells
individual disability coverage for loss of income for professionals, corporate
executives, business owners and administrative support personnel in the event of
a disabling accident or illness. The Company has only recently entered the
individual disability market and its current business in this area is
immaterial.
The following table illustrates, for the five years ended December 31,
1996, sales of individual life insurance and changes in individual life
insurance account value and aggregate life insurance in force, with internal
growth and acquisitions separately identified.
INDIVIDUAL LIFE INSURANCE SEGMENT ANNUAL SALES, ACCOUNT VALUE AND IN FORCE
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
ANNUAL SALES(1)
Variable life.............................. $ -- $ 1 $ 10 $ 27 $ 75
Universal life/Interest-sensitive whole 77 80 72 71 46
life....................................
Term life.................................. 11 13 10 7 7
Other...................................... 2 2 2 2 2
---- ---- ------ ------ ------
Total................................. $ 90 $ 96 $ 94 $ 107 $ 130
==== ==== ====== ====== ======
ACCOUNT VALUE
Internal
Variable life.............................. $ -- $ 4 $ 20 $ 158 $ 604
Universal life/Interest-sensitive whole 708 872 1,066 1,265 1,534
life....................................
Other...................................... 108 115 119 117 109
---- ---- ------ ------ ------
Total................................. $ 816 $ 991 $ 1,205 $ 1,540 $ 2,247
==== ==== ====== ====== ======
Acquisitions(2)
Universal life/Interest-sensitive whole $ -- $ 136 $ 251 $ 197 $ 208
life....................................
Modified guaranteed life................... -- 736 836 821 781
---- ---- ------ ------ ------
Total................................. $ -- $ 872 $ 1,087 $ 1,018 $ 989
==== ==== ====== ====== ======
</TABLE>
66
<PAGE> 242
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
IN FORCE
Internal
Variable life.............................. $ -- $ 158 $ 700 $ 1,645 $ 4,946
Universal life/Interest-sensitive whole 21,208 25,243 27,751 30,416 31,012
life....................................
Term life.................................. 8,098 10,705 11,711 11,507 11,623
Other...................................... 114 125 131 144 155
---- ---- ------ ------ ------
Total................................. $29,420 $36,231 $40,293 $43,712 $47,736
==== ==== ====== ====== ======
Acquisitions(2)
Universal life/Interest-sensitive whole $ -- $ 1,583 $ 2,784 $ 2,578 $ 2,560
life....................................
Term life.................................. -- 96 428 365 369
MODIFIED GUARANTEED LIFE................... -- 1,416 1,715 1,624 1,478
---- ---- ------ ------ ------
Total................................. $ -- $ 3,095 $ 4,927 $ 4,567 $ 4,407
==== ==== ====== ====== ======
</TABLE>
- ---------------
(1) Individual life insurance sales are recorded as new annualized weighted
premiums, except that, prior to 1994, some of the related data is recorded
on a paid weighted premium basis, which only records premium collected, and
thus is not directly comparable.
(2) This data reflects the individual life insurance portion of the Fidelity
Bankers, Pacific Standard and Investors Equity blocks of business
assumptions.
PRODUCTS
VARIABLE LIFE. Variable life insurance provides a return linked to an
underlying portfolio. The Company allows policyholders to determine their
desired asset mix among a variety of mutual funds. As the total 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. Variable life policies
represented 58% of new annualized weighted premiums for individual life
insurance products for the year ended December 31, 1996. The Company's variable
life insurance portfolio also includes products with a second-to-die feature.
These products are distinguished from other variable life insuance 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 used in
individual estate planning, often to fund estate taxes for a married couple.
UNIVERSAL 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. These policies provide policyholders
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 insurance policies represented 35% of new
annualized weighted premiums for individual life insurance products for the year
ended December 31, 1996. The Company also sells universal life insurance
policies with a second-to-die feature similar to that of the variable life
insurance product described above.
OTHER. The Company also offers individual term life and individual
disability insurance, although the Company has a limited presence in these
markets. However, management believes there may be opportunities to successfully
sell term insurance through banks and broker-dealers and is currently developing
term insurance products to sell through these distribution channels. Also, the
Company's individual disability insurance product is offered in a guaranteed
renewable contract, designed to minimize the Company's risk by allowing for
future premium increases in the event of greater than expected morbidity.
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MARKETING AND DISTRIBUTION
The Individual Life Insurance distribution system is segregated into two
product types: those products designed for high-end estate and business planning
and those products designed for protection against lost income from death to
cover basic needs such as mortgage payments (referred to as "middle income"
sales). The high-end estate and business planning organization is managed
through a sales office system of qualified life insurance professionals with
specialized training in sophisticated life insurance sales. These employees have
access to approximately 137,000 licensed life insurance agents. High-end sales
also occur in certain regions of the United States through the ELAR partners
("ELAR"), a group of independent life insurance marketing organizations, each of
which maintains a separate marketing agreement with the Company. The middle
income sales force is led by a group of internal employees who use lead
generation techniques to sell insurance through a collection of independent
sales organizations. The success of the Company's marketing efforts in its
Individual Life Insurance segment primarily depends on the breadth and quality
of its life insurance products, the competitiveness of its pricing, its
relationships with its third-party distributors and the quality of its customer
service. See "-- Information Systems; Customer Service; Research and
Development". Approximately 74% of the Company's new sales of individual life
insurance policies (measured by new annualized weighted premiums) in 1996 were
consummated through the Company's internal estate and business planning sales
force and ELAR in conjunction with life insurance professionals, The Hartford's
property-casualty agents and broker-dealers, 11% were sold to the middle income
market through licensed life insurance agents and 15% were single premium
variable life insurance contracts sold through the bank and broker-dealer
distribution network of the Annuity segment. Approximately $12 million, or 9%,
of the Company's 1996 sales in the Individual Life Insurance segment were
consummated through The Hartford's property-casualty agents.
EMPLOYEE BENEFITS
GENERAL
The Employee Benefits segment consists of two areas of operation: Group
Insurance and Specialty Insurance Operations. The Company markets group
insurance products, including group life insurance , group short- and long-term
managed disability, stop loss and supplementary medical coverage to employers
and employer-sponsored plans and accidental death and dismemberment, travel and
special risk coverage to employers and associations. The Company also offers
disability underwriting, administration, claims processing services and
reinsurance to other insurers and self-funded employer plans. The Specialty
Insurance Operations unit consists of the Company's COLI business, life/health
reinsurance operations and international operations.
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The following table sets forth, for the five years ended December 31, 1996,
net earned premiums for group insurance products, reserves for group insurance
products and the COLI account value held in the Company's general account and
separate accounts.
EMPLOYEE BENEFITS SEGMENT PREMIUMS, RESERVES AND ACCOUNT VALUE
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------
1992 1993 1994 1995 1996
------ ------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
GROUP INSURANCE PREMIUMS
Group Disability...................... $ 252 $ 285 $ 352 $ 419 $ 551
Group Life............................ 274 291 308 361 432
Other................................. 315 280 314 323 346
------ ------ ------ ------ ------
Total............................ $ 841 $ 856 $ 974 $1,103 $1,329
====== ====== ====== ====== ======
GROUP INSURANCE RESERVES
Group Disability...................... $ 549 $ 691 $ 857 $1,030 $1,268
Group Life............................ 220 270 294 325 389
Other................................. 287 263 261 278 277
------ ------ ------ ------ ------
Total............................ $1,056 $1,224 $1,412 $1,633 $1,934
====== ====== ====== ====== ======
COLI ACCOUNT VALUE
General Account....................... $ 864 $1,549 $2,308 $3,566 $4,028
Separate Account...................... -- -- 897 3,484 4,441
------ ------ ------ ------ ------
Total............................ $ 864 $1,549 $3,205 $7,050 $8,469
====== ====== ====== ====== ======
</TABLE>
GROUP INSURANCE
The Company provides life, disability and other group insurance coverage to
large and small employers across the United States. The Company estimates that
this aggregate coverage is maintained for the benefit of over 15 million
individuals. The Company had approximately $1.3 billion of premiums for group
insurance in 1996, of which $432 million is attributable to group life insurance
coverage and $551 million is attributable to group disability coverage (and of
which $23 million of such group life insurance premiums and $78 million of such
disability premiums related to the acquisition of a block of business from North
American Life Assurance Company of Toronto ("NAL")). The Company sells its
product line to employers through brokers and consultants and to multiple
employer groups through its relationships with trade associations. Management
believes that the comparative quality of its underwriting and claims management
provides a competitive advantage in the group disability insurance business. In
addition, all group life insurance policies sold by the Company are term
insurance, generally with one- to two-year rate guarantees. This allows the
Company to make adjustments in rates or terms of its policies in order to
minimize the adverse effect of various market trends.
The Company 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. As of December 31, 1996, the Company had
approximately 530 group disability contracts in force in the large case market,
covering an estimated 3 million employees. Management believes that further
opportunities exist in the "small" and "medium case" group markets due to the
Company's name recognition and reputation and managed disability and claims
administration capabilities. The Company intends to continue to expand its
operations in both the small and medium case markets. As of December 31, 1996,
the Company had sold approximately 22,500 and 585 group disability contracts in
the small and medium case markets, respectively, covering an estimated 600,000
and 335,000 employees, respectively. The Company's efforts in the group
disability area focus on early intervention, return-to-work programs, reduction
of long-term disability claims and successful rehabilitation. The
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<PAGE> 245
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).
Managed disability coverage is the flagship product for the Company's group
disability insurance operations. The Company emphasizes early claimant
intervention in this coverage in an effort to facilitate a disabled claimant's
return to work and to contain costs. The Company's newest generation of managed
disability is the Ability Assurance(R) program in which the Company offers an
expanded set of services to disabled employees of the Company's group disability
customers. Management believes its individualized approach to claim servicing,
as well as its incentive to control costs, leads to an overall reduction in the
cost of group disability coverage for employers and thus provides an important
competitive advantage.
GROUP SHORT-TERM DISABILITY. Short-term disability benefit plans provide a
weekly benefit amount (typically 60% to 70% of the employees earned income up to
a specified maximum benefit) to insured employees when they are unable to work
due to an accident or an illness. Most of these benefit plans begin providing
benefits immediately for accidents, or typically following a one-week waiting
period for sickness, and continue providing benefits for a limited term,
generally 52 weeks or less. Short-term disability, excluding the NAL block of
business, accounted for $104 million, or 8%, of net earned premiums from group
insurance products for the year ended December 31, 1996.
GROUP LONG-TERM DISABILITY. 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 begin providing benefits following 90- or 180-day waiting periods 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.
Premiums for long-term disability coverage are based upon expected claim
incidence rates and duration of claims of the insured group, as well as
assumptions concerning operating expenses and future interest rates. Long-term
disability, excluding the NAL block of business, accounted for $369 million, or
28%, of net earned premiums from group insurance products for the year ended
December 31, 1996.
GROUP TERM 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 works to distinguish itself from its competitors by
offering 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.
Premiums for group life insurance coverage are based upon the expected mortality
of the insured group, as well as operating expense and interest rate
assumptions. Group term life insurance, excluding the NAL block of business,
accounted for $409 million, or 31%, of net earned premiums from group insurance
products for the year ended December 31, 1996.
OTHER. The Company also provides term life insurance, accidental death and
dismemberment, 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.
SPECIALTY INSURANCE OPERATIONS
The Specialty Insurance Operations unit consists of a collection of niche
businesses, including International Corporate Marketing Group ("ICMG"), which
contains the Company's COLI operations, ITT Hartford International Life
Reassurance Corporation ("HLRe"), a specialty reinsurer, and the Company's
international operations.
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The Company is a leader in the COLI market and provides coverage for
approximately 400,000 individuals. COLI is life insurance purchased by a company
on the life of its employees, with the company named as the beneficiary under
the policy. Through the purchase of COLI, corporations have been able to use the
favorable tax treatment of life insurance to fund a variety of employee benefit
liabilities such as post-retirement health care and non-qualified benefit
programs. In 1992, the Company acquired the $5.6 billion COLI business of Mutual
Benefit, an insurance company presently in insolvency proceedings. Under two
coinsurance agreements between the Company and Mutual Benefit whereby Mutual
Benefit reinsured the Company for $3.5 billion of the purchased business and
certain newly written business, Mutual Benefit was required to secure the
coinsured liabilities by depositing assets at least equal to 100% of the
coinsured liabilities in certain trust accounts held for the benefit of the
Company. These trust accounts were established in 1992 in an amount equal to
$3.5 billion. The assets held in the two trust accounts comprise cash, Mutual
Benefit's interest in policy loans on the coinsured business, certain
investment-grade bonds and other securities that the trustee is permitted to
hold under the terms of the trust agreements. The terms of these coinsurance
agreements were approved by the New Jersey state court overseeing the insolvency
of Mutual Benefit. Mutual Benefit subsequently assigned its rights and
obligations under such coinsurance agreements, as well as the bulk of its
business, to MBL Life Assurance Corporation ("MBL"). Mutual Benefit is currently
subject to a final order of liquidation and, pending the disposition of certain
assets unrelated to the Company, is expected to be dissolved. In addition, the
rehabilitation plan under which MBL is operating the business assumed from
Mutual Benefit, including the coinsurance arrangements, has been approved by the
court. As a result of the security provided by these court-approved trusts,
management believes that the Company is not affected by the outcome of Mutual
Benefit's insolvency proceedings.
The Company retained the Mutual Benefit dedicated COLI staff and formed
ICMG, 60% of which is owned by the Company and 40% of which is owned by MBL. The
Company has the right to acquire the remaining 40% of ICMG in November 1997 by
transferring to MBL 40% of the net worth of ICMG and paying MBL 40% of ICMG's
earnings (which are substantially the same as its cash flow) over the following
five years. In addition, MBL has the right to put, and the Company has the
obligation to purchase, MBL's 40% interest in ICMG until November 2002 at the
formula price described above. The Company does not believe that such purchase
price would be a material amount.
Until the passage of the HIPA Act of 1996, the Company sold two principal
types of COLI, leveraged and variable. The HIPA Act of 1996 phases out the
deductibility of interest on policy loans under COLI by 1998, thus eliminating
all future sales of leveraged COLI. Leveraged COLI is a fixed premium life
insurance policy owned by a company or a trust sponsored by a company. The
proceeds from such a policy help to fund general corporate liabilities such as
deferred compensation plans or post-retirement obligations. This general account
policy provides cash flow flexibility and optimizes certain tax advantages for a
company or trust by allowing it to borrow the policy cash value and receive
certain interest deductions on such policy loans. The Company's leveraged COLI
product has been an important contributor to its profitability in recent years
and will continue to contribute to the profitability of the Company although
such contribution will be reduced in the future due to the effects of this
legislation. VARIABLE COLI continues to be a product used by employers to fund
non-qualified benefits or offset other post-employment benefits liabilities, but
does not provide the same cash flow or tax advantages generated by leveraged
COLI. See "Risk Factors -- Adverse Effect of Legislation and Regulatory
Actions".
In 1993, the Company also purchased HLRe (formerly known as American
Skandia Life Reinsurance Corporation), a specialty insurance subsidiary that
focuses on life/health reinsurance markets, especially the COLI market, from
American Skandia Life Assurance Corporation. The leveraged COLI business of HLRe
has been adversely affected by the HIPA Act of 1996 in a manner similar to the
Company's ICMG COLI business. The Company recently signed an agreement to sell
its conventional block of reinsurance to Cologne Life Reinsurance Company. This
transaction, which
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the Company expects to close during 1997, will not have a material effect on the
Company's results of operations.
The Company recently initiated an international expansion strategy to
diversify its risk exposure and expand its business opportunities in
international markets. In June 1994, the Company consummated its initial
international investment outside North America by forming ITT Hartford
Sudamericana Holding, S.A. ("HSH"), a joint venture with a group of Argentine
insurance executives, of which the Company owns 60%. Through this joint venture,
the Company operates several subsidiaries devoted to life insurance, retirement
annuities, life insurance brokerage and pensions. In 1995, the Company expanded
its activities in Argentina by initiating reinsurance coverage for Argentina's
developing life insurance market. In 1996, HSH and Banco de Galicia y Buenos
Aires, S.A. formed a joint venture to operate an insurance business in a number
of countries throughout South America. The Company also recently has formed two
Brazilian joint ventures, Icatu Hartford Capitalizacao, S.A. and Icatu Hartford
Seguros, S.A., each with Itaborai Participacoes S.A. (known as Grupo Icatu), a
broad-based financial services company in Brazil, to sell life insurance,
savings products, specialty health insurance and pensions. Management views each
of these international joint ventures as a long-term project. As of December 31,
1996, the Company had invested less than $100 million of start-up capital in all
its existing international operations. The Company plans to pursue other
international opportunities in Latin America from time to time as it deems
appropriate.
MARKETING AND DISTRIBUTION
The Company uses an experienced group of Company employees to distribute
its group insurance products and services through a variety of distribution
outlets. These channels include insurance agents, brokers, associations and
third-party administrators. The Company sells its COLI products through Company
employees working with brokers and consultants specializing in the COLI market.
The success of the Company's distribution efforts in the group insurance and
specialty insurance markets primarily depends on the variety and quality of its
product offerings, the Company's relationships with its third-party distributors
and the quality of its customer service, particularly in the case of its
disability products. See "-- Information Systems; Customer Service; Research and
Development". In addition, the Company benefits from its historical and ongoing
public relations and advertising campaign. In particular, the Company's recent
Break Away(SM) campaign, designed to showcase the achievements of disabled
athletes, has received favorable reviews in the market.
GUARANTEED INVESTMENT CONTRACTS
GENERAL
The Guaranteed Investment Contracts segment consists of GRC supported by
either the Company's general account or a guaranteed separate account.
Historically, a significant majority of these contracts was sold as general
account contracts with fixed rates and fixed maturities. The Company decided in
1995, after a thorough review of the guaranteed investment contract market, to
significantly de-emphasize general account GRC, choosing instead to focus its
distribution efforts on products sold by its other segments and selling general
account GRC primarily as an accommodation to customers. As a result, the Company
substantially withdrew from the general account GRC business in 1995 and, since
1994, sales of these products have declined dramatically. From 1992 to 1994, the
Company sold over $5 billion of GRC. In contrast, the Company sold only $169
million of GRC in 1996, $108 million of which was general account GRC. In the
first quarter of 1997, the Company wrote $13 million of general account GRC
(most of which were renewals to existing customers).
The Company internally segregates its Guaranteed Investment Contracts
segment into two distinct blocks of business which are separately managed. The
Company's GRC business sold prior to December 31, 1994 (including amounts sold
prior to this date where the cash was not received by
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the Company, and thus recorded as a sale, until early in 1995) is referred to as
Closed Book GRC. Closed Book GRC contains a segregated portfolio of assets
monitored and managed on a liquidating basis; however, such designation as a
"segregated" portfolio is only for internal management purposes and has no legal
or regulatory effect. Management expects that the net income or loss from Closed
Book GRC in the years subsequent to 1996 will be immaterial. For a further
discussion of Closed Book GRC, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Results of Operations for the
Years Ended December 31, 1994, 1995 and 1996 -- Comparison of Guaranteed
Investment Contracts Segment Results -- Closed Book GRC".
The following table illustrates, for the five years ended December 31,
1996, new sales and account value for the Guaranteed Investment Contracts
segment.
NEW SALES AND ACCOUNT VALUE
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
1992 1993 1994 1995 1996
------ ------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Guaranteed investment contract sales................... $1,608 $1,730 $1,732 $ 893 $ 169
Account value
General account................................... 5,673 6,216 7,257 5,722 4,124
Guaranteed separate account....................... 182 193 124 346 408
------ ------ ------ ------ ------
Total account value.......................... $5,855 $6,409 $7,381 $6,068 $4,532
====== ====== ====== ====== ======
</TABLE>
PRODUCTS
GENERAL ACCOUNT PRODUCTS. General account GRC provides a guaranteed rate
of return on investment (generally for a fixed period of time) on funds
deposited with the Company. Deposits can be made in a lump sum or in periodic
payments. The customer may choose between a fixed rate of interest or a floating
rate of interest tied to an index.
SEPARATE ACCOUNT PRODUCTS. Separate account GRC either provides a limited
guarantee of a certain rate of return on investment, with further upside
potential if performance of the assets supporting the contract dictates, or a
guaranteed rate of return tied to an index such as LIBOR. The assets supporting
these products are held in a guaranteed separate account.
MARKETING AND DISTRIBUTION
Sales of GRC products are generated by an internal sales force of the
Company. Historically, these individuals primarily sold GRC. Given that the
Company has substantially withdrawn from the general account GRC business, these
individuals now focus on other products sold by the Company and generally sell
general account GRC primarily as an accommodation to customers.
INFORMATION SYSTEMS; CUSTOMER SERVICE; RESEARCH AND DEVELOPMENT
The Company has significantly enhanced its systems capabilities in recent
years. Over the last three years, the Company has spent over $20 million for
systems technology and is projected to spend approximately $30 million over the
next two years. The Company currently maintains a decentralized network of
systems designed to meet the specific business needs of each of its units and is
in the process of fully integrating this system throughout the Company.
Management believes that such technology will improve workflow and document
management, develop processing economies of scale and facilitate communications
with customers. The Company also is on-line with many of its bank and
broker-dealer distributors to facilitate the marketing, sales and servicing
process.
The Company focuses on the maintenance and expansion of its distribution
system and customer base through quality customer service and efficient policy
administration. In that regard,
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management continuously focuses attention on productivity improvements and
process reassessments. As part of these efforts, the Company creates quality
service standards based upon industry studies which are used to evaluate the
Company's overall performance. Management believes its service performance
compares favorably with other life insurance companies. The Company received one
of the five Quality Tested Service Seals awarded in 1996 in the variable annuity
industry by DALBAR, which recognized the Company's achievement of the highest
tier of service in that industry. The Company's implementation of a new
state-of-the-art administration and customer service system has further improved
its ability to process new business applications, apply policyholder funds, pay
commissions, respond to customer inquiries and provide valuable management
information.
The Company's product development process is largely market and customer
driven, with each of the Company's units attempting to respond to and anticipate
the needs of its customers. Employees from the Company's sales, actuarial,
underwriting, accounting and administration operations are included in this
process at an early stage to ensure that pricing and underwriting are
coordinated and that administrative support is efficient and developed on a
cost-effective basis. After the initiation of a product, the Company monitors
sales and pricing assumptions to identify any adjustments necessary to maintain
sufficient profitability. Also, the Company maintains close contact with the
distributors to ensure that its new and established products and/or services
satisfy the targeted customer needs.
UNDERWRITING AND PRICING
The Company follows detailed and uniform underwriting practices and
procedures for its Individual Life Insurance segment designed to properly assess
and quantify risks before issuing coverage to qualified applicants. The Company
has underwriters who evaluate policy applications on the basis of the
information provided by the applicant and others. If the policy amount exceeds
certain prescribed dollar limits, a prospective policyholder must submit to a
variety of underwriting tests, such as medical examinations, electrocardiograms,
blood tests, urine tests, treadmill tests, chest X-rays and inspection reports.
Underwriting requirement limits are scrutinized against industry standards to
prevent anti-selection and to stay abreast of industry trends. Acquired Immune
Deficiency Syndrome ("AIDS") is expected to continue to adversely affect
mortality for the life insurance industry. Where permitted by law, the Company
has responded by considering AIDS information in underwriting and pricing
decisions. At the present time, comprehensive blood test screening, including
tests for the AIDS antibody, is performed on approximately 90% of all business
written.
The Company employs prudent underwriting standards to protect the quality
of its group life and group disability insurance business. The Company has
developed standard rating systems for each product line based on its past
disability experience and relevant industry experience. The Company updates its
manual rates on an ongoing basis and periodically reviews the quality of its
group life and group disability underwriting. Company underwriters evaluate the
risk characteristics of each prospective insured group. The premium rate quoted
to a prospective insured group is based on a standard rate and, for larger
groups, the group's past claims experience rate. Of the Company's group life and
group disability insurance business, over 80% is renewal business from which the
Company seeks annual rate increases where appropriate. The Company maintains a
persistency rate of approximately 85% to 90% with respect to its group life and
group disability insurance business.
The Company is not obligated to accept any policy or group of policies from
any distributor. Policies are underwritten on their merits and are not issued
without having been examined and underwritten individually. In addition, the
Company's policies generally afford it the flexibility to adjust dividend scales
and to increase rates charged to its policyholders (subject to specified maximum
charges) in order to provide for increased mortality and/or morbidity
experience. Management believes that its underwriting standards produce
mortality and morbidity results
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consistent with the assumptions used in product pricing, while also allowing
competitive risk selection.
Management believes that a competitive strength of the Company is its
ability to coordinate underwriting and product pricing. Product pricing on group
and individual insurance products is based on the expected pay-out of benefits
calculated through the use of assumptions for mortality, morbidity, expenses,
persistency and investment returns, as well as certain macroeconomic factors
such as inflation. Investment-oriented products are priced based on various
factors, including investment return, expenses and persistency, depending on the
specific product features. Product specifications are designed to prevent
greater than expected mortality and the Company periodically monitors mortality
and morbidity assumptions. Ongoing internal underwriting audits, conducted at
multiple levels, also monitor consistency of underwriting requirements and
philosophy. The Company's underwriters have extensive experience in the field
and the Company is committed to periodic retraining in order to keep its
underwriters familiar with the latest industry trends.
RESERVES
In accordance with applicable insurance regulations, the Company
establishes and carries as liabilities actuarially determined reserves which are
calculated to meet the Company's future obligations. The reserves are based on
actuarially recognized methods using prescribed morbidity and mortality tables
in general use in the United States, which are modified to reflect the Company's
actual experience when appropriate. These reserves are computed at amounts that,
with additions from 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
reported but not yet paid, claims incurred but not reported and claims in the
process of settlement. The Company's reserves for assumed reinsurance are
computed on bases essentially comparable to direct insurance reserves.
For the Company's individual life policies, universal life and
interest-sensitive whole life reserves are set according to premiums collected,
plus interest credited, less charges. Other fixed death benefit 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 stability of the Company's annuity and other interest-sensitive life
insurance reserves is enhanced by policy restrictions on withdrawal of funds.
Withdrawals in excess of allowable penalty-free amounts are assessed a surrender
charge during a penalty period of approximately 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. In addition, the Company's fixed MVA annuities
discourage surrender by policyholders. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources -- Operating Subsidiaries". The Company'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 GAAP, which may vary from
statutory accounting practices.
REINSURANCE
The Company follows the standard industry practice of reinsuring ("CEDING")
portions of its insurance risks with other insurance companies under traditional
indemnity reinsurance agree-
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<PAGE> 251
ments. This practice permits the Company to write policies in amounts larger
than the risk it is willing to retain. Each of the Company's lines of business
enters into reinsurance arrangements with different insurance carriers as it
deems appropriate. In general, the Company has entered into yearly renewable
term insurance contracts. The Company's method for allocating reinsurance
obligations among such reinsurers varies by product line. As of December 31,
1994, 1995 and 1996, the amount of premiums ceded to third-party reinsurers
totaled $184 million, $313 million and $413 million, respectively. The Company's
principal unaffiliated reinsurers of individual life insurance policies at
December 31, 1996 (and their corresponding A.M. Best rating as of June 30, 1996)
were: Lincoln National Life Insurance Company ("A+"), Manulife Reassurance
Corporation("A++"), Sun Life Assurance Company of Canada ("A++") and TMG Life
Insurance Company ("A++"). As of December 31, 1996, the life insurance in force
ceded to each of these reinsurers was $1.7 billion, $3.6 billion, $2.0 billion
and $1.7 billion, respectively, which, in the aggregate, constituted
approximately 21% of the Company's total ceded life insurance in force, other
than amounts ceded in respect of COLI. As of December 31, 1996, the Company also
ceded approximately $24 billion of
individual and group life insurance in force to companies affiliated with The
Hartford and assumed approximately $122 million of premiums relating to stop
loss and short-term disability insurance sold by the Company but written by a
number of The Hartford's property-casualty subsidiaries.
Reinsurance does not discharge the Company's obligations to pay policy
claims on the reinsured business. The Company remains responsible for policy
claims to the extent the reinsurer fails to pay such claims. The Company
therefore seeks to enter into reinsurance treaties with highly rated reinsurers
that have passed an internal due diligence review. At December 31, 1996,
excluding any reinsurance with its affiliates, of the $347 billion of gross
insurance in force, the Company had ceded to reinsurers approximately $89
billion of insurance in force.
The Company uses reinsurance to manage the net exposure in its individual
life and group life insurance lines of business. The risks that are reinsured
vary by product line. The Company does not currently reinsure any of the risks
associated with group short-term disability insurance. As of January 1, 1997,
the Company increased the level at which it retains the risk on any one
individual life insurance policy to $2.5 million from $1.25 million. The Company
reinsures mortality risk in excess of $1,000,000 on any single life covered by a
group life insurance policy and retains no more than $8,000 of monthly benefits
per insured life on group long-term disability policies. In addition, the
Company reinsures its accidental death and dismemberment and group travel
businesses for coverage exposure in excess of $250,000 per life and maintains
catastrophic coverage of up to $200 million for exposure in excess of $500,000
where more than two policyholders are involved in a catastrophe. The Company's
COLI business, which was acquired from Mutual Benefit, is 84% reinsured,
primarily through Mutual Benefit and its successor, MBL Life Assurance
Corporation, and assets have been placed in a security trust to support the
reinsurance recoverable asset which was $3.5 billion in 1992 and $3.8 billion as
of December 31, 1996.
INVESTMENT OPERATIONS
GENERAL
The Company's investment operations are managed by its investment strategy
group which reports directly to senior management of the Company and consists of
a risk management unit and portfolio management unit. 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 general asset allocation, duration, CONVEXITY and
other characteristics of the Company's general account and guaranteed separate
account investment portfolios. The investment staff of The Hartford executes the
strategic investment decisions of the portfolio management unit, including the
identification and purchase of securities that fulfill the objectives of the
investment strategy group.
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<PAGE> 252
The primary investment objective of the Company 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). The Company
is exposed to two primary sources of investment risk: credit risk, relating to
the uncertainty associated with the continued ability of a given obligor to make
timely payments of principal and interest, and interest rate risk, relating to
the market price and/or cash flow variability associated with changes in market
YIELD CURVES. The Company manages credit risk through industry and issuer
diversification and asset allocation. The Company manages interest rate risk as
part of its asset/liability management strategies, including the use of certain
hedging techniques (which may include the use of certain financial derivatives),
product design, such as the use of MVA features and surrender charges, and
proactive monitoring and management of certain non-guaranteed elements of the
Company's products (such as the resetting of credited interest rates for
policies that permit such adjustments). For a further discussion of hedging
strategies, including derivatives utilization, see "-- Asset/Liability
Management Strategies", as well as notes to consolidated financial statements
included elsewhere in this Prospectus.
The Company's separate accounts reflect two categories of risk assumption:
non-guaranteed separate accounts totaling $39.4 billion as of December 31, 1996,
wherein the policyholder assumes substantially all of the risk and reward, and
guaranteed separate accounts totaling $10.4 billion as of December 31, 1996,
wherein the Company contractually guarantees either a minimum return or account
value to the policyholder. The investment strategy followed varies by fund
choice, as outlined in the applicable fund prospectus or separate account plan
of operations. Non-guaranteed products include variable annuities and variable
life insurance contracts. The funds underlying such contracts are managed by the
investment staff of The Hartford and a variety of independent money managers,
including Wellington, Putnam and Dean Witter. Guaranteed separate account
products primarily consist of modified guaranteed individual annuities and
modified guaranteed life insurance, and generally include MVA features to
mitigate the disintermediation risk in the event of surrenders. Virtually all
the assets in the guaranteed separate accounts are fixed maturity securities
and, as of December 31, 1996, $10.2 billion, or approximately 99%, of the fixed
maturity securities portfolio within the guaranteed separate accounts was
investment grade or better. See "-- Asset/Liability Management Strategies".
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 investment strategy group works closely with the
business lines to develop 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 such
product line's individual risk and return objectives. For example, fixed
maturities are managed according to duration and return guidelines based
generally on the duration, cash payment and other characteristics of the
underlying liabilities. Fixed maturities in the Company's general account are
identified as available for sale and are carried at fair value with the net
unrealized investment gains and losses reflected as a component of stockholder's
equity. Equity securities are stated at fair value.
EFFECTS OF INTEREST RATES ON INVESTMENT OPERATIONS
From June 1991 to September 1993, interest rates fell more than 300 basis
points. This dramatic decline in rates, combined with an unprecedented push by
financial intermediaries to refinance mortgages, resulted in prepayment levels
substantially above the expectations and historical experience for the entire
investment community, including the Company.
In particular, the duration of the Company's CMO holdings in the Closed
Book GRC investment portfolio significantly shortened. Hedging performed to
mitigate prepayment acceleration in this portfolio was insufficient to cover
actual prepayment experience. As interest rates rose in 1994,
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<PAGE> 253
prepayment activity declined as fast as it had accelerated during the falling
interest rate environment, causing the duration of the CMO holdings in the
Closed Book GRC investment portfolio to extend relative to expectations. Thus,
the effect of actions taken by the Company to increase asset duration (to offset
fast prepayments) in the Closed Book GRC investment portfolio in 1992 and 1993
was intensified by extension of the mortgage collateral for such portfolio in
1994. This produced a portfolio with assets having a longer duration than the
related GRC liabilities.
In response to the corresponding losses associated with the Closed Book GRC
investment portfolio, the Company instituted an improved risk management process
during 1995 and 1996, including the division of the Company's investment
strategy group into two independently managed units -- a risk management unit
and a portfolio management unit. The Company also reduced its exposure to MBSs
and CMOs and recently enhanced its computerized analytical systems to allow for
more effective management of its portfolio positions and potential exposures to
identify potential asset/liability mismatches earlier. As a result, all material
portfolios, including Closed Book GRC, are now reviewed on a monthly basis to
determine if the net economic sensitivity of the assets and the related
liabilities to interest changes is within a pre-determined range. The Company
believes that the establishment of a separate risk management unit and more
frequent review of all its material portfolios adds an important oversight
mechanism to the Company's investment management operation.
The assets and liabilities of the Company's material portfolios also are
now stressed against parallel and non-parallel interest rate shifts of up to
plus or minus 300 basis points along the yield curve. Based on recent interest
rate volatility, a 300 basis point shift represents a shift of approximately
three standard deviations occurring over the course of a full year and
implicitly assumes that the affected portfolio is not managed. Since such a
shift generally will occur over more than one day and the Company's portfolios
are modeled and managed at least monthly, management believes that its
monitoring process will minimize the effects of a dramatic interest rate shift.
In the event of an interest rate shift of 100 basis points or more, the Company
would immediately test all material portfolios for any potential asset/liability
mismatches and would adjust any of its portfolios that failed to comply with its
written guidelines. Thus, management believes that the quantification of the
impact of interest rate shifts of greater than plus or minus 300 basis points is
of limited value.
The Company's analysis of non-parallel interest rate shifts is based upon a
comparison of the "key rate" or "partial" durations of its assets and
liabilities. At a minimum, the assets and liabilities are tested at the one,
two, five, seven, ten and twenty-year points on the yield curve. When coupled
with its analysis of parallel interest rate shifts, the Company is able to
assess the risk of various interest rate shifts within 300 basis points,
including parallel shifts along the yield curve as well as a flattening,
steepening and other such non-parallel shifts on the yield curve. The results of
such analyses demonstrate a very close matching of the Company's assets and
liabilities, consistent with written portfolio guidelines maintained by the
Company. By testing monthly, the Company believes that it can detect
asset/liability mismatches earlier and take action to reduce the potential
impact of interest rate fluctuations on the portfolio.
In addition, the Company annually performs asset adequacy analysis for all
of its life insurance subsidiaries. This includes cash flow testing for all
material product lines. These analyses are accomplished by projecting, under a
number of possible future interest rate scenarios, the anticipated cash flows
from such business and the assets required to support such business. The first
seven of these scenarios are required by state insurance laws. Projections also
are made using several additional scenarios which involve more extreme
fluctuations in future interest rates. The results of these tests demonstrate
that the projected cash flows for the assets are sufficient to provide the cash
flows needed for the liabilities under the scenarios tested.
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<PAGE> 254
DESCRIPTION OF INVESTMENT ASSETS IN GENERAL ACCOUNT
The following table sets forth by category the invested assets in the
Company's general account as of December 31, 1996.
INVESTED ASSETS BY CATEGORY
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
--------------------------------
PERCENT OF
TOTAL
INVESTED AND
SEPARATE
AMOUNT ACCOUNT ASSETS
------------- --------------
(IN MILLIONS)
<S> <C> <C>
Fixed maturity securities, available-for-sale, at fair value.... $15,711 22.6%
Equity securities, available-for-sale, at fair value............ 119 0.2
Policy loans, at outstanding balance(1)......................... 3,839 5.5
Other investments at cost(2).................................... 161 0.2
------- -----
Total general account invested assets...................... 19,830 28.5
Total separate account assets.............................. 49,770 71.5
------- -----
Total invested assets.................................... $69,600 100.0%
======= =====
</TABLE>
- ---------------
(1) Policy loans, which have a current weighted average interest rate of 11.9%,
are secured by the cash value of the related life insurance policy. These
loans do not mature in the conventional sense but expire in conjunction with
the related policy liabilities.
(2) The Company has approximately $2 million in commercial mortgages in its
general account.
The following table sets forth by category the fixed maturity securities,
including CMOs, MBSs and other asset-backed securities ("ABSS"), held in the
Company's general account as of December 31, 1996.
FIXED MATURITY SECURITIES BY CATEGORY
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
-----------------------------------------
WEIGHTED
AVERAGE
AMOUNT YIELD(1) PERCENTAGE
------------- -------- ----------
(IN MILLIONS)
<S> <C> <C> <C>
Fixed maturity securities:
Corporates............................................ $ 7,587 6.80% 48.3%
CMOs.................................................. 2,150 6.58 13.7
Gov't/gov't agencies -- U.S. (including municipals)... 621 5.85 3.9
MBSs-Agency........................................... 402 7.36 2.6
ABSs.................................................. 2,693 6.31 17.1
Gov't/gov't agencies -- Foreign....................... 395 7.24 2.5
Commercial mortgage-backed securities................. 1,098 7.68 7.0
Short-terms........................................... 765 5.97 4.9
------- ---- -----
Total............................................ $15,711 6.69% 100.0%
======= ==== =====
</TABLE>
- ---------------
(1) For the year ended December 31, 1996, the calculated yield on average fixed
maturities excluding derivatives was 6.69%, while the calculated yield
including derivative hedge income was 6.48%. The calculated yield represents
earnings on fixed maturities, excluding net realized capital gains and
losses (and excluding or including derivative hedge income, as applicable),
divided by average fixed maturities.
As of December 31, 1996, the Company had approximately 16.3% of its fixed
maturity securities portfolio invested in MBSs and CMOs. MBSs and CMOs are
subject to significant prepayment and payment extension risk, since underlying
mortgages may be repaid more or less rapidly than scheduled. See "Risk
Factors -- Interest Rate Risk". As a result, holders of MBSs and CMOs may
receive prepayments which cannot be reinvested at yields comparable to the rates
on such securities or may be forced to liquidate securities at a loss to meet
liquidity obligations. The Company measures and manages prepayment and payment
extension risk through option-adjusted
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<PAGE> 255
modeling of the market price sensitivity (duration and convexity) of all of its
assets, including MBSs and CMOs. For most MBSs and CMOs, prepayment risk causes
"negative convexity". Convexity can be increased for a portfolio by adding
securities or derivatives that have significant "positive convexity". In
particular, the Company uses interest rate caps and floors to increase portfolio
convexity and reduce the market price sensitivity of its MBSs and CMOs. At
December 31, 1996, the net weighted average coupon and weighted average life for
the Company's MBS portfolio was 7.74% and 5.2 years, respectively. At December
31, 1996, the net weighted average coupon of the mortgage collateral supporting
the Company's CMO portfolio was 6.75%, and the weighted average life of the CMO
portfolio was 4.6 years. The Company has reduced its exposure to CMOs and MBSs,
from 24% of the total fixed maturity securities as of December 31, 1995 to 16.3%
as of December 31, 1996.
The following table sets forth, by category, the CMOs in the Company's
general account as of December 31, 1996.
COLLATERALIZED MORTGAGE OBLIGATIONS(1)
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
--------------------------
PERCENTAGE
CARRYING OF
VALUE INVESTED
(AT MARKET) CMO ASSETS
----------- ----------
(IN
MILLIONS)
<S> <C> <C>
PAC........................................................ $ 786 36.6%
INVERSE FLOATERS........................................... 323 15.0
PRINCIPAL-ONLY SECURITIES.................................. 167 7.8
INTEREST-ONLY SECURITIES................................... 126 5.9
ACCRUAL SECURITIES......................................... 321 14.9
SEQUENTIAL-PAY SECURITIES.................................. 89 4.1
FLOATERS................................................... 252 11.7
Other...................................................... 86 4.0
------ -----
Total................................................. $ 2,150 100.0%
====== =====
</TABLE>
- ---------------
(1) As of December 31, 1996, approximately 56% of CMO holdings had implicit or
explicit protection against prepayment.
As of December 31, 1996, $15.66 billion or approximately 99.7% of the fixed
maturity securities portfolio was investment-grade securities or better, and
only $49 million or .3% of the fixed maturity securities portfolio was invested
in below investment-grade securities (less than "BBB"). The following table sets
forth the ratings of the fixed maturity securities in the Company's general
account as of December 31, 1996.
QUALITY DISTRIBUTION OF FIXED MATURITY SECURITIES(1)
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
----------------------------------------
PERCENTAGE OF TOTAL
AMOUNT GENERAL ACCOUNT ASSETS
------------- ----------------------
(IN MILLIONS)
<S> <C> <C>
U.S. Government/agency............................ $ 353 2.2%
Short-term........................................ 765 4.9
AAA............................................... 4,695 29.9
AA................................................ 1,902 12.1
A................................................. 5,366 34.2
BBB............................................... 2,581 16.4
BB and below...................................... 49 0.3
------- -----
Total fixed maturity securities.............. $15,711 100.0%
======= =====
</TABLE>
- ---------------
(1) The ratings referenced in this section are based on the S&P system or the
equivalent rating of another nationally recognized rating organization or,
if not rated, are internal ratings assigned by the Company based on the
Company's internal analysis of such securities. The Company holds
approximately 3.6% of non-rated securities.
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<PAGE> 256
At December 31, 1996, approximately 10.3% of the Company's fixed maturity
portfolio was invested in private placement securities (including Rule 144A
offerings). These securities are not registered with the Commission and
generally only can be purchased by certain institutional investors. Private
placement securities are thus generally less liquid than public securities.
However, covenants for private placements are generally designed to mitigate the
impact of such increased liquidity risk. Most of the private placement
securities in the Company's portfolio are rated by nationally recognized rating
organizations. If such securities are not so rated, the Company assigns ratings
for internal monitoring purposes based on the Company's general understanding of
methodologies employed by the nationally recognized rating organizations.
The estimated maturities of the Company's fixed and variable rate
investments in its general account, along with their respective yields at
December 31, 1996, are reflected in the table below. ABSs, MBSs and CMOs are
distributed to maturity year based on the Company's estimate of the rate of
future prepayments of principal over the remaining life of the securities. These
estimates are developed using prepayment speeds reported in broker consensus
data. Such estimates are derived from prepayment speeds experienced at the
interest rate levels projected for the applicable underlying mortgages and can
be expected to vary from actual experience. Expected maturities differ from
contractual maturities due to call or prepayment provisions.
FIXED MATURITY INVESTMENTS MATURITY SCHEDULE
<TABLE>
<CAPTION>
ESTIMATED MATURITY
-----------------------------------------------------------------------
1997 1998 1999 2000 2001 THEREAFTER TOTAL
------ ------ ------ ------ ------ ---------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
ABSS, MBSS AND CMOS(1)
Variable rate(2)
Amortized cost....... $ 185 $ 111 $ 80 $ 233 $ 157 $ 891 $ 1,657
Market value......... 183 131 171 226 148 851 1,710
Pre-tax yield(3)..... 5.97% 6.87% 6.60% 6.51% 6.63% 7.21% 7.09%
Fixed rate
Amortized cost....... $ 879 $ 630 $ 782 $ 709 $ 473 $1,188 $ 4,661
Market value......... 880 626 773 706 468 1,180 4,633
Pre-tax yield(3)..... 6.38% 6.76% 6.49% 6.74% 6.76% 6.96% 6.69%
BONDS AND NOTES
Variable rate(2)
Amortized cost....... $ 183 $ 72 $ 113 $ 90 $ 16 $ 248 $ 722
Market value......... 181 76 90 94 17 248 706
Pre-tax yield(3)..... 4.91% 5.74% 3.03% 5.97% 5.99% 6.72% 5.54%
Fixed rate
Amortized cost....... $1,673 $ 692 $ 919 $ 817 $ 752 $3,766 $ 8,619
Market value......... 1,692 689 918 821 751 3,791 8,662
Pre-tax yield(3)..... 6.35% 6.47% 6.43% 6.72% 6.84% 7.16% 6.80%
TOTAL FIXED MATURITIES
Amortized cost.......... $2,920 $1,505 $1,894 $1,849 $1,398 $6,093 $15,659
Market value............ 2,936 1,522 1,952 1,847 1,384 6,070 15,711
Pre-tax yield(3)........ 6.25% 6.59% 6.26% 6.66% 6.78% 7.11% 6.74%
</TABLE>
- ---------------
(1) With respect to the ABS, MBS and CMO portfolio of the Company, a 100 basis
point increase in interest rates would be expected to decrease the duration
of such portfolio from approximately 3.6 to 3.4 years; a 100 basis point
decrease in interest rates would be expected to increase the duration of
such portfolio from approximately 3.6 to 3.7 years. The maturities noted in
this table would be significantly impacted if interest rates were to
decrease by 100 basis points or increase by 300 basis points from December
31, 1996 levels.
(2) Variable rate securities are instruments for which the coupon rates move
directly with or based upon an index rate. These securities include
interest-only securities and inverse floaters, which represent less than 1%
and 2.48%, respectively, of the Company's invested assets. Interest-only
securities, for which cost approximates market, have an average life of 5.1
years and earn an average yield of 14.7%. Inverse floaters, for which cost
approximates market, have an average life of 4.8 years and earn an average
yield of 6.42%. Average yields are based upon estimated cash flows using
prepayment speeds reported in broker consensus data.
(3) Pre-tax yields do not reflect yields on derivative instruments though
derivative adjustments are included in fixed maturity amortized cost and
market value.
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<PAGE> 257
ASSET/LIABILITY MANAGEMENT STRATEGIES
Derivatives play an important role in facilitating the management of
interest rate risk, creating opportunities to efficiently fund obligations to
policyholders and contractholders, hedge against risks that affect the value of
certain liabilities and adjust broad investment risk characteristics as a result
of any significant changes in market risks. As an end user of derivatives, the
Company employs a variety of derivative financial instruments, including swaps,
caps, floors, forwards and exchange-traded financial futures and options, in
order to hedge exposure to price, foreign currency and/or interest rate risk on
anticipated investment purchases or existing assets and liabilities. The
notional amounts of derivatives contracts represent the basis upon which pay and
receive amounts are calculated and are not reflective of credit risk for
derivatives contracts. Credit risk for derivatives contracts is limited to the
amounts calculated to be due to the Company on such contracts. The Company
believes it maintains prudent policies regarding the financial stability and
credit standing of its major counterparties and typically requires credit
enhancement provisions to further limit its credit risk. Many of these
derivatives contracts are bilateral agreements that are not assignable without
the consent of the relevant counterparty. Notional amounts pertaining to
derivative financial instruments of the Company totaled $10.9 billion at
December 31, 1996 ($8.3 billion of which related to life insurance investments
and $2.6 billion of which related to life insurance liabilities). Management
believes that the use of derivatives allows the Company to sell more innovative
products, capitalize on market opportunities and execute a more flexible
investment strategy for its general account portfolio. The strategies described
below are used by the Company to manage the aforementioned risks associated with
its obligations.
ANTICIPATORY HEDGING. For certain liabilities, the Company commits to the
price of the product prior to receipt of the associated premium or deposit. The
Company routinely executes anticipatory hedges to offset the impact of any
changes in asset prices arising from interest rate changes pending the receipt
of the premium or deposit payment and the resulting purchase of the assets.
These hedges involve taking a long position in an interest rate futures position
or entering into an interest rate swap with duration characteristics equivalent
to the associated liabilities or anticipated investments. The notional amount of
derivatives used for anticipatory hedges totaled $392 million and $718 million
at December 31, 1996 and 1995, respectively.
LIABILITY HEDGING. Several products obligate the Company to credit a
return to the contractholder which is indexed to a market rate. In order to
hedge risks associated with these products, the Company typically enters into
interest rate swaps to convert the contract rate into a rate that trades in a
more liquid and efficient market. This hedging strategy enables the Company to
customize contract terms and conditions to customer objectives and satisfies the
Company's asset/liability matching policy. Additionally, interest rate swaps are
used to convert certain fixed contract rates into floating rates, thereby
allowing them to be appropriately matched against floating rate assets. The
notional amount of derivatives used for liability hedging totaled $2.6 billion
and $1.7 billion at December 31, 1996 and 1995, respectively.
ASSET HEDGING. To meet the various policyholder obligations and to provide
investment risk diversification, the Company may combine two or more derivative
financial instruments to achieve the investment characteristics that match the
associated liability. The use of derivatives in this regard effectively
transfers unwanted investment risks or attributes to others. The selection of
the appropriate derivatives depends on the investment risk, the liquidity and
efficiency of the market and the asset and liability characteristics. The
notional amount of asset hedges totaled $2.4 billion and $3.0 billion at
December 31, 1996 and 1995, respectively.
PORTFOLIO HEDGING. The Company periodically compares the duration and
convexity of its portfolios of assets to their corresponding liabilities and
enters into portfolio hedges to reduce certain differences to acceptable levels.
Portfolio hedges reduce the mismatch between assets and liabilities and offset
the potential cash flow impact caused by interest rate changes. The notional
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<PAGE> 258
amount of portfolio hedges totaled $5.5 billion and $4.2 billion at December 31,
1996 and 1995, respectively.
The Company is committed to maintaining effective risk management
discipline. Derivatives used by the Company must support at least one of the
following objectives: to manage the risk arising from price, interest rate and
foreign currency volatility, to manage liquidity or to control transaction
costs. The Company has established credit limits, diversification standards and
review procedures for all credit risk, whether borrower, issuer or counterparty.
Each of the Company's segments utilizes the aforementioned derivatives
strategies. In particular, the Annuity and Employee Benefits segments use
anticipatory hedges to protect against adverse investment results from new
business sales due to interim interest rate movements and the Annuity segment
also uses a number of liability hedges in order to convert certain fixed rate
liabilities into floating rate liabilities. In contrast, the Individual Life
Insurance segment uses derivatives infrequently, other than utilizing certain
liability hedges (such as the purchase of interest rate floors) to hedge against
a dramatic decline in interest rates for products with long-term minimum
credited rate guarantees. In June 1996, FASB issued an exposure draft of an
accounting standard which, if adopted in the form in which it was issued, would
require companies to report derivatives on the balance sheet at fair value with
changes in fair value recorded in income or equity. Under SFAS No. 115,
derivatives linked to assets are currently reflected in the fair value of such
assets reported on the Company's balance sheet. This exposure draft also would
change the accounting for derivatives used in hedging strategies from
traditional deferral accounting to a current recognition approach which could
impact a company's income statement and balance sheet and expand the definition
of a derivative instrument to include certain structured securities currently
accounted for as fixed maturities. This exposure draft has drawn widespread
criticism primarily because the required accounting treatment would not match
the perceived economic effect of such hedging strategies. As a result of, among
other things, the concerns and criticisms in comment letters and at public
hearings held on this exposure draft, the Company is unable to predict the form
that the final accounting standard, if adopted, may take and believes it would
be inappropriate to speculate on the effects of any such adoption at this time.
See "Risk Factors -- Potential New Accounting Policy for Derivatives".
For a discussion of (i) the investments of the Company segregated by major
category, (ii) the types of derivatives related to the type of investment and
their respective notional amounts and the accounting policies utilized by the
Company for derivative financial instruments, see notes to consolidated
financial statements included elsewhere in this Prospectus.
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<PAGE> 259
INSURANCE LIABILITY CHARACTERISTICS
Insurance liabilities, other than non-guaranteed separate accounts, which
were backed by $40.6 billion in total assets (including investments of $30.2
billion), totaled $30.8 billion (net of ceded reinsurance) at December 31, 1996.
These insurance liabilities consisted of future policy benefits of $4 billion,
other policyholder funds of $22.2 billion, guaranteed separate accounts of $10.4
billion and reinsurance recoverables of $(5.8) billion. Matching of the duration
of the investments with respective policyholder obligations is an explicit
objective of the Company's management strategy. The Company's insurance policy
liabilities, along with estimated duration periods based on the Company's
internal actuarial assumptions, can be summarized based on investment needs in
the five categories described below at December 31, 1996.
ESTIMATED DURATION YEARS(1)
<TABLE>
<CAPTION>
BALANCE AT LESS
DECEMBER 31, THAN 1-5 6-10 OVER 10
DESCRIPTION 1996 1 YEAR YEARS YEARS YEARS
- ------------------------------------------- ------------ ------ ----- ----- -------
(IN BILLIONS)
<S> <C> <C> <C> <C> <C>
Fixed rate asset accumulation vehicles..... $ 13.8 $1.9 $ 8.2 $3.7 $ --
Indexed asset accumulation vehicles........ 0.2 0.2 -- -- --
Interest credited asset accumulation
vehicles................................. 13.6 4.2 5.1 3.7 0.6
Long-term payout liabilities............... 2.7 0.1 0.6 0.8 1.2
Short-term payout liabilities.............. 0.5 0.5 -- -- --
----- ---- ----- ---- ----
Total................................. $ 30.8 $6.9 $13.9 $8.2 $ 1.8
===== ==== ===== ==== ====
</TABLE>
- ---------------
(1) The duration of liabilities reflects management's assessment of the market
price sensitivity of the liabilities to changes in market interest rates,
and is not necessarily reflective of the projected liabilities' cash flows
under any specific scenario.
FIXED RATE ASSET ACCUMULATION VEHICLES. Products in this category require
the Company to pay a fixed rate of interest for a specified period of time. The
cash flows are not interest rate sensitive because the products include an MVA
feature and the liabilities have protection against the early withdrawal of
funds through surrender charges. The primary risk associated with these products
is that the spread between investment return and credited rate is not sufficient
to earn the Company's targeted return. Product examples include fixed rate
annuities with an MVA feature and fixed rate GRC. Contract duration is reflected
above and is dependent on the policyholder's choice of guarantee period. The
weighted average credited policyholder rate for these policyholder liabilities
was 6.71% at December 31, 1996.
INDEXED ASSET ACCUMULATION VEHICLES. Products in this category are similar
to the fixed rate asset accumulation vehicles, but require the Company to pay a
rate that is determined by an external index. The amount and/or timing of cash
flows will therefore vary based on the level of the particular index. The
primary risks inherent in these products are similar to the fixed rate asset
accumulation vehicles, with an additional risk of changes in the index adversely
affecting profitability. Product examples include indexed GRC with an estimated
duration of up to two years. The weighted average credited rate was 5.78% at
December 31, 1996.
INTEREST CREDITED ASSET ACCUMULATION VEHICLES. Products in this category
credit interest to policyholders, subject to market conditions and minimum
guarantees. Policyholders may surrender at book value but are subject to
surrender charges for an initial period. The primary risks vary depending on the
degree of insurance element contained in the product. Product examples include
universal life insurance contracts and the general account portion of the
Company's variable annuity products. Liability duration is short- to
intermediate-term and is reflected in the table above. The average credited rate
for these liabilities was 5.52% at December 31, 1996, excluding policy loans.
LONG-TERM PAYOUT LIABILITIES. Products in this category are long-term in
nature and may contain significant actuarial (including mortality and morbidity)
pricing risks. The cash flows are not
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interest sensitive, but do vary based on the timing and amount of benefit
payments. The primary risks associated with these products are that the benefits
will exceed expected actuarial pricing and/or the investment return will be
lower than assumed in pricing. Product examples include structured settlement
contracts, on-benefit annuities (i.e., the annuitant is currently receiving
benefits thereon) and long-term disability contracts. Contract duration is
generally six to ten years but, at times, exceeds 30 years. Policy liabilities
under these contracts are not interest-sensitive.
SHORT-TERM PAYOUT LIABILITIES. These liabilities are short-term in nature
with a duration of less than one year. The primary risks associated with these
products are determined by the non-investment contingencies such as mortality or
morbidity. Liquidity is of greater concern than for the long-term payout
liabilities. Products include individual and group-term life insurance contracts
and short-term disability contracts.
COMPETITION
The Company competes with the over 2,000 life insurance companies in the
United States, as well as certain banks, securities brokerage firms, investment
advisors and other financial intermediaries marketing insurance products,
annuities, mutual funds and other retirement-oriented investments. Some of these
companies have greater financial resources and currently have higher financial
strength and claims-paying ability ratings from major rating agencies than the
Company. National banks, in particular, may become more significant competitors
in the future for insurers who sell annuities, including the Company, as a
result of recent court decisions and regulatory actions discussed under
"-- Insurance Regulation -- Regulation at Federal Level". Although the effect of
these recent developments on the Company and its competitors is uncertain, both
the persistency of the Company's existing products and the Company's ability to
sell products could be materially impacted in the future. Also, several
proposals to repeal or modify the Glass-Steagall Act and the Bank Holding
Company Act have been made by members of Congress and the Executive Branch.
Certain of these proposals would repeal or modify the current restrictions that
prevent banks from being affiliated with insurance companies. None of these
proposals has yet been enacted, and it is not possible to predict whether any of
these proposals will be enacted or, if enacted, their potential effect on the
Company or its competitors.
The fundamental competitive factors affecting the sale of the Company's
products are price, the levels of commissions, charges and other expenses,
financial strength and claims-paying ability ratings, distribution capabilities,
reputation, quality of service, visibility in the marketplace and range of
products. For variable life insurance and annuity products, additional
competitive factors include mutual fund options, product design and investment
performance ratings. The Company's ability to compete is affected in part by its
ability to provide competitive products and quality service to the consumer,
wholesalers, general agents, licensed insurance agents and broker-dealers.
Management believes that its alternative and competing distribution systems
provide the Company with a competitive advantage in penetrating and
communicating with its growing target markets.
The Company also competes for distributors of its products such as banks,
broker-dealers and wholesalers. Management believes the principal bases upon
which insurance and financial services companies compete for distribution
channels are the services provided to, and the relationships developed with,
broker-dealers, wholesalers and other distributors, as well as compensation and
the variety and quality of products. Since the Company does not have a career
agency force, it must compete with other insurers and financial services
providers to attract and maintain productive independent distributors to sell
its products. Moreover, the Company does not have exclusive agency agreements
with many of its distributors and believes that certain of them sell products
similar to those marketed by the Company for other insurance companies.
In addition, the investment performance of investment managers chosen by
the Company to manage the assets related to its products may vary and
non-competitive investment performance could adversely affect the Company's
ability to market its products.
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RATINGS
Ratings are an important factor in establishing the competitive position of
insurance companies. The Company's principal insurance subsidiaries currently
are rated "A+ (superior)" by A.M. Best and have claims-paying ability ratings of
"AA" from S&P and "AA+" from Duff & Phelps, and one such insurance subsidiary,
Hartford Life, has an insurance financial strength rating of "Aa3" from Moody's.
A ratings downgrade (or the potential for such a downgrade) of the Company
could, among other things, materially increase surrender levels, adversely
affect relationships with broker-dealers, banks, agents, wholesalers and other
distributors of the Company's products and services, negatively impact
persistency, adversely affect the Company's ability to compete and thereby
materially and adversely affect the Company's business, financial condition and
results of operations. For more information on the ratings of the Company, see
"Risk Factors -- Importance of Company Ratings".
A.M. Best's financial condition ratings for insurance companies currently
range from "A++ (superior)" to "F (in liquidation)". These ratings reflect A.M.
Best's opinion of an insurance company's financial strength, operating
performance and ability to meet its obligations to policyholders. Moody's
insurance financial strength ratings currently range from "Aaa (exceptional)" to
"C (lowest rated)". Such ratings are an opinion of the ability of an insurance
company to repay senior policyholder claims and obligations. S&P's insurance
claims-paying ability ratings currently range from "AAA (superior)" to "CCC
(extremely vulnerable)". Such a rating is an opinion of an operating insurance
company's financial capacity to meet the obligations of its insurance policies
in accordance with their terms. Duff & Phelps' claims-paying ability ratings
currently range from "AAA (negligible risk factors)" to "DD (liquidation)". Such
a claims-paying ability rating relates to the likelihood of timely payment of
policyholder and contractholder obligations.
The foregoing ratings reflect each rating agency's opinion of the Company's
principal life insurance subsidiaries' financial strength, operating performance
and ability to meet its obligations to policyholders and are not evaluations
directed toward the protection of investors.
INSURANCE REGULATION
GENERAL REGULATION AT STATE LEVEL
The insurance business of the Company is subject to comprehensive state and
federal regulation and supervision throughout the United States. The laws of the
various jurisdictions establish supervisory agencies with broad administrative
powers with respect to, among other things, licensing to transact business,
licensing agents, admittance of assets, regulating premium rates, approving
policy forms, regulating unfair trade and claims practices, establishing reserve
requirements and solvency standards, fixing maximum interest rates on life
insurance policy loans and minimum rates for accumulation of surrender values,
restricting certain transactions between affiliates and regulating the type,
amounts and valuations of investments permitted.
Several states, including the State of Connecticut, regulate affiliated
groups of insurers, such as the Company, under insurance holding company
legislation. As a holding company with no significant business operations of its
own, the Company relies on dividends from its subsidiaries, which are primarily
domiciled in the State of Connecticut, as the principal source of cash to meet
its obligations, including the payment of principal and interest on debt
obligations of the Company and the payment of dividends to holders of its
capital stock. The payment of dividends by Connecticut-domiciled life insurers
is limited under the insurance holding company laws of Connecticut which require
notice to and approval by the Connecticut Insurance Commissioner for the
declaration or payment of any dividend that, together with the other dividends
or distributions made within the preceding twelve months, exceeds the greater of
(i) 10% of the insurer's policyholder surplus as of December 31 of the preceding
year or (ii) net gain from operations for the twelve-month period ending on
December 31 last preceding, in each case determined under statutory insurance
accounting practices. In addition, if any dividend of a Connecticut-domiciled
insurer exceeds the
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insurer's earned surplus, it requires the approval of the Connecticut Insurance
Commissioner. Based on these limitations and statutory results as of December
31, 1996, the Company would have been able to receive $132 million in dividends
in 1997 from Hartford Life and Accident, the Company's direct subsidiary,
without obtaining the approval of the Connecticut Insurance Commissioner.
Life insurance companies are required to establish an AVR consisting of two
components: (i) a "default component" which provides for future credit-related
losses on fixed maturity investments and (ii) an "equity component" which
provides for losses on all types of equity investments, including real estate.
Insurers also are required to establish an IMR for fixed maturity net realized
capital gains and losses, net of tax, related to changes in interest rates. The
IMR is required to be amortized into statutory earnings on a basis reflecting
the remaining period to maturity of the fixed maturity securities sold. These
reserves are required by state insurance regulatory authorities to be
established as a liability on a life insurer's statutory financial statements,
but do not affect financial statements of the Company prepared in accordance
with GAAP. Although future additions to AVR will reduce the future statutory
surplus of the Company's insurance subsidiaries, the Company does not believe
that the impact under current regulations of such reserve requirements will
materially affect the ability of its insurance subsidiaries to grow its
statutory surplus and pay dividends to the Company in the future.
In addition, the Company is a holding company which owns directly or
indirectly all the outstanding shares of capital stock of certain insurance
company subsidiaries domiciled in Connecticut and New Jersey. Insurance laws of
such states applicable to the Company generally provide that no person may
acquire control of the Company, and thus indirect control of these insurance
company subsidiaries, without the prior approval of the appropriate insurance
regulators. In general, any person who acquires beneficial ownership of 10% or
more of the voting securities of the Company would be presumed to have acquired
such control, although the appropriate insurance regulators, upon application,
may determine otherwise. See "Description of Capital Stock -- Restrictions on
Ownership Under Insurance Laws".
Each insurance company is required to file detailed annual reports with
supervisory departments in each of the jurisdictions in which it does business
and its operations and accounts are subject to examination by such departments
at regular intervals. Each of the Company's life insurance subsidiaries prepare
statutory financial statements in accordance with accounting practices
prescribed or permitted by the insurance departments of their respective states
of domicile. Prescribed statutory accounting practices include publications of
the NAIC, as well as state laws, regulations and general administrative rules.
In addition, as part of their routine regulatory oversight process, state
insurance departments conduct detailed examinations periodically (generally once
every three to five years) of the books, records, accounts and market conduct of
insurance companies domiciled in their states. Such examinations are generally
conducted in cooperation with the departments of two or three other states under
guidelines promulgated by the NAIC. In 1996, a State of Connecticut association
examination report of the Company's operations for the four years ended December
31, 1993 found no material discrepancies. The Company anticipates that its next
examination will occur in 1998. In addition, in 1995, a State of New York
Insurance Department examination of the Company's market conduct for the three
years ended December 31, 1994 found no material deficiencies. The Company is
currently undergoing separate periodic market conduct examinations conducted by
the State of Connecticut (covering the period from July 1, 1995 through June 30,
1996), the State of Maryland (covering the period from January 1, 1992 through
December 31, 1995) and the State of California (covering the period from January
1, 1995 through June 30, 1996). Management does not expect any finding from any
of these examinations that would have a material adverse effect on the Company.
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REGULATORY INITIATIVES
State insurance regulators and the NAIC are continually re-examining
existing laws and regulations, specifically focusing on insurance company
investments and solvency issues, risk-adjusted capital guidelines,
interpretations of existing laws, the development of new laws, the
implementation of non-statutory guidelines and the circumstances under which
dividends may be paid. These initiatives may be adopted by the various states in
which the Company's insurance subsidiaries are licensed, but the ultimate
content and timing of any statutes and regulations adopted by the states cannot
be determined at this time. It is impossible to predict the future impact of
changing state and federal regulations on the Company's operations, and there
can be no assurance that existing or future insurance-related laws and
regulations will not become more restrictive.
In the 1970s, the NAIC developed a set of financial relationships or
"tests" known as the Insurance Regulatory Information System ("IRIS") that was
designed for early identification of companies that may require special
attention by insurance regulatory authorities. Insurance companies submit data
annually to the NAIC, which in turn analyzes the data using ratios covering
twelve categories of financial data with defined "usual ranges" for each such
category. An insurance company may fall out of the usual range for one or more
ratios because of specific transactions or events that are in and of themselves
immaterial or eliminated at the consolidated level. Generally, an insurance
company will become subject to regulatory scrutiny if it falls outside the usual
ranges of four or more of the ratios, and regulators may then act, if such
company has insufficient capital, to constrain the company's underwriting
capacity. The Company has determined that, for 1996, one IRIS ratio for Hartford
Life and two IRIS ratios for Hartford Life and Accident fall outside the usual
range due to normal business operations such as the ownership by Hartford Life
and Accident of Hartford Life.
The NAIC also has approved risk-based capital ("RBC") standards, which are
used to determine the amount of total adjusted capital (STATUTORY CAPITAL AND
SURPLUS plus AVR and other adjustments) that a life insurance company must have,
taking into account the risk characteristics of such company's investments and
liabilities. The formula establishes a standard of capital adequacy that is
related to risk. The RBC formula establishes capital requirements for four
categories of risk: asset risk, insurance risk, interest rate risk and business
risk. For each category, the capital requirements are determined by applying
specified factors to various asset, premium, reserve and other items, with the
factor being higher for items with greater underlying risk and lower for items
with less risk. The formula is used by insurance regulators as an early warning
tool to identify deteriorating or weakly capitalized companies for the purpose
of initiating regulatory action.
The NAIC's RBC requirements provide for four levels of regulatory attention
depending on the ratio of a company's total adjusted capital to its RBC. If a
company's total adjusted capital is less than 100% but greater than or equal to
75% of its RBC, or if a negative trend has occurred (as defined in the
regulations) and total adjusted capital is less than 125% of its RBC, the
company must submit a comprehensive plan to the regulatory authority which
discusses proposed corrective actions to improve its capital position. If a
company's total adjusted capital is less than 75% but greater than or equal to
50% of its RBC, the regulatory authority will perform a special examination of
the company and issue an order specifying corrective actions that must be
followed. If a company's total adjusted capital is less than 50% but greater
than or equal to 35% of its RBC, the regulatory authority may take any action it
deems necessary, including placing the company under its control. If a company's
total adjusted capital is less than 35% of its RBC, the regulatory authority is
mandated to place the company under its control. The RBC ratios for each of
Hartford Life, Hartford Life and Accident and ITT Hartford Life and Annuity
Insurance Company have been in excess of 200% of their respective RBC from 1993
through 1996.
In addition, state regulatory authorities, industry groups and rating
agencies have developed several initiatives regarding market conduct. For
example, the NAIC has adopted the NAIC Model Illustration Regulation, which
applies to group and individual life insurance policies and certificates,
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and the Market Conduct Handbook. State regulators have imposed significant fines
on various insurers for improper market conduct. The American Council on Life
Insurance established the Insurance Market Place Standards Association, a
self-regulatory organization, to implement its Principles and Code of Ethical
Life Insurance Market Conduct, which includes a third-party assessment
procedure. Market conduct also has become one of the criteria used to establish
the ratings of an insurance company. For example, A.M. Best's ratings analysis
now includes a review of the insurer's compliance program. Management does not
believe that these market conduct initiatives will have a material adverse
effect on its business, financial condition or results of operations.
In addition, the NAIC has adopted a model regulation called "Valuation of
Life Insurance Policies Model Regulation", which would establish new minimum
STATUTORY RESERVE requirements for individual life insurance policies written in
the future. Before the new reserve standards can become effective, individual
states must enact the model regulation. If these reserve standards were adopted
in their current form, companies selling certain individual life insurance
products such as term life insurance products with guaranteed premium periods
and universal life insurance products with no-lapse guarantees would be required
to adjust reserves to be consistent with the new minimum standards. It is
impossible at this time to predict if the model regulation will be enacted and,
if enacted, when it will become applicable. However, the Company anticipates no
material impact as a result of the enactment of this legislation.
ASSESSMENTS AGAINST INSURERS
Under the INSURANCE GUARANTY FUND laws existing in each state, the District
of Columbia and Puerto Rico, insurers licensed to do business can be assessed by
state insurance guaranty associations for certain obligations of insolvent
insurance companies to policyholders and claimants. Recent regulatory actions
against certain large life insurers encountering financial difficulty have
prompted various state insurance guaranty associations to begin assessing life
insurance companies for the deemed losses. Most of these laws do provide,
however, that an assessment may be excused or deferred if it would threaten an
insurer's solvency and further provide for annual limits on such assessments. A
large part of the assessments paid by the Company's insurance subsidiaries
pursuant to these laws may be used as credits for a portion of the Company's
insurance subsidiaries' premium taxes. The Company's insurance subsidiaries were
assessed $11 million, $13 million and $12 million in 1994, 1995 and 1996,
respectively. Since such assessments are typically not made for several years
after an insurer fails and depend upon the final outcome of liquidation or
rehabilitation proceedings, the Company cannot accurately determine the amount
or timing of any future assessment on the Company's insurance subsidiaries.
However, based on the best information presently available, management believes
the Company's total future assessments will not be material to its operating
results or financial position.
REGULATION AT FEDERAL LEVEL
Although the federal government does not directly regulate the business of
insurance, federal legislation and administrative policies in several areas,
including pension regulation, financial services regulation and federal
taxation, can significantly and adversely affect the insurance industry and thus
the Company. For example, Congress has from time to time considered legislation
relating to the deferral of taxation on the accretion of value within certain
annuities and life insurance products, the removal of barriers preventing banks
from engaging in the insurance business, changes in ERISA regulations, the
alteration of the federal income tax structure and the availability of Section
401(k) or individual retirement accounts. In particular, Congress has reviewed
various proposals to repeal or modify the McCarran-Ferguson Act (which exempts
the insurance industry from certain federal laws), the Glass-Steagall Act (which
restricts banks from engaging in a securities-related business) and the Bank
Holding Company Act (which prohibits banks from being affiliated with insurance
companies). In addition, Congress is currently considering enacting legislation
that would reduce the tax rate applicable to long-term capital gains. This may
result in alternative financial products becoming less tax disadvantaged versus
variable annuities.
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Moreover, the United States Supreme Court held on January 18, 1995 in
NationsBank of North Carolina v. Variable Annuity Life Insurance Company that
annuities are not insurance for purposes of the National Bank Act. In addition,
the Supreme Court also held on March 26, 1996 in Barnett Bank of Marion City v.
Nelson that state laws prohibiting national banks from selling insurance in
small-town locations are preempted by federal law. The Office of the Comptroller
of the Currency also adopted a ruling in November 1996 that permits national
banks, under certain circumstances, to expand into other financial services,
thereby increasing competition for the Company. At present, the extent to which
banks can sell insurance and annuities without regulation by state insurance
departments is being litigated in various courts in the United States. Although
the effect of these recent developments on the Company and its competitors is
uncertain, both the persistency of the Company's existing products and the
Company's ability to sell products may be materially impacted in the future.
In addition, the HIPA Act of 1996 phases out the deductibility of interest
on policy loans under COLI by 1998, thus eliminating all future sales of
leveraged COLI. The Company's leveraged COLI product has been an important
contributor to its profitability in recent years and will continue to contribute
to the profitability of the Company (although such contribution will be reduced
in the future due to the effects of this legislation). As a result, net income
contributed by COLI may be lower in the future (particularly during 1999 and
later years) as a result of the elimination of leveraged COLI sales.
SECURITIES LAWS
Certain of the Company's subsidiaries, and certain policies and contracts
offered by them, are subject to regulation under the federal securities laws
administered by the Commission and certain state securities laws. Certain
separate accounts of the Company's insurance subsidiaries are registered as
investment companies under the Investment Company Act of 1940, as amended (the
"Investment Company Act"). Separate accounts through which certain variable
annuity contracts and variable insurance policies issued by the Company's
insurance subsidiaries are made available are also registered under the
Securities Act. Certain other subsidiaries of the Company are registered as
broker-dealers under the Exchange Act and are members of, and subject to
regulation by, the National Association of Securities Dealers, Inc.
Certain of the Company's subsidiaries are investment advisors registered
under the Investment Advisers Act of 1940, as amended. The investment companies
managed by such subsidiaries are registered with the Commission under the
Investment Company Act and the shares of certain of these entities are qualified
for sale in certain states in the United States and the District of Columbia.
Certain subsidiaries of the Company are also subject to the Commission's net
capital rules.
In October 1996, the National Securities Markets Improvements Act of 1996
was enacted into law. Of particular interest to the variable products industry
are the provisions establishing a new "reasonableness standard" for all fees and
charges in variable annuity and variable life insurance policies. Because
insurers no longer will have to explain each and every component of their fees
and charges to the Commission, and instead will be subject to an overall
reasonableness standard for aggregate fees and charges, the Company believes the
legislative changes will provide the industry with greater flexibility in
product design. However, given the significant barriers to market entry, such as
entering into relationships with broker-dealers and systems constraints, the
Company believes that the legislation overall will have a minimal competitive
impact.
All aspects of the Company's investment advisory activities are subject to
various federal and state laws and regulations. These laws and regulations are
primarily intended to benefit investment advisory clients and investment company
stockholders and generally grant supervisory agencies broad administrative
powers, including the power to limit or restrict the carrying on of business for
failure to comply with such laws and regulations. In such event, the possible
sanctions which may be imposed include the suspension of individual employees,
limitations on the activities in which the investment advisor may engage,
suspension or revocation of the investment advisor's registration as an advisor,
censure and fines.
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ERISA CONSIDERATIONS
Enacted into law on August 20, 1996, the Small Business Protection Act (the
"SBPA") offered insurers protection from potential litigation exposure prompted
by the 1993 U.S. Supreme Court decision in John Hancock Mutual Life Insurance
Company v. Harris Trust & Savings Bank (the "Harris Trust Decision") in which
the Court held that, with respect to a portion of the funds held under certain
general account group annuity contracts, an insurer is subject to the fiduciary
requirements of ERISA. The pertinent SBPA provisions provide that insurers are
protected from lawsuits claiming breaches of fiduciary duties under ERISA for
past actions. However, insurers remain subject to federal criminal law and
liable for actions brought by the U.S. Secretary of Labor alleging breaches of
fiduciary duties that also constitute a violation of federal or state criminal
law. The SBPA also provides that contracts issued from an insurer's general
account on or before December 31, 1998, that are not guaranteed benefit
policies, will be permanently grandfathered if they meet the requirements of
regulations the United States Department of Labor is required to issue by
December 31, 1997. The SBPA further provides that contracts issued from an
insurer's general account after December 31, 1998, that are not guaranteed
benefit policies, will be subject to ERISA. Although the Company does not
believe that the Harris Trust Decision had a material adverse effect on its
business, financial condition or results of operations, the Company supported
and welcomed the enactment of the aforementioned provisions of the SBPA as a
means to remove an area of potential exposure for the insurance industry
generally.
With respect to employee welfare benefit plans subject to ERISA, the United
States Congress periodically has considered amendments to the law's federal
preemption provision, which would expose the Company, and the insurance industry
generally, to state law causes of action, and accompanying extra-contractual
(e.g., punitive) damages in lawsuits involving, for example, group life and
group disability claims. To date, all such amendments to ERISA have been
defeated.
PROPERTIES
The Company's headquarters, located in Simsbury, Connecticut, is currently
leased from a third party by Hartford Fire pursuant to a sale-leaseback
arrangement. After the Equity Offerings, the Company or one of its subsidiaries
will sublease from Hartford Fire the right to use the headquarters building. For
a further discussion of this sublease arrangement, see "Certain Relationships
and Transactions--Intercompany Arrangements--Simsbury Sublease". The remainder
of the material facilities of the Company are either leased or subleased from
The Hartford or its subsidiaries or leased from third parties. The Company
believes its existing properties are adequate for its present operations.
LEGAL PROCEEDINGS
The Company is a defendant in various lawsuits arising in the ordinary
course of business. In the opinion of management, the resolution of these
matters is not expected to have a material adverse effect on the Company's
business, financial condition or results of operations. In addition, companies
in the life insurance industry historically have been subject to substantial
litigation resulting from claims disputes and other matters. Most recently, such
companies have faced extensive claims, including class-action lawsuits, alleging
improper sales practices relating to sales of certain life insurance products.
Negotiated settlements of such class-action lawsuits have had a material adverse
effect on the business, financial condition and results of operations of certain
of these companies. The Company is not and has not been a defendant in any such
class-action lawsuit alleging improper sales practices. No assurance can be
given that such class-action lawsuits or other litigation would not materially
and adversely affect the Company's business, financial condition or results of
operations.
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EMPLOYEES
As of May 13, 1997, the Company had 3,782 direct employees, 2,209 of whom
are employed at the home office in Simsbury, Connecticut, and 1,573 of whom are
employed at various branch offices throughout the United States, Canada and
elsewhere. Management believes that its employee relations are good. None of the
Company's employees is subject to a collective bargaining agreement and the
Company is not aware of any current efforts to implement such an agreement.
MANAGEMENT
DIRECTORS
The names, ages and a description of the business experience, principal
occupation and employment during at least the last five years of each of the
directors of the Company that will have been elected prior to the completion of
the Equity Offerings are set forth below:
<TABLE>
<CAPTION>
NAME AGE
---
<S> <C>
Ramani Ayer......................... 49
Donald R. Frahm..................... 65
Paul G. Kirk, Jr.................... 59
Lowndes A. Smith.................... 57
H. Patrick Swygert.................. 54
DeRoy C. Thomas..................... 71
Gordon I. Ulmer..................... 64
David K. Zwiener.................... 42
</TABLE>
Mr. Ayer has been Chairman and Chief Executive Officer of The Hartford
since February 1, 1997 and a director since 1991. Prior to that, Mr. Ayer served
as an Executive Vice President of The Hartford since the ITT Spin-Off in
December 1995. He has been President and Chief Operating Officer of Hartford
Fire since 1991 and previously served as Executive Vice President of Hartford
Fire from 1990 to April 1991 and Senior Vice President from 1989 to 1990. Mr.
Ayer joined The Hartford in 1973 as a member of the Operations Research
Department. In 1981 he was appointed Secretary and Director of Corporate
Reinsurance. In 1983 he was named Vice President of Hartford Re Company, The
Hartford's reinsurance subsidiary, and, in 1984, he joined the Hartford
Specialty Company, of which he was appointed President in 1986.
Mr. Frahm served as Chairman and Chief Executive Officer of The Hartford
from April 1988 until his retirement on January 31, 1997. He has served on The
Hartford's Board of Directors since 1985. Mr. Frahm is a member of the Board of
Directors of the Insurance Information Institute and the American Insurance
Association. He also is a director of the Hartford Hospital, Junior Achievement
North Central Connecticut Inc. and the Greater Hartford Chamber of Commerce. He
also is a corporator of Connecticut Children's Medical Center.
Mr. Kirk became a partner in the law firm of Sullivan & Worcester in 1977
and is presently of counsel to the firm. He served as Chairman of the Democratic
Party of the United States from 1985 to 1989 and as its Treasurer from 1983 to
1985. Following his resignation in 1989 as Chairman of the Democratic Party, he
returned to Sullivan & Worcester as a partner in general corporate practice at
the firm's Boston and Washington offices. Mr. Kirk has served on The Hartford's
Board of Directors since 1995. He is a director of Kirk-Sheppard & Co., Inc., of
which he also is Chairman and Treasurer. Mr. Kirk also is a director of ITT
Corporation (formerly ITT Destinations, Inc.) ("New ITT"), the Bradley Real
Estate Corporation and Rayonier Inc. He is Co-Chairman of the Commission on
Presidential Debates, Chairman of the Board of Directors of the John F. Kennedy
Library Foundation, Chairman of the Board of Directors of the National
Democratic Institute for International
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Affairs and a trustee of Stonehill College and St. Sebastian's School. He is a
graduate of Harvard College and Harvard Law School.
Mr. Smith has been Vice-Chairman of The Hartford since February 1, 1997 and
is President and Chief Executive Officer of the Company. He served as an
Executive Vice President of The Hartford from December 1995 until his
appointment as Vice-Chairman and has been a director of The Hartford since 1991.
Mr. Smith has been President and Chief Operating Officer of The Hartford's life
insurance subsidiaries since 1989. Prior to that time, he served as Senior Vice
President and Group Controller for all companies owned or operated by The
Hartford. Mr. Smith joined The Hartford in 1968 as a member of the Corporate
Accounting Department and in 1972 he was appointed the Secretary and Director of
Corporate Accounting. He was elected Assistant Vice President in 1974, and he
was named Controller in 1977. Mr. Smith is a director of the Connecticut
Children's Medical Center and the American Council of Life Insurance.
Mr. Swygert has been President of Howard University, Washington, D.C.,
since August 1995. Prior to that, he was President of the University at Albany,
State University of New York, since 1990. Mr. Swygert received his undergraduate
and law degrees from Howard University, has been a visiting professor and
lecturer abroad and is the author of numerous articles and publications on
higher education and the law. He has been a director of The Hartford since 1996
and is a member of the Board of Directors of The Victory Funds, Cleveland, Ohio.
Mr. Swygert also is Chairman of the Washington, D.C. Area Consortium of Colleges
and Universities, a trustee of the Institute of Public Administration and a
member of the Commission on Women in Higher Education and the Capital District
Martin Luther King, Jr. Commission.
Mr. Thomas is a retired partner of LeBoeuf, Lamb, Greene & MacRae, a law
firm in New York, New York, having practiced there from 1991 through December
31, 1994. He was President, Chief Operating Officer and a director of ITT from
1988 to 1991, and from 1983 to 1988 he was Vice-Chairman and Chief Operating
Officer of ITT Diversified Services and Chairman and Chief Executive Officer of
The Hartford. He has been a director of The Hartford since 1995 and also is a
director of Houghton-Mifflin, Connecticut Health Services and MedSpan, Inc. He
also is a former trustee of Fordham University, Wheelock College, University of
Hartford, Hartford Hospital and CT Health System. Mr. Thomas is President of
Goodspeed Opera House and the Chairman of the Old State House Association.
Mr. Ulmer is former Chairman and Chief Executive Officer of the former
Connecticut Bank and Trust Company ("CBT") and retired President of the former
Bank of New England Corporation, the former holding company of CBT ("BNEC"). He
joined CBT in 1957 and held numerous positions before being elected President
and a director in 1980 and Chairman and Chief Executive Officer in 1985. In
1988, he was elected President of BNEC, and he retired as President in December
1990. Mr. Ulmer has been a director of The Hartford since 1995 and also serves
as a director of Rayonier Inc. and the Old State House Association. He is a
graduate of Middlebury College, the American Institute of Banking and the
Harvard Business School Advanced Management Program and attended New York
University's Graduate School of Engineering.
Mr. Zwiener has been Executive Vice President and Chief Financial Officer
of The Hartford since August 1995. From March 1993 until August 1995, he served
as Executive Vice President and Chief Financial Officer of ITT Financial
Corporation. From 1987 to February 1993, Mr. Zwiener served as Senior Vice
President and Treasurer, as well as Executive Vice President -- Capital Markets
Division, of Heller International Corporation.
Promptly following the completion of the Equity Offerings, The Hartford and
the Company expect to elect two additional directors of the Company who will be
persons not associated currently or formerly with The Hartford or the Company.
The Board of Directors will then consist of ten members, including eight who are
directors and/or officers of The Hartford. The Hartford will have the ability to
change the size and composition of the Board of Directors.
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<PAGE> 269
Members of the Board of Directors will be divided into three classes with
staggered three-year terms and each class as equal in number as possible. Of the
directors that will have been elected to the Board of Directors prior to the
completion of the Equity Offerings, the terms of Messrs. Zwiener, Kirk and Ulmer
will expire at the next annual meeting of stockholders (expected to occur in the
second quarter of 1998), the terms of Messrs. Smith and Thomas and one of the
two individuals to be elected to the Board of Directors who is not currently or
formerly associated with The Hartford or the Company will expire at the annual
meeting of stockholders to be held in 1999 and the terms of Messrs. Ayer, Frahm
and Swygert and the other individual to be elected to the Board of Directors who
is not currently or formerly associated with The Hartford or the Company will
expire at the annual meeting of stockholders to be held in 2000.
The Board of Directors will have an audit committee which will review the
results and scope of the audit and other services provided by the Company's
independent auditors as well as review the Company's internal accounting and
control procedures and policies. The Board of Directors also will have a
compensation and personnel committee (the "Compensation and Personnel
Committee") which will oversee the compensation and benefits of the management
and employees of the Company and will consist entirely of directors who are
disinterested persons within the meaning of Rule 16b-3 under the Exchange Act.
The Board of Directors may, from time to time, establish certain other
committees to facilitate the management of the Company.
COMPENSATION OF DIRECTORS
Members of the Board of Directors who are employees of the Company or The
Hartford or their respective subsidiaries will not be compensated for service on
the Board of Directors or any committee thereof. Other directors of the Company
will receive an annual retainer fee of $20,000 payable solely in restricted
shares of Class A Common Stock, $1,000 in cash for each board meeting attended
and $1,000 in cash for each committee meeting attended. See "-- Restricted Stock
Plan for Non-Employee Directors". All directors will be reimbursed for travel
expenses incurred on behalf of the Company.
RESTRICTED STOCK PLAN FOR NON-EMPLOYEE DIRECTORS
Prior to the completion of the Equity Offerings, the Company is expected to
adopt (and the sole stockholder of the Company prior to the Equity Offerings is
expected to approve) the 1997 Hartford Life, Inc. Restricted Stock Plan for
Non-Employee Directors (the "1997 Restricted Stock Plan"). The 1997 Restricted
Stock Plan is designed to further the Company's objectives of attracting and
retaining individuals of ability as directors and aligning the directors'
interests more closely with the interests of its stockholders.
Under the proposed 1997 Restricted Stock Plan, directors of the Company who
are not employees of the Company, The Hartford or any of their respective
subsidiaries will automatically participate in the 1997 Restricted Stock Plan.
There will be seven directors of the Company eligible to participate in the 1997
Restricted Stock Plan.
The 1997 Restricted Stock Plan will be administered by the Compensation and
Personnel Committee. The Compensation and Personnel Committee will have the
responsibility of interpreting and establishing the rules appropriate for the
administration of the 1997 Restricted Stock Plan.
Grants of restricted Class A Common Stock will be made automatically on the
date of each annual meeting of stockholders to each non-employee director
elected at the meeting or continuing in office following the meeting. The amount
of the award will equal (and be in lieu of) the annual retainer (currently set
at $20,000 and not including meeting attendance fees) in effect for the
twelve-month period beginning on the date of the annual meeting divided by the
fair market value of one share of the Company's Class A Common Stock. Fair
market value is the average of the high and low sales price per share of Class A
Common Stock on the date of the annual meeting, as reported on the NYSE
Composite Tape. No awards will be made prior to completion of the Equity
Offerings. For periods of service on the Board of Directors preceding the
Company's first annual
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<PAGE> 270
meeting, each non-employee director is expected to be granted a prorated number
of restricted shares of Class A Common Stock. Non-employee directors elected to
the Board of Directors between annual meetings also will be awarded a prorated
number of restricted shares based on the duration of their service. A total of
100,000 shares of Class A Common Stock may be issued under the 1997 Restricted
Stock Plan. However, the 1997 Restricted Stock Plan is expected to provide that
no award will be made thereunder, and the Company will have no obligation to
make any award thereunder, if such award would cause the percentage of The
Hartford's beneficial ownership of the combined voting power or the value of the
capital stock of the Company to fall below 80%. The shares to be issued may be
treasury shares, reacquired shares, authorized but unissued shares or shares
purchased on the open market. The shares of Class A Common Stock that are
granted under the 1997 Restricted Stock Plan will be registered in the name of
the director and held in escrow by the Company and will be subject to a
restriction period (after which restrictions will lapse) which shall mean a
period commencing on the grant date and ending on the earliest of (i) the fifth
anniversary of the grant date, (ii) upon retirement at age 72, (iii) upon a
"change of control" (as defined in the 1997 Restricted Stock Plan) of the
Company, (iv) death, (v) the onset of total disability, as defined in the
Hartford Investment and Savings Plan, or (vi) resignation under certain
circumstances. Except as provided above, any resignation from board service
within the restriction period will result in forfeiture of the shares. Shares
may not be sold, assigned, transferred, pledged or otherwise disposed of during
the restriction period. However, during the restriction period, a director will
have the right to vote and to receive dividends on the shares granted under the
1997 Restricted Stock Plan.
The Board of Directors may amend, suspend or discontinue the 1997
Restricted Stock Plan at any time, except that the Board of Directors may not,
without stockholder approval, take any action that would cause grants of
restricted stock under the 1997 Restricted Stock Plan to no longer be exempt
from Section 16(b) of the Exchange Act, pursuant to Rule 16b-3 thereunder, or
any other regulatory requirement. No amendment, suspension or discontinuance of
the 1997 Restricted Stock Plan may impair a director's right under a restricted
stock award previously granted without his or her consent.
The 1997 Restricted Stock Plan will become effective as of the date of
consummation of the Equity Offerings and terminate on December 31, 2007;
provided, however, that grants of Restricted Stock made prior to the termination
of the 1997 Restricted Stock Plan may vest following such termination in
accordance with their terms.
NON-EMPLOYEE DIRECTORS' BENEFITS
Prior to the completion of the Equity Offerings, the Company is expected to
adopt the 1997 Hartford Life, Inc. Insurance Program for non-employee directors.
Under the program, the Company will provide non-employee directors with $100,000
of group life insurance coverage and $750,000 of accidental death and
dismemberment and permanent total disability coverage while they are serving on
the Board of Directors. Non-employee directors also may purchase additional
benefits under this program.
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OFFICERS
The names, ages and positions of each of the executive and other key
officers of the Company are set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ ---- --------------------------------------------------------
<S> <C> <C>
Lowndes A. Smith.............. 57 Chief Executive Officer and President
John P. Ginnetti.............. 51 Executive Vice President, Asset Management
Thomas M. Marra............... 38 Executive Vice President, Individual Life and Annuities
Leonard E. Odell, Jr.......... 51 Senior Vice President, Specialty Insurance Operations
Raymond P. Welnicki........... 48 Senior Vice President, Employee Benefits
Gregory A. Boyko.............. 45 Senior Vice President, Chief Financial Officer and
Treasurer
Lynda Godkin.................. 43 Vice President and General Counsel
Craig R. Raymond.............. 36 Vice President and Chief Actuary
Ann M. de Raismes............. 46 Vice President, Human Resources
David M. Znamierowski......... 36 Vice President, Investment Strategy
Lizabeth H. Zlatkus........... 38 Vice President, Group Life and Disability
William A. Godfrey............ 39 Vice President, Information Technology
Robert F. Nolan............... 42 Vice President, Corporate Relations
Walter C. Welsh............... 50 Vice President, Government Affairs
</TABLE>
Set forth below is a description of the business experience, principal
occupation and employment, during at least the last five years, of the executive
and other key officers of the Company.
For Mr. Smith's business experience, principal occupation and employment
history, see information under "-- Directors".
Mr. Ginnetti has been Executive Vice President and Director of Asset
Management Services since 1994. From 1988 to 1994, he served as Senior Vice
President and Director of Individual Life and Annuities. Mr. Ginnetti joined
Hartford Life in 1982 as General Counsel. Previously, he was Assistant General
Counsel with the Life Insurance Company of North America.
Mr. Marra has been Executive Vice President and Director of Individual Life
and Annuities since 1996. Mr. Marra also oversees the Individual Life Insurance
segment. Mr. Marra joined Hartford Life in 1980 as an associate actuary. He held
positions of increasing responsibility and in 1991 was named Vice President and
Director of Individual Annuities. He was elected Senior Vice President in 1994.
He is the current Chairman of the National Association of Variable Annuities. He
also is a Fellow of the Society of Actuaries.
Mr. Odell has been Senior Vice President and Director of Specialty
Insurance Operations since 1994. Prior to that, he was Vice President, Chief
Actuary and Director of Business Development for Hartford Life. Mr. Odell joined
Hartford Life in 1973 as Actuary and has held positions of increasing
responsibility, including Vice President and Director of Individual Life
Actuarial, Marketing and Underwriting and Vice President and Director of Group
Actuarial, Marketing and Underwriting. He is a Fellow of the Society of
Actuaries.
Mr. Welnicki has been Senior Vice President and Director of Employee
Benefits since 1994. 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. 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.
Mr. Boyko is Senior Vice President, Chief Financial Officer and Treasurer.
He joined Hartford Life in 1995 as Controller and was elected Vice President in
1996. 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
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<PAGE> 272
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.
Ms. Godkin is 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.
Mr. Raymond is Vice President and Chief Actuary. Since joining Hartford
Life in 1985, Mr. Raymond has held actuarial leadership positions of increased
responsibility throughout the Company. In 1992, he was named Assistant Vice
President and Director of Individual Life and Annuities, Actuarial and became
Vice President in 1994. Prior to joining Hartford Life, Mr. Raymond held
positions at Integon Corporation and The National Life and Accident Insurance
Company. He is a Fellow of the Society of Actuaries and Chairman of the American
Academy of Actuaries Committee on Life Insurance.
Ms. de Raismes is Vice President and Director of Human Resources. She
joined Hartford Life in 1984 as Manager of Staffing. She has been Director of
Human Resources since 1991 and was elected Vice President in 1994. Previously,
she held human resource management positions of increasing responsibility with
SCM Corporation. She is a member of The Hartford Foundation Board of Directors.
Mr. Znamierowski is 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.
Ms. Zlatkus is Vice President and Director of Group Life and Disability.
Ms. Zlatkus held positions of increasing responsibility since joining The
Hartford in 1983. She was named Vice President and Director of Risk Management
and Business Operations in 1994. Prior to joining The Hartford, she was a senior
accountant with Peat, Marwick, Mitchell & Company. She became a Certified Public
Accountant in 1982.
Mr. Godfrey is Vice President and Director of Information Technology. He
joined the senior management team at Hartford Life in 1996 to oversee technology
management. Previously, Mr. Godfrey held information technology positions at
Fleet Financial Group and systems development positions with CIGNA Corporation
and Electronic Data Systems.
Mr. Nolan is Vice President and Director of Corporate Relations. Mr. Nolan
joined Hartford Life in 1992 and was elected Vice President in 1995. Previously,
Mr. Nolan held positions of increasing responsibility at Aetna Life & Casualty
Company in public relations, marketing communications and corporate
communications.
Mr. Welsh is Vice President and Director of Government Affairs. Mr. Welsh
has worked at The Hartford since 1979. Since 1993, Mr. Welsh has served as
Director of Government Relations for Hartford Life. From 1979 to 1993, Mr. Welsh
held various tax management positions within the Law Department of The Hartford.
He was named Assistant General Counsel in 1984 and was named Assistant Director
of Taxes in 1986. He previously practiced law with the Internal Revenue Service
and is a member of the Connecticut and American Bar Associations.
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<PAGE> 273
EMPLOYMENT AGREEMENT
Mr. Smith currently is the only employee of the Company who is a party to
an employment agreement with The Hartford. Mr. Smith's employment agreement is
effective as of December 19, 1995 and expires on December 19, 1999. Following
the Equity Offerings, the Company is expected to become a party to this
agreement. The agreement provides, or is expected to be amended following the
Equity Offerings to provide, among other things: (i) a base salary payable by
the Company in an amount not less than $525,000 per annum, (ii) participation in
the benefit plans described herein, (iii) Mr. Smith's employment as President
and Chief Executive Officer of the Company and The Hartford's life insurance
subsidiaries, and as Vice-Chairman of The Hartford, and (iv) certain payments
and benefits in the event of termination, without cause, by the Company or The
Hartford such that Mr. Smith will receive salary, on a monthly basis, equivalent
in the aggregate to the amounts of salary remaining unpaid until the expiration
of this agreement, or, at the discretion of the Company and The Hartford, the
balance remaining of such aggregate amount in a lump sum payment if Mr. Smith
accepts other full-time employment. In addition, as long as such salary
continues to be paid, he will be eligible for participation in certain benefit
plans of the Company and The Hartford and outstanding stock options issued by
the Company and The Hartford, or he will receive a termination allowance under
The Hartford's Severance Pay Program or other termination allowance plan if such
allowance exceeds the salary described above.
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EXECUTIVE COMPENSATION
SUMMARY
Since the formation of the Company, none of the executive officers of the
Company has received any compensation from the Company. All compensation has
been paid by Hartford Fire, a certain percentage of which has been allocated to
the Company's life insurance subsidiaries which have reimbursed Hartford Fire
for such cost. Upon completion of the Equity Offerings, all compensation of the
executive officers of the Company is expected to be paid by a subsidiary of the
Company.
The following table reflects all compensation paid by Hartford Fire to the
Company's chief executive officer and the other four most highly compensated
executive officers of the Company (the "Named Executives") for services rendered
to the Company for the fiscal year ended December 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
----------------
ANNUAL COMPENSATION SECURITIES
--------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(1)(#) COMPENSATION(2)($)
- ------------------------------ ---- ------------ ------------ ---------------- ------------------
<S> <C> <C> <C> <C> <C>
Lowndes A. Smith.............. 1996 $525,000 $ 310,000 37,200 $ 21,260
Chief Executive Officer and
President
John P. Ginnetti.............. 1996 375,000 335,000 11,500 16,802
Executive Vice President,
Asset Management
Thomas M. Marra............... 1996 350,000 610,000 16,300 16,355
Executive Vice President,
Individual Life &
Annuities
Leonard E. Odell, Jr. ........ 1996 238,000 166,400 11,500 11,215
Senior Vice President,
Specialty & International
Raymond P. Welnicki........... 1996 238,000 169,500 11,500 11,911
Senior Vice President,
Employee Benefits
</TABLE>
- ---------------
(1) Represents options to purchase shares of The Hartford common stock.
(2) Amounts in this column consist of contributions by The Hartford under the
Hartford Investment and Savings Plan and the Hartford Excess Savings Plans
(each, a defined contribution plan, as defined below), vacation time sold
under The Hartford flexible benefit programs and imputed income from group
term life insurance. Under the Hartford Investment and Savings Plan and the
Hartford Excess Savings Plans, The Hartford makes a matching contribution in
an amount equal to 50% of an employee's contribution, such matching
contributions not to exceed 3% of such employee's salary. The Hartford also
makes a non-matching contribution equal to 1/2 of 1% of an employee's
salary. Contributions under these plans for 1996 were $18,375, $13,917,
$12,250, $8,330 and $8,330 for Messrs. Smith, Ginnetti, Marra, Odell and
Welnicki, respectively. The Hartford's flexible benefit programs allow for
the sale back to The Hartford of up to one week of vacation time, and the
amounts in this column include $2,885 for each of Messrs. Smith, Ginnetti,
Marra and Odell from the sale of vacation time. In addition, The Hartford
provides certain group term life insurance coverage to employees, and
employees may purchase additional amounts of coverage. For federal income
tax purposes, income will be imputed to an employee who purchases more than
$50,000 of coverage to the extent that the value of the coverage is greater
than the premium paid. For 1996, $1,220 and $3,581 of income was imputed to
Messrs. Marra and Welnicki, respectively, and such amounts are included in
this column.
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OPTION GRANTS ON THE HARTFORD COMMON STOCK TO COMPANY EXECUTIVES IN LAST FISCAL
YEAR
The following table provides information on grants of options in fiscal
year 1996 to the Named Executives to purchase shares of The Hartford common
stock. No options to acquire Common Stock of the Company have been granted or
are outstanding.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZED
---------------------------------------------- VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PER PRICE APPRECIATION
UNDERLYING GRANTED TO SHARE FOR OPTION TERM(4)
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION ----------------------
NAME GRANTED(1) 1996(2) PRICE(3) DATE 5% 10%
- ------------------------------ ---------- ------------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Lowndes A. Smith.............. 37,200 2.60% $52.00 2/16/06 $1,216,440 $3,082,764
John P. Ginnetti.............. 11,500 0.80 52.00 2/16/06 376,050 953,005
Thomas M. Marra............... 16,300 1.14 52.00 2/16/06 533,010 1,350,761
Leonard E. Odell, Jr. ........ 11,500 0.80 52.00 2/16/06 376,050 953,005
Raymond P. Welnicki........... 11,500 0.80 52.00 2/16/06 376,050 953,005
</TABLE>
- ---------------
(1) Represents options to purchase shares of The Hartford common stock. The
options granted to Mr. Smith became fully exercisable on December 5, 1996,
when the closing price of The Hartford common stock was equal to or greater
than $65.00 for ten consecutive trading days. The options granted to Messrs.
Ginnetti, Marra, Odell and Welnicki are exercisable in three equal annual
installments commencing on the first anniversary date of the grant. The
exercisability, payment or vesting of options may be accelerated upon the
occurrence of a change of control (as defined in the 1995 Hartford Incentive
Stock Plan) of The Hartford.
(2) Percentages indicated are based on options to purchase a total of 1,431,217
shares of The Hartford common stock granted to 764 employees of The Hartford
during 1996.
(3) Options were granted at exercise prices that were 100% of the fair market
value of one share of common stock of The Hartford on the date of grant. The
exercise price may be paid in cash or in shares of The Hartford common stock
valued at their fair market value on the date of exercise.
(4) At the end of the three-year term of the options granted in 1996, the
projected price of a share of The Hartford common stock would be $84.70 and
$134.87 at assumed annual appreciation rates of 5% and 10%, respectively.
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table provides information on option exercises in 1996 by the
Named Executives and the value of each such Named Executive's unexercised
options to acquire common stock of The Hartford at December 31, 1996.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED,
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS HELD AT
SHARES FISCAL YEAR-END(#) FISCAL YEAR-END(2)
ACQUIRED VALUE -------------------------- -------------------------
NAME ON EXERCISE (#) REALIZED(1) UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------- --------------- ----------- ------------- ---------- -------------
EXERCISABLE
-----------
<S> <C> <C> <C> <C> <C> <C>
Lowndes A. Smith....... -- $ -- 241,216 -- $7,201,309 $ --
John P. Ginnetti....... -- -- 30,979 27,438 1,028,808 658,702
Thomas M. Marra........ -- -- 35,582 38,891 1,112,123 898,365
Leonard E. Odell,
Jr................... -- -- 13,721 19,134 444,726 392,493
Raymond P. Welnicki.... 5,333 93,114 6,591 19,350 200,034 386,331
</TABLE>
- ---------------
(1) The value realized reflects the difference between the fair market value of
a share of The Hartford common stock on the date of exercise of the option
and the per share exercise price of such option.
(2) Values are calculated for "in-the-money" options by subtracting the exercise
price per share from the per share market price of $67.50, as reported on
the NYSE Composite Tape, on December 31, 1996.
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LONG-TERM INCENTIVE PLANS -- AWARDS IN FISCAL YEAR 1996
The following table provides information on long-term performance share
awards made to the Named Executives during 1996.
<TABLE>
<CAPTION>
AWARDS OF PERFORMANCE SHARES
RELATING TO THE HARTFORD COMMON ESTIMATED FUTURE PAYOUTS UNDER
STOCK IN LAST FISCAL YEAR NON-STOCK PRICE-BASED PLANS(#)(1)
------------------------------------ -------------------------------------
NAME # OF SHARES PERIOD UNTIL PAYOUT(1) THRESHOLD(#) TARGET(#) MAXIMUM(#)
- -------------------------- ----------- ---------------------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
Lowndes A. Smith.......... 8,250 12/31/98 4,125 8,250 16,500
John P. Ginnetti.......... 2,550 12/31/98 1,275 2,550 5,100
Thomas M. Marra........... 3,600 12/31/98 1,800 3,600 7,200
Leonard E. Odell, Jr. .... 2,550 12/31/98 1,275 2,550 5,100
Raymond P. Welnicki....... 2,550 12/31/98 1,275 2,550 5,100
</TABLE>
- ---------------
(1) Each of the Named Executives was granted the number of performance shares
relating to The Hartford common stock set forth above. The grants are
contingent upon The Hartford achieving two general performance objectives
over a three-year period ending on December 31, 1998. The performance
objectives and the extent to which a Named Executive may be entitled to a
future payout are described under "-- Hartford Stock Plan; Prior Awards".
The threshold, target and maximum number of shares that may be awarded as
set forth in the table above are based on The Hartford equally achieving
75%, 100% and 150% or more, respectively, of each of the two performance
objectives.
COMPENSATION, BENEFIT AND RETIREMENT PLANS
As described below, prior to the completion of the Equity Offerings, the
Company is expected to adopt (and the sole stockholder, prior to the completion
of the Equity Offerings, is expected to approve) the 1997 Hartford Life, Inc.
Incentive Stock Plan (the "1997 Stock Plan"), 1997 Hartford Life, Inc. Deferred
Restricted Stock Unit Plan (the "1997 Bonus Swap Plan") and 1997 Hartford Life,
Inc. Employee Stock Purchase Plan (the "1997 Stock Purchase Plan") in which the
officers of the Company are expected to participate after completion of the
Equity Offerings. In addition, prior to the completion of the Equity Offerings,
certain employees of the Company, including the Named Executives, were eligible
to participate in the following benefit plans and programs operated by The
Hartford: the 1995 ITT Hartford Incentive Stock Plan (the "Hartford Stock
Plan"), the 1996 ITT Hartford Deferred Restricted Stock Unit Plan (the "Hartford
Bonus Swap Plan"), the Annual Executive Bonus Program, the Hartford Fire
Insurance Company Retirement Plan for U.S. Employees (the "Hartford Retirement
Plan"), The Hartford Senior Executive Severance Pay Program (the "Hartford
Senior Executive Severance Pay Program"), The Hartford Investment and Savings
Plan (the "Hartford Investment and Savings Plan"), the 1996 ITT Hartford
Deferred Compensation Plan (the "Hartford Deferred Compensation Plan"), the ITT
Hartford Employee Stock Purchase Plan (the "Hartford Stock Purchase Plan") and
certain other plans offered as part of The Hartford's employee welfare benefits
program. After completion of the Equity Offerings, as described herein and to
the extent provided in the Hartford Stock Plan, certain employees of the
Company, including the Named Executives, will remain eligible for vesting of
restricted stock of The Hartford and receipt of any performance shares and
exercise of options previously awarded by The Hartford under the Hartford Stock
Plan. Further, after completion of the Equity Offerings, certain employees of
the Company, including the Named Executives, will continue to be eligible under
and participate in The Hartford's plans and programs described above with
respect to compensation paid by the Company and for services rendered to the
Company, except that none of the employees of the Company, other than Mr. Smith,
is expected to continue to be eligible to participate in the Hartford Bonus Swap
Plan or the Hartford Stock Plan. The Company will reimburse The Hartford for any
direct costs, distributions and other expenses associated with post-Equity
Offerings payments (and corresponding reserves of the Company) to Company
employees in respect of the Hartford Stock Plan and the other Hartford plans
referred to above pursuant to the terms of the Master Intercompany Agreement.
See "Certain Relationships and Transactions -- Intercompany
Arrangements -- Master Intercompany Agreement".
The following is a description of the compensation, benefit and retirement
plans for certain employees of the Company, including the Named Executives, that
are currently expected to be
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<PAGE> 277
adopted by the Board of Directors, and that are maintained by The Hartford and
currently cover and are expected to continue to cover certain employees of the
Company, including the Named Executives, as described above.
1997 STOCK PLAN
GENERAL. One of the reasons for the Equity Offerings is to enable the
Company to provide meaningful long-term incentives for its key employees,
directly related to their individual and collective performance in enhancing
stockholder value. Once the Equity Offerings have been completed and a public
market has developed for the Class A Common Stock, market-based incentives based
on stock performance will allow the Company to provide significant incentives to
key employees of the Company. Awards of stock options and other market-based
incentives will permit key employees to profit as stockholder value is enhanced
(through increases in the market price for Class A Common Stock) and will also
give the Company an effective tool to encourage key employees to continue in the
employ of the Company.
The 1997 Stock Plan is expected to achieve these objectives and will be
administered by the Compensation and Personnel Committee. The 1997 Stock Plan
provides for the grant of incentive stock options (qualifying under Section 422
of the Internal Revenue Code), non-qualified stock options, stock appreciation
rights ("SARs"), performance shares and restricted stock, or any combination of
the foregoing, as the Compensation and Personnel Committee may determine, as
well as substitute stock options and restricted stock for award to key employees
who are permitted by the Compensation and Personnel Committee to surrender
previously awarded options or restricted stock of The Hartford as described
below. The 1997 Stock Plan will expire on December 31, 2007 but will continue in
effect for awards then outstanding for so long as such awards are outstanding.
No determination has yet been made as to the number of key employees of the
Company who will be eligible to participate in the 1997 Stock Plan.
The 1997 Stock Plan contains the following formula for establishing an
annual limit on the number of shares that may be awarded (or with respect to
which non-stock awards may be made) in any given calendar year (the "Annual
Limit"), the maximum number of which generally will be 1.5% of the total issued
and outstanding shares and treasury shares of Class A Common Stock as of the
December 31st immediately preceding the year of the awards (each, a "Plan
Year"). In addition, for the Plan Year that includes the Equity Offerings, the
number of shares that may be awarded will equal the Annual Limit plus the number
of substitute awards granted to key employees who are entitled to and do
surrender stock options and restricted stock previously awarded by The Hartford.
Any unused portion of the Annual Limit for any Plan Year shall be carried
forward and be made available for awards in succeeding Plan Years. In addition
to the foregoing, the 1997 Stock Plan is expected to provide that no award will
be made thereunder, and the Company will have no obligation to make any award
thereunder, if such award would cause the percentage of beneficial ownership by
The Hartford of the combined voting power or the value of the capital stock of
the Company to fall below 80%.
In addition to the foregoing, in no event shall more than five million
shares of Class A Common Stock be cumulatively available for awards of options
under the 1997 Stock Plan and no more than 20% of the total number of shares
available on a cumulative basis shall be available for awards of restricted
Class A Common Stock and awards of performance shares relating to Class A Common
Stock. For any Plan Year, no individual key employee may receive options to
acquire Class A Common Stock or SARs for more than the lesser of (i) 10% of the
Annual Limit applicable to that Plan Year or (ii) 500,000 shares; except that,
for the Plan Year that follows the date of consummation of the Equity Offerings,
each individual key employee may receive, in addition to the foregoing limit,
the number of substitute options to acquire Class A Common Stock required to
replace the surrendered options to acquire The Hartford common stock.
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Subject to the above limitations, shares of Class A Common Stock to be
issued under the 1997 Stock Plan may be made available from the authorized but
unissued Class A Common Stock, treasury stock or from shares purchased on the
open market or any combination of the foregoing. In the event of a
reorganization, merger, stock dividend or other change in the corporate
structure of the Company or any change in the Class A Common Stock described in
the 1997 Stock Plan, the number of shares subject to the 1997 Stock Plan, the
number of shares then subject to awards and the price per share payable on
exercise of options may be appropriately adjusted by the Compensation and
Personnel Committee.
For the purpose of computing the total number of shares of stock available
for awards under the 1997 Stock Plan, there shall be counted against the
foregoing limitations the number of shares of Class A Common Stock subject to
issuance upon exercise or settlement of awards and the number of shares of Class
A Common Stock that equal the value of awards of performance shares, in each
case determined as at the dates on which such awards are granted. If any awards
under the 1997 Stock Plan are forfeited, terminated, expire unexercised, are
settled in cash in lieu of Class A Common Stock or are exchanged for other
awards, the shares of stock which were theretofore subject to such awards shall
again be available for awards under the 1997 Stock Plan to the extent of such
forfeiture, termination, expiration, cash settlement or exchange of such awards.
Further, any shares that are exchanged (either actually or constructively) by
optionees as full or partial payment to the Company of the purchase price of
shares being acquired through the exercise of a stock option granted under the
1997 Stock Plan may be available for subsequent awards.
The Compensation and Personnel Committee, none of whose members may receive
any award under the 1997 Stock Plan, will administer the 1997 Stock Plan,
including, but not limited to, making determinations with respect to the
designation of those key employees who shall receive awards, the number of
shares to be covered by options, SARs and restricted stock awards, the exercise
price of options (which may not be less than 100% of the fair market value of
Class A Common Stock on the date of grant), other option terms and conditions
and the number of performance shares to be granted and the applicable
performance objectives. The Compensation and Personnel Committee may impose such
additional terms and conditions on an award as it deems advisable. The
Compensation and Personnel Committee's decisions in the administration of the
1997 Stock Plan shall be binding on all persons for all purposes.
The Compensation and Personnel Committee may, in its sole discretion,
delegate such administrative powers as it may deem appropriate to the chief
executive officer or other members of senior management of the Company, except
that awards to executive officers will be made solely by the Compensation and
Personnel Committee subject to compliance with Rule 16b-3 under the Exchange
Act.
STOCK OPTIONS AND RELATED SARS. Options and related SARs under the 1997
Stock Plan will expire within ten years after grant; non-qualified stock options
and related SARs will expire not more than ten years and two days after grant.
The exercise price for options must be at least equal to the closing market
price for the Class A Common Stock, as reported on the NYSE Composite Tape, on
the date of grant. The exercise price for options must be paid to the Company at
the time of exercise and, in the discretion of the Compensation and Personnel
Committee, may be paid in the form of cash or already-owned shares of Class A
Common Stock or a combination thereof. During the lifetime of a key employee, an
option or SAR must be exercised only by the key employee (or his or her estate
or designated beneficiary) but no later than three months after his or her
termination of employment (or for longer periods as determined by the
Compensation and Personnel Committee). If termination is caused by retirement,
total disability or death, an option or SAR may be exercised within five years
after such termination (or such other period determined by the Compensation and
Personnel Committee), but in no event later than the expiration of the original
term of the option. If a key employee voluntarily resigns or is terminated for
cause, the options and SARs are canceled immediately.
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PERFORMANCE SHARES. Performance shares under the 1997 Stock Plan are
contingent rights to receive future payments of Class A Common Stock, cash or a
combination thereof, based on the achievement of performance objectives as
prescribed by the Compensation and Personnel Committee. Such performance
objectives will be determined by the Compensation and Personnel Committee and
may vary by employee, for a measurement period of not less than two nor more
than five years, and related to at least one of the objective criteria
enumerated in the 1997 Stock Plan, which may be (i) determined solely by
reference to the performance of the Company, any subsidiary or affiliate of the
Company or any division or unit of any of the foregoing or (ii) based on
comparative performance of any one or more of the Company or any such
subsidiary, affiliate, division or unit, as applicable, relative to other
entities. The maximum number of performance shares that may be granted to any
individual key employee in any given year is 100,000. The ultimate payments are
determined by the number of shares awarded and the extent that performance
objectives are achieved during the period. In the event a key employee
terminates employment during such a performance period, the key employee will
forfeit any right to payment unless the Compensation and Personnel Committee
determines otherwise. However, in the case of retirement, total disability,
death or cases of special circumstances, the key employee may, in the discretion
of the Compensation and Personnel Committee, be entitled to an award prorated
for the portion of the performance period during which he or she was employed by
the Company.
RESTRICTED SHARES. Restricted shares of Class A Common Stock awarded under
the 1997 Stock Plan will be issued subject to a restriction period set by the
Compensation and Personnel Committee during which time the shares may not be
sold, transferred, assigned or pledged or otherwise disposed of. In the event a
key employee terminates employment during a restriction period, all such shares
still subject to restrictions will be forfeited by such employee and reacquired
by the Company, except when the Compensation and Personnel Committee determines
otherwise in special circumstances. The Compensation and Personnel Committee may
provide for the lapse of restrictions where deemed appropriate and it may also
require the achievement of pre-determined performance objectives in order for
such shares to vest. The recipient, as owner of the awarded shares, shall have
all other rights of a stockholder, including the right to vote the shares and
receive dividends and other distributions during the restriction period. The
restrictions may be waived, in the discretion of the Compensation and Personnel
Committee, in the event of the awardee's retirement, total disability, death or
in cases of special circumstances.
SUBSTITUTE AND EXPECTED NEW AWARDS. In order to provide meaningful
compensation in the form of options and related rights to acquire Class A Common
Stock of the Company and restricted shares of Class A Common Stock to the
Company's key employees who surrender, upon completion of the Equity Offerings,
options and related rights to acquire common stock of The Hartford and
restricted stock of The Hartford previously awarded pursuant to The Hartford
Stock Plan (see "-- Hartford Stock Plan; Prior Awards"), the Compensation and
Personnel Committee is authorized to award to such key employees of the Company
substitute non-qualified options to acquire Class A Common Stock and restricted
Class A Common Stock of the Company, not to exceed eight million shares of Class
A Common Stock in the aggregate. As indicated above, the substitute options
awarded to any one individual by the Compensation and Personnel Committee for
the Plan Year following the date of consummation of the Equity Offerings shall
not exceed the number of non-qualified options required to replace surrendered
options on The Hartford common stock as determined by application of the
formulas described below. Subject to this limitation, shares of Class A Common
Stock to be issued upon the exercise of substitute stock options and restricted
shares may be made available from authorized but unissued shares, treasury
shares, shares purchased on the open market, or any combination of the
foregoing.
The terms and conditions of each substitute award, including, without
limitation, the time or times when, and the manner in which, each substitute
award shall be exercisable, the duration of the exercise or restriction period,
the permitted method of exercise, settlement and payment, the rules that shall
apply in the event of the termination of employment of the key employee, the
events, if any,
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that may give rise to a key employee's right to accelerate the time of exercise
of an option and the vesting provisions of restricted stock, shall be equitably
determined to preserve the economic value of the surrendered award of The
Hartford.
The following describes the 1997 awards of restricted common stock of The
Hartford and options to acquire common stock of The Hartford previously made
pursuant to the Hartford Stock Plan (see "-- Hartford Stock Plan; Prior Awards")
and the expected substitution therefor, upon completion of the Equity Offerings,
of restricted Class A Common Stock and options to acquire Class A Common Stock.
Other than the foregoing, no substitutions of Company awards for awards made by
The Hartford are expected. The following also describes new awards of restricted
Class A Common Stock and performance shares of the Company that are expected to
be made upon completion of the Equity Offerings, such awards having been
approved by The Hartford compensation and personnel committee contingent upon
completion of the Equity Offerings.
SUBSTITUTE AND NEW RESTRICTED STOCK AWARDS. Effective January 24, 1997,
The Hartford compensation and personnel committee awarded Mr. Smith 20,000
shares of restricted common stock of The Hartford pursuant to the Hartford Stock
Plan, subject to a three-year restriction period. Upon completion of the Equity
Offerings, it is expected that 10,000 of these restricted shares will be
canceled upon surrender, and that the Company's Compensation and Personnel
Committee will issue to Mr. Smith, pursuant to the Company's 1997 Stock Plan, a
number of substitute restricted shares of Class A Common Stock (rounded to the
nearest whole number) calculated as follows: the number of surrendered shares of
restricted common stock of The Hartford shall be multiplied by the average of
the closing market prices of The Hartford's common stock, as reported on the
NYSE Composite Tape, for the ten trading days following the date of consummation
of the Equity Offerings (the "Hartford Average Fair Market Value"), and then
divided by the average of the closing market prices of the Company's Class A
Common Stock, as reported on the NYSE Composite Tape, for the ten trading days
following the date of consummation of the Equity Offerings (the "Company Average
Fair Market Value"). These substitute restricted shares will be subject to the
same restriction period and other terms and conditions as the surrendered
restricted shares of The Hartford.
After completion of the Equity Offerings, it is expected that the
Compensation and Personnel Committee will award to Mr. Marra, pursuant to the
1997 Stock Plan, the nearest whole number of shares equal to the greater of the
amounts resulting from the following calculations: (i) the amount resulting from
multiplying 15,000 by $72.25 (the closing market price for one share of The
Hartford common stock, as reported on the NYSE Composite Tape, on January 24,
1997), and then dividing the resulting amount by the Company Average Fair Market
Value, or (ii) the amount resulting from multiplying 15,000 by the Hartford
Average Fair Market Value, and then dividing the resulting amount by the Company
Average Fair Market Value. One-third of these restricted shares will be subject
to a three-year restriction period and two-thirds will be subject to a
seven-year restriction period, each restriction period to begin on the effective
date of award. This award was approved, contingent upon completion of the Equity
Offerings, by The Hartford compensation and personnel committee on December 11,
1996.
SUBSTITUTE OPTION AWARDS. On January 24, 1997, The Hartford compensation
and personnel committee approved pursuant to the Hartford Stock Plan the award
to certain key employees of the Company of non-qualified options to acquire
common stock of The Hartford. The exercise price for these options is $72.25,
the closing market price for one share of The Hartford common stock, as reported
on the NYSE Composite Tape, on January 24, 1997. The Hartford granted 47,170
options to Mr. Smith on such date. These options are to become exercisable on
the earlier of (i) the date the closing market price for The Hartford common
stock, as reported on the NYSE Composite Tape, reaches and remains at 125% of
the exercise price for such options for ten consecutive trading days (rounded to
the nearest whole number) or (ii) seven years from the date of grant. The
Hartford granted 7,862, 12,579, 7,862 and 7,862 options to Messrs. Ginnetti,
Marra, Odell and Welnicki,
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respectively, on such date. These options are to become exercisable in one-third
increments on the first, second and third anniversaries of the date of grant.
After completion of the Equity Offerings, it is expected that 28,302 of the
foregoing options on The Hartford common stock granted to Mr. Smith and all of
the options to the other Named Executives will be canceled (upon surrender
within a certain time period) and that the Company's Compensation and Personnel
Committee will issue to such key employees in substitution therefor a number of
non-qualified options to acquire Class A Common Stock pursuant to the Company's
1997 Stock Plan. The number of substitute options (rounded to the nearest whole
number) issued to the Named Executives will be calculated as follows: the number
of surrendered options on The Hartford common stock shall be multiplied by the
Hartford Average Fair Market Value, and then divided by the Company Average Fair
Market Value. The substitute options will have an exercise price determined as
follows: $72.25 shall be divided by the Hartford Average Fair Market Value, and
the resulting amount shall be multiplied by 100, resulting in a percentage
amount. This percentage amount shall be multiplied by the Company Average Fair
Market Value, resulting in the exercise price for the substitute options. Such
options will become exercisable on the earlier of (i) the date the closing
market price for the Class A Common Stock, as reported on the NYSE Composite
Tape, reaches and remains at 125% of the exercise price for the substitute
options for ten consecutive trading days or (ii) seven years from the date of
grant of the canceled options.
NEW PERFORMANCE SHARE AWARDS. After completion of the Equity Offerings, it
is expected that the Compensation and Personnel Committee will award to certain
key employees of the Company a number of performance shares contingent upon the
Company achieving certain performance objectives described below. To the extent
that the performance objectives are achieved, a combination of cash and shares
of Class A Common Stock will be paid to such key employees pursuant to the terms
of the 1997 Stock Plan. The number of performance shares (rounded to the nearest
whole number) to be awarded will be calculated as follows: the dollar value
approved by The Hartford compensation and personnel committee with respect to a
key employee, contingent upon completion of the Equity Offerings, shall be
divided by 75% of the Company Average Fair Market Value.
Under the terms of the expected performance share awards, there will be two
equally weighted performance objectives measured over the performance period
beginning on the date of consummation of the Equity Offerings and ending on
December 31, 1999: performance award core earnings per share of the Company
("Performance Core Earnings") and total stockholder return ("TSR"). Performance
Core Earnings will be defined as the Company's GAAP net income minus (i) net
realized capital gains and/or losses except for capital items related to Closed
Book GRC; (ii) income or losses associated with one-time accounting changes;
(iii) the entire amount of any individual non-catastrophe loss associated with
any significant, unusual and non-recurring charge that exceeds $100 million; and
(iv) the income or losses associated with the liabilities allocated pursuant to
the Spin-Off Distribution Agreement in connection with the ITT Spin-Off. TSR
will be measured by the difference between the price of the Company's Class A
Common Stock at the beginning of the performance period and the price at the end
of such period (assuming the reinvestment of dividends paid), compared with the
TSR of the stock of the companies in the Merrill Lynch Life Insurance Stock
Index, a recognized index of publicly traded life insurance companies. There
will be a minimum threshold, a target and a maximum cap for Performance Core
Earnings and TSR to be achieved in connection with the awards, such targets
having been approved, contingent upon completion of the Equity Offerings, by The
Hartford compensation and personnel committee. If the targets are achieved, the
key employees will receive 100% of the performance shares awarded (payable
one-third in cash and two-thirds in Class A Common Stock). If the minimum
thresholds are not achieved, the key employees will not receive any of the
performance shares awarded. If the Performance Core Earnings and TSR achieved
exceed the minimum thresholds but fall below the targets, key employees will
receive awards adjusted downward by interpolation to reflect falling
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short of the targets. If the targets are exceeded, the executives will receive
awards adjusted upward by interpolation subject to a maximum cap.
After completion of the Equity Offerings, the Company expects to make
performance share awards to Messrs. Smith, Ginnetti, Marra, Odell and Welnicki
equal to $360,000, $100,000, $160,000, $100,000 and $100,000, respectively.
COMPENSATION UPON CHANGE OF CONTROL. The 1997 Stock Plan provides for the
automatic protection of intended economic benefits for key employees in the
event of a change of control of the Company (i.e., upon the occurrence of an
"Acceleration Event" as defined below). Notwithstanding any other provisions of
the 1997 Stock Plan, upon the occurrence of an Acceleration Event (a) all
options and SARs will generally become immediately exercisable for a period of
60 calendar days; (b) all options and SARs will continue to be exercisable for a
period of seven months in the case of an employee whose employment is terminated
other than for "just cause" (as defined in the 1997 Stock Plan) or who
voluntarily terminates employment because of a good faith belief that such
employee will not be able to discharge his or her duties; (c) SARs exercised
during the 60-day period will be settled fully in cash based on a formula price
generally reflecting the highest price paid for a share of Class A Common Stock
during the 60-day period preceding the date such SARs are exercised; (d)
"limited stock appreciation rights" shall automatically be granted on all
outstanding options not otherwise covered by SARs, which shall generally be
immediately exercisable in full and which shall entitle the holders to the same
exercise period and formula price referred to in clauses (a), (b) and (c) above;
(e) outstanding performance share awards shall automatically vest, with the
valuation of such performance shares based on the formula price; and (f)
restrictions applicable to awards of restricted stock shall be automatically
waived.
"Acceleration Event" is generally defined in the 1997 Stock Plan as any of
the following events: (i) the filing of a report on Schedule 13D with the
Commission pursuant to Section 13(d) of the Exchange Act disclosing that any
person (within the meaning of Section 13(d) of the Exchange Act), other than the
Company, The Hartford, any of their respective subsidiaries or any employee
benefit plan sponsored by any of the foregoing, is the beneficial owner (as such
term is defined in Rule 13d-3 under the Exchange Act) directly or indirectly of
the greater of (A) the percentage of the outstanding capital stock owned at such
time by The Hartford or (B) 20% or more of the outstanding capital stock
(calculated as provided in paragraph (d) of Rule 13d-3 under the Exchange Act in
the case of rights to acquire Common Stock); (ii) the purchase by any person
(within the meaning of Section 13(d) of the Exchange Act), other than any of the
entities described in clause (i) above, of shares pursuant to a tender offer or
exchange offer to acquire any capital stock (or securities convertible into
capital stock) for cash, securities or any other consideration; provided that
after consummation of the offer, the person in question is the beneficial owner
(as such term is defined in Rule 13d-3 under the Exchange Act) directly or
indirectly of the greater of (A) the percentage of the outstanding capital stock
owned at such time by The Hartford or (B) 15% or more of the outstanding capital
stock (calculated as provided in paragraph (d) of Rule 13d-3 under the Exchange
Act in the case of rights to acquire capital stock); (iii) the approval by the
stockholders of the Company of (A) any consolidation or merger of the Company in
which the Company is not the continuing or surviving corporation or pursuant to
which shares of capital stock would be converted into cash, securities or other
property, other than a merger of the Company in which holders of capital stock
immediately prior to the merger have the same proportionate ownership of common
stock of the surviving corporation immediately after the merger as immediately
before, or (B) any sale, lease, exchange or other transfer (in one transaction
or a series of related transactions) of all or substantially all the assets of
the Company; (iv) a change in a majority of the members of the Board of
Directors within a twelve-month period unless the election or nomination for
election by the Company's stockholders of each new director during such
twelve-month period was approved by the vote of two-thirds of the directors then
still in office who were directors at the beginning of such twelve-month period;
or (v) the occurrence of an Acceleration Event (as defined in the Hartford Stock
Plan) with respect to The Hartford at a time
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when The Hartford beneficially owns more than 50% of the combined voting power
and value of the capital stock of the Company. The 1997 Stock Plan is expected
to provide that a sale of The Hartford's interest in the Company will not be
considered an Acceleration Event.
AMENDMENT AND TERMINATION OF THE 1997 STOCK PLAN. The Board of Directors
may amend or discontinue the 1997 Stock Plan at any time and, specifically, may
make such modifications to the 1997 Stock Plan as it deems necessary to avoid
the application of Section 162(m) of the Internal Revenue Code and the United
States Treasury regulations issued thereunder. However, stockholder approval is
required for certain amendments, including any amendment applicable to tax
qualified options which may (i) increase the number of shares reserved for
awards (except as provided in the 1997 Stock Plan with respect to stock splits
or other similar changes) or (ii) materially change the group of employees
eligible for awards.
1997 BONUS SWAP PLAN
Prior to the completion of the Equity Offerings, the Board of Directors is
expected to adopt the 1997 Bonus Swap Plan, a component of the 1997 Stock Plan.
Under the 1997 Bonus Swap Plan, key employees who elect to receive a portion of
their annual bonuses in the form of contractual rights to receive shares of
Class A Common Stock after the expiration of a three-year restriction period
(the "elective shares") are awarded contractual rights to receive additional
"premium" shares of restricted Class A Common Stock equal to 10% of the elective
shares. The premium shares are also subject to a three-year restriction period.
In the event a key employee terminates employment during the restriction period,
the premium shares are forfeited by such employee and reacquired by the Company
unless the Compensation and Personnel Committee provides otherwise where deemed
appropriate in accordance with the 1997 Stock Plan. The restrictions on the
premium shares may be waived, in the discretion of the Compensation and
Personnel Committee, in the event of the key employee's retirement, total
disability, death or in cases of special circumstances. The elective shares are
nonforfeitable. The key employee will have no stockholder rights by virtue of
participation in the 1997 Bonus Swap Plan, but will have the right to direct the
voting of actual Company shares (owned by a grantor trust) corresponding to the
number of elective and premium shares awarded to the executive. Additional
elective and premium shares are awarded to a key employee equal to any dividend
paid during the restriction period on the number of shares of Class A Common
Stock corresponding to the elective and premium shares previously awarded. Such
additional elective and premium shares are subject to the same conditions as the
elective and premium shares with respect to which they are awarded. The 1997
Bonus Swap Plan is expected to provide that no awards shall be made thereunder,
and the Company shall have no obligation to make any awards thereunder, if such
an award would cause the percentage of beneficial ownership of The Hartford of
the combined voting power or the value of the capital stock of the Company to
fall below 80%.
1997 STOCK PURCHASE PLAN
The 1997 Stock Purchase Plan is intended to meet the applicable
requirements of Section 423 of the Internal Revenue Code. Under the 1997 Stock
Purchase Plan, all full-time and certain part-time employees of the Company who
meet certain minimum service requirements will be eligible to purchase shares of
Class A Common Stock by means of payroll deductions. Eligible employees may
elect to participate in quarterly offering periods ("Purchase Periods") under
the 1997 Stock Purchase Plan by authorizing after-tax payroll deductions of up
to 10% (in whole percentages) of their salary for the purchase of shares of
Class A Common Stock under the Stock Purchase Plan. The 1997 Stock Purchase Plan
will have a term of five years and a maximum aggregate number of shares of Class
A Common Stock available thereunder of 2.7 million. The price at which shares of
Class A Common Stock will be purchased at the end of each Purchase Period will
be 85% of the closing market price, as reported on the NYSE Composite Tape, at
the beginning or end of the Purchase Period (or the nearest prior trading day),
whichever is less. No participating employee will be entitled in any calendar
year under the 1997 Stock Purchase Plan to purchase Class A Common
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Stock having an aggregate closing market price at the beginning of the
applicable Purchase Period, as reported on the NYSE Composite Tape (or the
nearest prior trading day), in excess of $25,000. Further, the 1997 Stock
Purchase Plan is expected to provide that no Class A Common Stock may be
purchased thereunder, and the Company will have no obligation to permit the
purchase of Class A Common Stock thereunder, if such purchase would cause the
percentage of beneficial ownership by The Hartford of the combined voting power
or the value of the capital stock of the Company to fall below 80%. Additional
restrictions may apply to employees deemed to be "insiders" under Section 16 of
the Exchange Act in order to comply with the exemption provided by Rule 16b-3
thereunder. Shares of Class A Common Stock available for issuance under the 1997
Stock Purchase Plan may be made available from treasury shares, authorized but
unissued shares, reacquired shares, shares purchased on the open market or any
combination of the foregoing.
HARTFORD STOCK PLAN; PRIOR AWARDS
The Hartford Stock Plan has been in place since December 1995. The terms
and provisions of the Hartford Stock Plan are identical in material part to
those of the Company's 1997 Stock Plan (see "-- 1997 Stock Plan"), except that
awards are made to key employees of The Hartford and its subsidiaries and
affiliates by and in the discretion of The Hartford compensation and personnel
committee in the form of tax-qualified incentive stock options and non-qualified
options and related rights to acquire common stock of The Hartford, SARs
relating to common stock of The Hartford, performance shares payable in cash and
common stock of The Hartford and restricted shares of common stock of The
Hartford. After completion of the Equity Offerings, the employees of the Company
will remain eligible for awards under the Hartford Stock Plan; however, The
Hartford compensation and personnel committee is not expected to make awards
pursuant to the Hartford Stock Plan to any employees of the Company except Mr.
Smith.
As indicated above, 10,000 of the restricted shares of common stock of The
Hartford awarded to Mr. Smith on January 24, 1997 pursuant to the Hartford Stock
Plan are expected, upon completion of the Equity Offerings, to be canceled upon
surrender thereof, and restricted shares of Class A Common Stock of the Company
are expected to be issued in substitution therefor pursuant to the 1997 Stock
Plan. See "-- 1997 Stock Plan -- Substitute and New Restricted Stock Awards".
The remaining 10,000 restricted shares awarded to Mr. Smith on such date will
not be subject to substitution.
Certain options to acquire common stock of The Hartford granted to key
employees of the Company on February 14, 1996 pursuant to the Hartford Stock
Plan will not be subject to cancelation and substitution. For Mr. Smith, such
options have an exercise price of $52 per share and are presently exercisable.
For Messrs. Ginneti, Marra, Odell and Welnicki, such options are to become
exercisable in one-third increments on the first, second and third anniversaries
of the grant date, and are subject to the general terms of the Hartford Stock
Plan.
As indicated above, on January 24, 1997, The Hartford compensation and
personnel committee awarded Mr. Smith options to acquire 47,170 shares of common
stock of The Hartford pursuant to the Hartford Stock Plan. Of these options,
18,868 will not be subject to substitution. These options have an exercise price
of $72.25 per share and will become exercisable on the earlier of (i) the date
the closing market price for The Hartford's common stock, as reported on the
NYSE Composite Tape, reaches and remains at 125% of the exercise price for such
options for ten consecutive trading days or (ii) seven years from the date of
grant.
On February 14, 1996, The Hartford compensation and personnel committee
made contingent awards of performance shares to certain key employees of the
Company, including the Named Executives. The awards are contingent upon The
Hartford achieving certain performance objectives described below. To the extent
that the performance objectives are achieved, cash and shares of The Hartford
common stock will be granted to such key employees pursuant to the performance
share provisions of the Hartford Stock Plan. These performance shares will not
be subject to
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cancelation and substitution, but rather will become payable after the
performance period to the extent described below.
Under the terms of the awards, there are two equally weighted performance
objectives measured over the 1996-1998 performance period: core earnings per
share of The Hartford ("Hartford Core Earnings") and TSR. Hartford Core Earnings
is defined as The Hartford's GAAP net income minus: (i) net realized capital
gains or losses; (ii) income or losses due to changes in methods of accounting;
(iii) the amount of losses from individual catastrophes in excess of 1% of
worldwide property-casualty earned premium for the year; (iv) the amount of any
individual non-catastrophe loss associated with any non-recurring charge that
exceeds $100 million; and (v) the income or loss associated with allocations
resulting from the liability sharing agreement entered into in connection with
the ITT Spin-Off. TSR is measured by the difference between the price of The
Hartford's common stock as of January 1, 1996 and the price as of December 31,
1998 (assuming the reinvestment of dividends paid), compared with the TSR of the
stock of a group of peer insurance companies.
The Hartford compensation and personnel committee established a minimum
threshold, a target and a maximum cap for Hartford Core Earnings and TSR to be
achieved in connection with the awards. If the targets are achieved, the key
employee will receive 100% of the performance shares awarded (payable one-third
in cash and two-thirds in common stock of The Hartford). If the minimum
thresholds are not achieved, the key employee will not receive any of the
performance shares awarded. If the Hartford Core Earnings and TSR achieved
exceed the minimum thresholds but fall below the targets, the key employee will
receive awards adjusted downward by interpolation to reflect falling short of
the targets. If the targets are exceeded, the key employee will receive awards
adjusted upward by interpolation subject to the maximum cap.
On January 24, 1997, the Hartford compensation and personnel committee
awarded Mr. Smith 4,444 performance shares relating to common stock of The
Hartford pursuant to the Hartford Stock Plan. This award will not be subject to
substitution. The terms of the award are substantially similar to those
described above with respect to awards of performance shares made on February
14, 1996, except that the performance period for the award runs from 1997 to
1999 and the "Performance Core Earnings" definition applies.
ANNUAL EXECUTIVE BONUS PROGRAM
Certain executives and key managers of the Company, including the Named
Executives, will be eligible to participate in an annual incentive bonus program
(the "Annual Bonus Program") administered by The Hartford. Under this program,
each executive and key manager is assigned a target bonus based on grade and
position, expressed as a percentage of the individual's year end base salary
rate. At year end, the aggregate amount of individual target bonuses is adjusted
in accordance with a pre-established formula to create a bonus pool for the
year.
For 1996, the Company measures net income and ROE against budgeted amounts
for the year and the measures are weighted 60% and 40%, respectively. Corporate
staff, including Mr. Smith, will be measured by a weighted average performance
factor for the Company. The maximum bonus pool is 200% of the aggregate target
bonus. Individual bonus amounts from the bonus pool are determined on a
discretionary basis taking into account specific personal contributions during
the year.
For 1996, incentive bonus programs were developed for Messrs. Ginnetti,
Marra, Welnicki and Odell. Financial measures and target bonuses are unique to
each such Named Executive. At year end, the individual target bonuses are
adjusted in accordance with the pre-established formula under each plan, with a
maximum bonus payout at 200% of target. The incentive formulas used to calculate
these individual target bonuses are based on various financial measures,
including ROE, net income and sales for the respective areas of responsibility
for such individuals, as well as the Company's net income and certain other
discretionary measures.
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During 1996, the target bonus adjustment factors pursuant to the above
formulas were 178.7% for Mr. Ginnetti, 290.5% for Mr. Marra, 142.4% for Mr.
Welnicki and 139.8% for Mr. Odell. In total, approximately $4,297,000 was
authorized for expenditure to approximately 100 executives and key managers of
the Company, including the amounts indicated in the Summary Compensation Table
for the Named Executives.
Bonus awards for certain Company executives that are payable in 1997 are
subject to approval by The Hartford compensation and personnel committee and
Company senior line of business management.
For 1997, the formula for the Company's bonus program, which includes Mr.
Smith, measures "core earnings" (as defined pursuant to the Annual Bonus
Program) and ROE against budgeted amounts for the year, weighted at 60% and 40%,
respectively.
For 1997, incentive bonus programs, similar to those described above for
1996, have been developed for Messrs. Ginnetti, Marra, Odell and Welnicki.
Financial measures, including a core earnings measure for bonus purposes, and
target bonuses are unique to each executive. At year end, the individual target
bonuses are adjusted in accordance with the pre-established formula under each
plan, with a maximum bonus payout at 200%. These individual target bonuses are
calculated in a manner substantially similar to the 1996 incentive bonus
programs.
HARTFORD RETIREMENT PLAN
The Hartford Retirement Plan covered substantially all eligible U.S.
salaried employees of the Company and its subsidiaries, including the Named
Executives, prior to the Equity Offerings and will continue to do so after the
completion thereof. An employee's annual pension will equal 2% of his or her
average final compensation up to thirty years of benefit service, reduced by
1 2/3% of the employee's primary Social Security benefit for each such year of
benefit service; provided that no more than one-half of an employee's primary
Social Security benefit is used for such reduction. An employee's average final
compensation is defined under the Hartford Retirement Plan as the total of (i)
an employee's average annual base salary earned in the 60 calendar months during
the last 120 consecutive calendar months of eligible service affording the
highest such average, plus (ii) a member's average annual compensation, not
including base salary, for the five calendar years of the member's last 120
consecutive calendar months of eligible service affording the highest such
average. The Hartford Retirement Plan also provides for undiscounted early
retirement pensions for employees who retire at or after age 60 following
completion of fifteen years of eligible service. An employee will be vested in
benefits accrued under the Hartford Retirement Plan upon completion of five
years of eligible service.
Applicable federal law limits the amount of benefits that can be paid and
compensation that may be recognized under a tax-qualified retirement plan.
Therefore, The Hartford has non-qualified unfunded retirement plans (the
"Hartford Excess Retirement Plans") for payment of those benefits at retirement
for eligible employees that cannot be paid from the qualified Hartford
Retirement Plan. After the completion of the Equity Offerings, certain employees
of the Company, including the Named Executives, also will remain eligible to
participate in the Hartford Excess Retirement Plans. The practical effect of the
Hartford Excess Retirement Plans is to continue calculation of retirement
benefits for all employees on a uniform basis. The Hartford also maintains an
excess plan trust under which excess benefits under the Hartford Excess
Retirement Plans for certain officers of The Hartford are funded. Any such
employee may indicate a preference, subject to certain conditions, to receive
any excess benefit in the form of a single discounted lump-sum payment. Any
"excess" benefit accrued to any such employee will be immediately payable in the
form of a single discounted lump sum payment upon the occurrence of a change in
corporate control (as defined in the Hartford Excess Retirement Plan). Upon the
completion of the Equity Offerings, such excess plan trust will continue to
provide such benefits to any eligible Company officers.
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Based on various assumptions as to remuneration and years of service,
before Social Security reductions, the following table illustrates the estimated
annual benefits payable from the Hartford Retirement Plan at retirement at age
65 that are paid for by the Company.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
AVERAGE YEARS OF SERVICE
FINAL ------------------------------------------------
COMPENSATION 15 20 25 30
------------------------------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C>
$ 50,000.......................... $ 15,000 $ 20,000 $ 25,000 $ 30,000
100,000.......................... 30,000 40,000 50,000 60,000
300,000.......................... 90,000 120,000 150,000 180,000
500,000.......................... 150,000 200,000 250,000 300,000
750,000.......................... 225,000 300,000 375,000 450,000
1,000,000.......................... 300,000 400,000 500,000 600,000
1,500,000.......................... 450,000 600,000 750,000 900,000
</TABLE>
The amounts shown under "Salary" and "Bonus" opposite the names of the
Named Executives in the Summary Compensation Table in "-- Executive
Compensation -- Summary" comprise the compensation that is used for purposes of
determining "average final compensation" under the plan. The years of service
with the Company of each of the Named Executives for eligibility and benefit
purposes as of December 31, 1996, are as follows: Mr. Smith, 28.75 years; Mr.
Ginnetti, 14.5 years; Mr. Marra, 16.58 years; Mr. Odell, 23.33 years; and Mr.
Welnicki, 4.17 years.
HARTFORD SENIOR EXECUTIVE SEVERANCE PAY PROGRAM
The Hartford Senior Executive Severance Pay Program applies to the
Company's senior executives, including, as of December 31, 1996, the Named
Executives. Under the Hartford Senior Executive Severance Pay Program, if a
participant's employment is terminated by the Company, other than for misconduct
or other disciplinary action or in other events specified in the program, the
participant is entitled to severance pay in an amount up to 24 months of base
salary from the Company depending upon his or her length of service, except that
Mr. Smith is entitled to severance pay for the greater of (i) the remaining term
of his employment contract (his current contract expires on December 19, 1999)
or (ii) 24 months. The Hartford Senior Executive Severance Pay Program provides,
however, that in no event will severance pay (for the Company's senior
executives, including the Named Executives, other than Mr. Smith) exceed the
amount of base salary from the Company for the number of months remaining
between the termination of employment and the participant's normal retirement
date, and that in no event will the total amount of severance pay exceed two
times the participant's total annual compensation during the year immediately
preceding such termination. The Hartford Senior Executive Severance Pay Program
includes offset provisions for other compensation from the Company and
requirements on the part of executives with respect to non-competition and
compliance with certain standards of conduct. Under the Hartford Senior
Executive Severance Pay Program, severance payments would ordinarily be made
periodically over the scheduled term of such payments. However the Company and
The Hartford have the option to make such payments in the form of a single
lump-sum payment discounted to present value.
The annual base salaries of Messrs. Smith, Ginnetti, Marra, Odell and
Welnicki as of December 31, 1996 were $525,000, $375,000, $350,000, $238,000 and
$238,000, respectively.
HARTFORD INVESTMENT AND SAVINGS PLAN
The salaried employees of the Company who, prior to the Equity Offerings,
have been participants in the Hartford Investment and Savings Plan, including
the Named Executives, will continue to be eligible to participate in the Plan
after the completion of the Equity Offerings. However, future employer
contributions to the Hartford Investment and Savings Plan, on behalf of
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Company employees, will be made in Class A Common Stock of the Company and a new
investment fund permitting employees of the Company and The Hartford to invest
their own prior and future contributions in the Company's stock will be added to
the Plan. Employees of the Company may also elect to transfer to the new
investment fund, within a certain time period, contributions previously made by
The Hartford on their behalf. The Hartford Investment and Savings Plan is a
defined contribution plan that is intended to be tax-qualified under Sections
401(a) and 401(k) of the Internal Revenue Code. The Hartford Investment and
Savings Plan is expected to provide that no contributions of Class A Common
Stock will be made thereunder, and the Company and The Hartford shall have no
obligation to make or permit any contribution thereunder, if such contribution
would cause the percentage of beneficial ownership by The Hartford of the
combined voting power or the value of the capital stock of the Company to fall
below 80%.
Federal legislation limits the annual contributions which an employee may
make to the Hartford Investment and Savings Plan. Accordingly, The Hartford has
adopted Excess Savings Plans (the "Hartford Excess Savings Plans") and, after
the completion of the Equity Offerings, the Company's employees will continue to
be eligible for the Hartford Excess Savings Plans, which will enable an employee
who is precluded by these limitations from contributing the entire 6% of his or
her salary to the Hartford Investment and Savings Plan to make up the shortfall
through salary deferrals to the Hartford Excess Savings Plan and thereby receive
an amount credited to a book reserve account maintained by The Hartford equal to
the 50% matching employer contribution and one-half of 1% non-matching employer
contribution otherwise allowable under the Hartford Investment and Savings Plan.
Salary deferrals, employer contributions and imputed earnings will be entered
into a book reserve account maintained by The Hartford for each participant in
the Hartford Excess Savings Plan.
HARTFORD DEFERRED COMPENSATION PLAN
Employees of The Hartford who meet certain salary level standards have been
participants in the Hartford Deferred Compensation Plan. It is intended that the
employees of the Company, including the Named Executives, who meet such
standards will continue to be eligible for the Hartford Deferred Compensation
Plan after the completion of the Equity Offerings. Under the Hartford Deferred
Compensation Plan, eligible employees with eligible compensation of $200,000 or
more may elect to defer receipt of up to 100% of their 1997 bonus. The Hartford
will credit participating employees a hypothetical return on the deferred
compensation based upon the performance of benchmark investment funds made
available under the plan and selected by the executive to measure such return.
EMPLOYEE WELFARE BENEFITS
After the completion of the Equity Offerings, salaried employees of the
Company and its participating subsidiaries, including the Named Executives, will
continue to participate in the broad-based employee welfare benefits program
which is currently sponsored by The Hartford. The Company's salaried employees
will participate in The Hartford's comprehensive benefits program, which will
include group medical and dental coverage, group life insurance and other
benefit plans, in addition to the pension program and investment and savings
plan available to salaried employees of The Hartford described previously.
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SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth at May 9, 1997, the beneficial ownership of
common stock, par value $.01 per share, of The Hartford by the Company's
directors, the Named Executives and all the directors and executive officers of
the Company as a group.
<TABLE>
<CAPTION>
AMOUNT
BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED(1)(2)
--------------------------------------------------------------- -----------
<S> <C>
Ramani Ayer.................................................... 265,468
Donald R. Frahm................................................ 311,245
Paul G. Kirk, Jr. ............................................. 2,278
Lowndes A. Smith............................................... 265,910
H. Patrick Swygert............................................. 1,011
DeRoy C. Thomas................................................ 27,029
Gordon I. Ulmer................................................ 3,268
David K. Zwiener............................................... 115,644
John P. Ginnetti............................................... 99,651
Thomas M. Marra................................................ 63,532
Leonard E. Odell, Jr. ......................................... 32,631
Raymond P. Welnicki............................................ 14,203
All directors and executive officers of the Company
as a group (15 persons)...................................... 1,211,654
</TABLE>
- ---------------
(1) All shares are owned directly except as otherwise indicated below. Pursuant
to regulations of the Commission, shares (i) that may be acquired by
directors and executive officers upon exercise of stock options exercisable
within sixty days after May 9, 1997, (ii) allocated to the accounts of
certain directors and executive officers under the Hartford Investment and
Savings Plan based on a valuation of plan accounts as of May 9, 1997, (iii)
acquired by directors and executive officers under the Hartford Dividend
Reinvestment and Cash Payment Plan through May 9, 1997, (iv) owned by a
director's or executive officer's spouse or minor child or (v) that have
been granted under the Hartford Incentive Stock Plan or the 1995 ITT
Hartford Group, Inc. Restricted Stock Plan for Non-Employee Directors and
are restricted, but as to which the directors or executive officers have the
right to vote, are deemed to be beneficially owned by such directors and
executive officers as of such date and are included in the number of shares
listed in the table above.
Of the number of shares shown above, the following represent shares that may
be acquired upon exercise of stock options that are exercisable within sixty
days after May 9, 1997 by: Mr. Smith, 241,216 shares; Mr. Ginnetti, 38,165
shares; Mr. Marra, 55,216 shares; Mr. Odell, 19,901 shares; Mr. Welnicki,
13,240 shares; and all directors and executive officers as a group, 951,798
shares.
(2) The shares of The Hartford's common stock beneficially owned by each person
named above do not exceed 1% of the issued and outstanding shares of common
stock of The Hartford. The shares beneficially owned by all the directors
and executive officers of the Company as a group are approximately 1% of
such issued and outstanding shares.
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CERTAIN RELATIONSHIPS AND TRANSACTIONS
GENERAL
The Hartford is currently the beneficial owner of all the capital stock of
the Company. Following the completion of the Equity Offerings, The Hartford will
continue to be the controlling stockholder of the Company and will beneficially
own 100% of the outstanding Class B Common Stock, which will represent
approximately 96.1% of the combined voting power of all the outstanding Common
Stock and approximately 83.2% of the economic interest in the Company (or
approximately 95.6% and 81.4%, respectively, if the Underwriters' over-allotment
options are exercised in full). For so long as The Hartford continues to
beneficially own shares of Common Stock representing more than 50% of the
combined voting power of the outstanding Common Stock, it generally will be able
to approve any matter submitted to a vote of the stockholders, including, among
other things, the election of the entire Board of Directors or the amendment of
the Certificate of Incorporation and By-laws without the consent of the other
stockholders of the Company. In addition, through its controlling beneficial
ownership of the Company (as well as certain provisions of the Master
Intercompany Agreement discussed under "-- Intercompany Arrangements -- Master
Intercompany Agreement"), The Hartford will be able to exercise a controlling
influence over the business and affairs of the Company, including determinations
with respect to mergers or other business combinations involving the Company,
the acquisition or disposition of assets by the Company, the Company's access to
the capital markets, the payment of dividends and any change of control of the
Company. In the foregoing situations or otherwise, various conflicts of interest
between the Company and The Hartford could arise. Furthermore, ownership
interests of directors or officers of the Company in common stock of The
Hartford or service as a director or officer of both the Company and The
Hartford could create, or appear to create, potential conflicts of interest when
directors and officers are faced with decisions that could have different
implications for the Company and The Hartford.
COMPETITION
The Hartford historically has conducted the operations of its Annuity,
Individual Life Insurance and Employee Benefits segments (each as described in
this Prospectus) in the United States and Canada solely through the Company and
its subsidiaries. The Hartford has informed the Company that it currently
intends to continue this strategy with respect to those products and services
currently being offered by the Company through those business segments.
Separately, The Hartford has informed the Company that The Hartford intends to
engage in efforts to provide investment management services to large businesses,
some of which may be customers of the Company. The Company currently does not
plan to enter those lines of business in the United States and Canada in which
The Hartford or any of its subsidiaries (other than the Company or any of its
subsidiaries) currently operates. The Hartford currently provides commercial
property-casualty insurance, property-casualty reinsurance and personal lines
(including homeowners and auto) coverages.
The Hartford historically has conducted its international life insurance
and annuity operations both through the Company, and its subsidiaries, and
through other subsidiaries of The Hartford. Currently, The Hartford holds life
insurance and annuity operations internationally through direct or indirect
wholly owned subsidiaries in The Netherlands, Spain and the United Kingdom,
while the Company operates lines of business in Brazil and Argentina. There is
no current intention on the part of the Company or The Hartford to enter such
lines of business in countries in which The Hartford or the Company,
respectively, currently operates.
The Certificate of Incorporation of the Company provides that, subject to
any contractual agreements of the Company to the contrary, and subject to
applicable law, The Hartford or any subsidiary thereof (other than the Company
or any of its subsidiaries) will have the right to compete with the Company or
any of its subsidiaries. For a further discussion of the Company's Certificate
of Incorporation, see "Certain Provisions of the Certificate of Incorporation
and By-Laws of the Company". It is possible that areas of competition and
conflicts of interest may arise between the
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two companies or their respective subsidiaries in the future. No assurance can
be given that such areas of competition or conflicts of interest will not arise
or will be resolved in a manner favorable to the Company.
The Hartford has advised the Company that its current intent is to continue
to hold all the Class B Common Stock it beneficially owns. However, The Hartford
has no contractual obligation to retain its shares of Class B Common Stock,
except for a limited period described in "Underwriting". In addition, the
Company has agreed that it will, upon the request of The Hartford, use its best
efforts to effect the registration under applicable federal and state securities
laws of any shares of Common Stock held by The Hartford or any of its
affiliates. See "-- Intercompany Arrangements -- Master Intercompany Agreement".
The address of The Hartford is Hartford Plaza, Hartford, Connecticut 06115.
BOARD OF DIRECTORS
Promptly following the completion of the Equity Offerings, The Hartford and
the Company expect to elect two additional directors of the Company who will be
persons not currently or formerly associated with The Hartford or the Company.
The Board of Directors will then consist of ten members, including eight who are
directors and/or officers of The Hartford. See "Management -- Directors".
Members of the Board of Directors will be divided into three classes and serve
staggered three-year terms. The Hartford will have the ability to change the
size and composition of the Company's Board of Directors.
INTERCOMPANY ARRANGEMENTS
The Company's relationship with The Hartford will be governed by, among
other things, certain agreements to be entered into in connection with the
Equity Offerings and possibly in the future, including the Master Intercompany
Agreement, the Investment Management Agreements, the Tax Sharing Agreement and
the Simsbury Sublease, the material terms of which are summarized below. The
agreements entered into in connection with the Equity Offerings generally will
maintain the relationship between the Company and The Hartford in a manner
consistent in all material respects with past practice. Under applicable
insurance holding company laws, agreements between the Company's insurance
subsidiaries and The Hartford or its affiliates must be fair and reasonable and
may be subject to the approval of applicable state insurance commissioners.
However, none of these agreements, nor any agreements entered into in the future
between the Company and The Hartford or their respective subsidiaries (for so
long as The Hartford maintains controlling beneficial ownership in the Company),
will result from arm's-length negotiations and, as a result, the terms of
certain of such agreements may be less favorable to the Company than could be
obtained from an independent third party.
The descriptions set forth below are intended to be summaries and, while
material terms of the agreements are set forth herein, the descriptions are
qualified in their entirety by reference to the relevant agreement or form
thereof filed with the Registration Statement of which this Prospectus forms a
part.
MASTER INTERCOMPANY AGREEMENT
SERVICES. The Company and The Hartford will enter into the Master
Intercompany Agreement which will identify those services that The Hartford will
agree to provide to the Company and that the Company will agree to provide to
The Hartford, with the costs of such services allocated according to established
methodologies determined on an annual basis by The Hartford, in its sole
discretion, after consultation with the Company, which evidence each such
party's fair and reasonable share of such costs. Such allocation of costs for
such services provided in prior years is reflected in the Company's consolidated
financial statements. In particular, The Hartford intends to allow eligible
employees of the Company to continue to participate in The Hartford's employee
benefit plans.
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The general purpose of the Master Intercompany Agreement is to ensure that
The Hartford continues to provide to the Company the range of services provided
by it prior to the Equity Offerings. These services include, among others,
certain corporate relations, executive, government affairs, human resources,
legal, investment, finance, real estate, information management, internal audit,
cash management, tax and treasury services.
In addition, the Company will have the exclusive right under the Master
Intercompany Agreement to distribute certain of its products through The
Hartford. The Hartford will not solicit or encourage any of its independent
agents to (x) sell or endorse any products of another company similar in type
and nature to such products of the Company or (y) transfer any of such
independent agents' in force business with the Company relating to such products
to another company.
APPROVAL OF CORPORATE ACTIVITIES. The Master Intercompany Agreement also
will require that, prior to the date on which The Hartford ceases to
beneficially own 50% or more of the combined voting power of the Voting Stock
then outstanding, neither the Company nor any of its subsidiaries may undertake
or agree to undertake any of the following without the prior written consent of
The Hartford:
(i) any merger or consolidation (or equivalent transaction) of the
Company or any of its subsidiaries with or into any corporation,
partnership, joint venture or any other person, or division thereof, which
merger or consolidation (or equivalent transaction) is material to the
Company and its subsidiaries taken as a whole;
(ii) the acquisition by the Company or any of its subsidiaries of a
majority of the issued and outstanding shares of capital stock or all or
substantially all the assets of any corporation, partnership, joint venture
or any other person involving consideration or value in excess of $5
million;
(iii) any sale, assignment, lease, transfer or other disposition, or
the pledge, mortgage or encumbrance, of assets of the Company or any of its
subsidiaries other than (w) any transaction in the ordinary course of
business and consistent with past practice, (x) any acquisition,
disposition or transfer of securities pursuant to investment portfolio
decisions in the ordinary course of business and consistent with past
practice, (y) any transaction between or among any of the Company and its
subsidiaries or (z) any transaction, or series of related transactions,
which does not involve aggregate consideration or value in excess of $5
million;
(iv) any transaction, or series of related transactions, not
specifically enumerated in subparagraphs (i) through (iii) above, involving
aggregate consideration, value or liabilities in excess of $10 million or
that is or are otherwise material to the Company and its subsidiaries taken
as a whole;
(v) any transaction, or series of related transactions, that could
have a material effect on The Hartford;
(vi) any increase or decrease in, or the reclassification of, the
authorized capital stock of the Company or the creation of any class or
series of capital stock of the Company;
(vii) the dissolution, liquidation or winding up of the Company;
(viii) any redemption, acquisition or issuance by the Company of any
shares of its capital stock or any options, warrants or rights to acquire
such capital stock or securities convertible into or exchangeable for
capital stock, other than issuances in respect of and pursuant to the
requirements of the 1997 Restricted Stock Plan, the 1997 Stock Plan, the
1997 Bonus Swap Plan and the 1997 Stock Purchase Plan or such other
employee and director stock option, profit sharing or other benefit plans
of the Company in effect from time to time;
(ix) the declaration or payment of dividends on or in respect of any
class or series of capital stock of the Company or any other distribution
to the stockholders of the Company,
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other than dividends on or in respect of the Common Stock consistent with
the Company's dividend policy then in effect; and
(x) any direct or indirect act that would result, either alone or
taking into account the business, operations, properties, activities and
legal and regulatory status of The Hartford and the Company, in (i) The
Hartford or any of its subsidiaries (other than the Company and any of its
subsidiaries) being required to file any notice, report or other document
or make any registration with, or obtain any approval, consent or
authorization of, any governmental or regulatory agency, other than in the
ordinary course of business and consistent with past practice, or otherwise
becoming subject to any applicable law or regulation or (ii) any director
of The Hartford being ineligible to serve or prohibited from so serving as
a director of The Hartford under or pursuant to any applicable law or
regulation.
REGISTRATION RIGHTS. The Master Intercompany Agreement will further
provide that, upon the request of The Hartford or any other Rights Holder, the
Company will use its best efforts to effect the registration under the
applicable federal and state securities laws of any of the shares of Common
Stock (and any other securities issued in respect of or in exchange therefor)
beneficially owned by The Hartford or any such other Rights Holder, as
applicable, for sale in accordance with its intended method of disposition
thereof, and will take such other actions as may be necessary to permit the sale
thereof in other jurisdictions, subject to certain limitations specified in the
Master Intercompany Agreement. The Hartford and any other Rights Holder also
will each have the right, subject to certain limitations, to include at any time
and from time to time the shares of Common Stock (and any other securities
issued in respect of or in exchange therefor) beneficially owned by it in
certain other registrations of such securities initiated by the Company on its
own behalf or on behalf of its other stockholders. The Company generally will
agree, subject to the provisions of the Master Intercompany Agreement, to pay
all out-of-pocket costs and expenses in connection with each such registration
that The Hartford or any other Rights Holder requests or in which The Hartford
or any other Rights Holder participates. Subject to certain limitations
specified in the Master Intercompany Agreement, such registration rights will be
assignable by The Hartford or any other Rights Holder and their assigns. The
Master Intercompany Agreement will contain customary terms and provisions with
respect to, among other things, registration procedures and certain rights to
indemnification and contribution granted by the parties thereunder in connection
with such a registration.
INDEMNIFICATION. The Master Intercompany Agreement will provide for the
assumption of liabilities and cross-indemnities allocating liability in respect
of the Company's businesses to the Company and in respect of The Hartford's
businesses (other than the businesses of the Company and its subsidiaries) to
The Hartford. In addition, for those liabilities not specifically arising out of
or allocable to either of their respective former or present businesses, the
parties will agree to share such liabilities, allocating 30% of the cost of such
liabilities to the Company and 70% of the cost of such liabilities to The
Hartford. In addition, pursuant to the terms of the Master Intercompany
Agreement, the Company will be responsible for 30% of certain shared liabilities
not specifically arising out of or allocable to any of the present or former
businesses of ITT, New ITT or The Hartford under the distribution agreement
executed in connection with the ITT Spin-Off (the "Spin-Off Distribution
Agreement") and for which The Hartford has responsibility thereunder. See
"-- ITT Spin-Off".
Under the tax allocation agreement entered into in connection with the ITT
Spin-Off (the "Spin-Off Tax Agreement"), The Hartford also is responsible for a
one-third share of certain federal, state or foreign tax liabilities with
respect to the ITT Spin-Off and certain business activities of ITT prior to the
date of such ITT Spin-Off. See "-- ITT Spin-Off". Pursuant to the Master
Intercompany Agreement, the Company will be responsible for 30% of any such
liabilities and The Hartford will be responsible for 70% of any such
liabilities. In addition, the Company and The Hartford will agree that, pursuant
to the Master Intercompany Agreement, any sales or use tax arising from or
imposed upon the transfer of property or services by either of them or their
respective subsidiaries following the
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completion of the Equity Offerings will be the liability of the party receiving
such property or services. The Master Intercompany Agreement also will provide
that the Company and its subsidiaries will be liable for any payroll tax
attributable to 1997 that arises from the employment by the Company after the
completion of the Equity Offerings of individuals who perform services for the
Company or any of its subsidiaries during 1997. Further, the Master Intercompany
Agreement will provide that the Company and its subsidiaries or The Hartford and
its subsidiaries (other than the Company and its subsidiaries) (each group, an
"Indemnifiable Group"), as applicable, will each indemnify the other
Indemnifiable Group for any taxes, including interest and penalties thereon
(regardless of which Indemnifiable Group member taxes are imposed upon),
attributable to, or otherwise arising as a result of, the exercise by the
Internal Revenue Service, or any other governmental revenue authority, of the
authority granted under Section 482 of the Internal Revenue Code or any similar
statutory provision, to distribute, apportion or allocate gross income,
deductions, credits or allowances between or among The Hartford or any of its
subsidiaries (other than the Company and its subsidiaries) and the Company and
its subsidiaries, as applicable.
LICENSE AND SUBLICENSE. Hartford Fire will grant to (x) the Company the
Hartford License and the right to grant Hartford Sublicenses to the extent
described under "Risk Factors -- Control by and Relationship with The
Hartford -- Intercompany Arrangements -- Master Intercompany Agreement" and (y)
the Company and/or certain of its subsidiaries a personal, non-transferable
sublicense to use the "ITT" name and marks, including the logo, owned by ITT
Sheraton Corporation (each, an "ITT Sublicense") which was previously licensed
to Hartford Fire under the ITT Trade Name and Service Mark License Agreement
(the "ITT License Agreement") entered into in connection with the ITT Spin-Off,
each such license subject to customary usage restrictions. The rights that will
be granted under an ITT Sublicense may be restricted or terminated pursuant to
the terms of the ITT License Agreement, including a provision that allows for
termination by The Hartford of its license thereunder upon six months' prior
written notice. Moreover, the ITT License Agreement provides that ITT may, under
certain limited circumstances, terminate the ITT License Agreement and thereby
the ITT Sublicenses. For a description of the circumstances under which ITT may
terminate the ITT License Agreement, see "-- ITT Spin-Off".
Subject to the foregoing limitations, each of the Hartford License, any
Hartford Sublicenses and the ITT Sublicenses will be perpetual, except that, in
the event that The Hartford reduces its beneficial ownership below 50% of the
combined voting power of the outstanding Voting Stock, Hartford Fire may revoke
the Hartford License and/or any Hartford Sublicenses upon the later of the fifth
anniversary of the date of consummation of the Equity Offerings or one year
after receipt by the Company of written notice of Hartford Fire's intention to
revoke the Hartford License and/or any Hartford Sublicenses. However, only with
respect to any future international property-casualty operations conducted by
the Company, the Hartford License and/or any Hartford Sublicenses may be revoked
by Hartford Fire upon six months' written notice in the event that The Hartford
reduces its beneficial ownership below 50% of the combined voting power of the
outstanding Voting Stock. Each ITT Sublicense will terminate on the earlier of
(i) the earliest termination date specified in the ITT License Agreement or (ii)
the date that The Hartford reduces its beneficial ownership below 50% of the
combined voting power of the outstanding Voting Stock; provided, however, that
if the Company provides an indemnity to The Hartford to cover any resulting
liabilities, the Company may elect to have each ITT Sublicense terminate only
upon the earliest termination date specified in the ITT License Agreement. In
addition, in each case the Hartford License, any Hartford Sublicenses and the
ITT Sublicenses may be revoked immediately in certain other limited, customary
circumstances, such as material breach of any such licenses, insolvency and any
non-permitted transfers of such licenses and sublicenses. Each of the Company
and The Hartford will agree to indemnify the other and any of its subsidiaries,
and their respective employees, officers, directors and agents, from and against
any claims, demands, suits, actions, damages and judgments brought or obtained
by a third party arising out of any (i) use of the "Hartford" name and/or any of
the various trademarks and service marks licensed pursuant to the Hartford
License and any Hartford Sublicenses by the Company or certain of its
subsidiaries or The Hartford or any of its subsidiaries,
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as applicable, or (ii) breach by the Company or certain of its subsidiaries or
The Hartford and any of its subsidiaries, as applicable, of the terms and
conditions of the Hartford License and any Hartford Sublicenses, as applicable.
In addition, Hartford Fire will agree to indemnify the Company and any of its
subsidiaries, and their respective employees, officers, directors and agents,
from and against any claims, demands, suits, actions, damages and judgments
brought or obtained by a third party arising out of an assertion that the use of
such "Hartford" name, trademarks or service marks infringes the trade names,
trademarks and service marks of a third party. The Company will be able to
assign its rights in the Hartford License to a third party upon the prior
written approval of Hartford Fire. See "Risk Factors -- Control by and
Relationship with The Hartford -- Intercompany Arrangements -- Master
Intercompany Agreement".
TERM. The Master Intercompany Agreement will contain various termination
provisions. In the case of the provision of services, the relevant provisions of
the Master Intercompany Agreement will be subject to termination by the Company
or The Hartford, upon six months' prior written notice, on and after the date on
which The Hartford ceases to own 50% or more of the combined voting power of the
Voting Stock then outstanding and as otherwise specified therein. As noted
above, the provisions in respect of approval of certain corporate activities by
The Hartford will only be effective so long as The Hartford beneficially owns
50% or more of the combined voting power of the outstanding Voting Stock. The
Master Intercompany Agreement will not provide for termination of the provisions
in respect of registration rights and indemnification discussed above. For a
discussion of the termination provisions in respect of the Hartford License, any
Hartford Sublicenses and the ITT Sublicenses, see "-- License and Sublicense".
TAX SHARING AGREEMENT AND TAX CONSOLIDATION
Pursuant to the Tax Sharing Agreement, the Company, its subsidiaries and
The Hartford will make payments between them such that, with respect to any
period, the amount of taxes to be paid by the Company, subject to certain
adjustments, generally will be determined as though the Company were to file
separate federal, state and local income tax returns (including, except as
provided below, any amounts determined to be due as a result of a
redetermination of the tax liability of The Hartford arising from an audit or
otherwise). With respect to certain tax items, however, such as foreign tax
credits, alternative minimum tax credits, net operating losses and net capital
losses, the Company's right to reimbursement will be determined based on the
usage of such credits or losses by the consolidated group.
The Hartford will continue to have all the rights of a parent of a
consolidated group (and similar rights provided for by applicable state and
local law with respect to a parent of a combined, consolidated or unitary
group), will be the sole and exclusive agent for the Company in any and all
matters relating to the tax liabilities of the Company, will have sole and
exclusive responsibility for the preparation and filing of all tax returns (or
amended returns) and will have the power, in its sole discretion, to contest or
compromise any asserted tax adjustment or deficiency and to file, litigate or
compromise any claim for refund on behalf of the Company.
The Hartford will control all the tax decisions of the Company, as is
presently the case, by virtue of its controlling beneficial ownership of the
Company and the terms of the Tax Sharing Agreement. Under the Tax Sharing
Agreement, The Hartford will have sole authority to respond to and conduct all
tax proceedings (including tax audits) relating to the Company, file all returns
on behalf of the Company and determine the amount of the Company's liability to
(or entitlement to payment from) The Hartford under the Tax Sharing Agreement.
This arrangement may result in conflicts of interest between the Company and The
Hartford. For example, under the Tax Sharing Agreement, The Hartford will be
able to choose to contest, compromise or settle any adjustment or deficiency
proposed by the relevant taxing authority in a manner that may be beneficial to
The Hartford and detrimental to the Company.
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Provided that The Hartford continues to beneficially own, directly or
indirectly, at least 80% of the combined voting power and the value of the
outstanding capital stock of the Company, the Company will be included for
federal income tax purposes in the consolidated group of which The Hartford is
the common parent. It is the present intention of The Hartford and its
subsidiaries to continue to file a single consolidated federal income tax
return. In certain circumstances, certain of the Company's subsidiaries also
will be included with certain subsidiaries of The Hartford (other than Company
subsidiaries) in combined, consolidated or unitary income tax groups for state
and local tax purposes. Each member of a consolidated group for federal income
tax purposes is jointly and severally liable for the federal income tax
liability of each other member of the consolidated group. Similar principles
apply with respect to members of a combined group for state law tax purposes.
Accordingly, although the Tax Sharing Agreement will allocate tax liabilities
between the Company and The Hartford during the period in which the Company is
included in The Hartford's consolidated group, the Company could be liable for
the federal income tax liability of any other member of The Hartford
consolidated group in the event any such liability is incurred, and not
discharged, by such other member.
In addition, provided that The Hartford continues to beneficially own at
least 80% of the combined voting power or the value of the outstanding capital
stock of the Company, the Company will be included for federal income tax
purposes in the controlled group of which The Hartford is the common parent.
Each member of a controlled group is jointly and severally liable for pension
funding and pension termination liabilities of each other member of the
controlled group, as well as certain benefit plan taxes. Accordingly, the
Company could be liable for pension funding, pension termination liabilities and
certain other pension-related excise taxes as well as other taxes of another
member of The Hartford-controlled group in the event any such liability is
incurred, and not discharged, by such other member.
INVESTMENT MANAGEMENT AGREEMENTS
The Investment Management Agreements will provide that the investment staff
of The Hartford will implement (e.g., selection, purchase and sale of
securities) the investment strategies determined by the investment strategy
group of the Company and act as advisor to certain of the Company's
non-guaranteed separate accounts and mutual funds. The Investment Management
Agreements also will provide that the Company will pay a fee designed to reflect
the actual costs of providing such services. In addition, the Investment
Management Agreements generally will provide that, prior to April 1, 2000, The
Hartford may not terminate such Agreements, and the Company may only terminate
such Agreements, upon six months' written notice, based on The Hartford's
failure to satisfy performance benchmarks agreed to by the parties. Further, the
Investment Management Agreements generally will provide that from and after
April 1, 2000, the Investment Management Agreements will continue unless 180
days' prior written notice of termination is provided on or after October 1,
1999 by one party to the other. The Investment Management Agreements for the
Company's mutual funds will be terminable by any of the mutual funds' board of
directors at any time. See "Risk Factors -- Control by and Relationship with The
Hartford -- Intercompany Arrangements -- Investment Management Agreements".
SIMSBURY SUBLEASE
The Company's headquarters, located in Simsbury, Connecticut, is currently
leased from a third party by Hartford Fire pursuant to a sale-leaseback
arrangement. After the Equity Offerings, the Company or one of its subsidiaries
will sublease from Hartford Fire the right to use the headquarters building
pursuant to the Simsbury Sublease. The right to purchase the facility and the
renewal option in respect of the sale-leaseback arrangement are being retained
by Hartford Fire. In addition, a subsidiary of The Hartford owns the land
underlying and surrounding the headquarters building. The Hartford Fire sublease
expires on January 1, 2010. Rental payments are fixed (but not level) over the
term of the lease. The Company expects to pay rent of $12 million in each of
1997, 1998 and
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1999, respectively, $21 million in each of 2000 and 2001, respectively, and $175
million thereafter in the aggregate over the remaining term of the sublease.
ITT SPIN-OFF
The agreements entered into in connection with the ITT Spin-Off are not
affected by the Equity Offerings and, in material part, to the extent still in
force and effect, are the obligations of The Hartford. However, certain matters
addressed in the agreements relating to the ITT Spin-Off are also addressed in
agreements to be entered into in connection with the Equity Offerings. The Spin-
Off Distribution Agreement provides for, among other things, the assumption of
liabilities and cross-indemnities designed generally to allocate among ITT, New
ITT and The Hartford, effective as of the effective date of the ITT Spin-Off
(the "Distribution Date"), financial responsibility for the liabilities arising
out of or in connection with their respective businesses, including liabilities
in respect of The Hartford's business, and for certain shared liabilities not
specifically arising out of or allocable to any of their respective former or
present businesses. The Hartford is responsible for one-third of the costs of
such shared liabilities under the Spin-Off Distribution Agreement. The
intellectual property agreements entered into in connection with the ITT
Spin-Off provide for the licensing to and among such entities of rights under
patents, copyrights, software, technology, trade secrets and certain other
intellectual property owned by them and their respective subsidiaries as of the
Distribution Date, including a grant of rights and licenses to The Hartford
(with rights to sublicense to its subsidiaries) to continue to use the "ITT"
name and marks in the operation of its business following the Distribution Date,
subject to certain conditions. For a description of the allocation of the above-
described shared liabilities between the Company and The Hartford, see
"-- Master Intercompany Agreement -- Indemnification".
However, under the terms of the ITT License Agreement, ITT may, in its
discretion, terminate such agreement in the event of a change of control of The
Hartford, which is defined therein to include (i) the sale of 20% or more of the
outstanding common stock of The Hartford to any person, (ii) a tender or
exchange offer for 15% or more of the outstanding common stock of The Hartford,
(iii) a consolidation or merger in which The Hartford is not the surviving
corporation and (iv) a change in the majority of the members of the board of
directors of The Hartford during any twelve-month period. Pursuant to the Master
Intercompany Agreement, Hartford Fire will grant the ITT Sublicenses to the
Company and certain of its subsidiaries subject to the foregoing terms and
conditions and certain other terms and conditions included in the ITT License
Agreement. See "-- Master Intercompany Agreement -- License and Sublicense".
The Spin-Off Tax Agreement provides that New ITT and The Hartford will pay
their respective shares of ITT's consolidated tax liability for the tax years
that they were included in ITT's consolidated federal income tax return, as well
as their respective shares of any state, local and foreign taxes attributable to
periods prior to the Distribution Date. The Hartford is responsible for a
one-third share of certain federal, state or foreign tax liabilities with
respect to the ITT Spin-Off and certain business activities of ITT prior to the
date of such ITT Spin-Off. While there can be no ultimate assurance, management
does not believe that its share of any such tax liabilities under the Spin-Off
Tax Agreement will have a material adverse effect on the results of operations,
financial condition or businesses of the Company. For a description of the
allocation of such liabilities between the Company and The Hartford, see
"-- Master Intercompany Agreement -- Indemnification".
HARTFORD FIRE GUARANTEE
Pursuant to the Guarantee Agreement, Hartford Fire has provided to Hartford
Life and Accident and Hartford Life an unconditional guarantee since 1990, on
behalf of and for the benefit of such subsidiaries and the owners of the life,
disability and other insurance and annuity contracts issued by either such
subsidiary, in respect of any contractual claims made under such contracts by
the beneficiaries thereof. Upon the completion of the Equity Offerings, Hartford
Fire will terminate such
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guarantee; however, the guarantee will remain in full force and effect with
respect to any outstanding contracts at the time of such termination. Although
management does not believe the termination of the guarantee will have an
adverse impact on sales, it is possible that future sales of some of the
Company's products could be adversely impacted as a result of the absence of the
marketing benefit associated with such guarantee.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Equity Offerings, the Company will have issued and
outstanding 23,000,000 shares of Class A Common Stock (or 26,000,000 shares if
the Underwriters' over-allotment options are exercised in full) and 114,000,000
shares of Class B Common Stock. All of the shares of Class A Common Stock sold
in the Equity Offerings will be freely tradeable without restrictions under the
Securities Act, except for shares owned by "affiliates" of the Company, as such
term is defined in Rule 144, which will be subject to the resale limitations of
Rule 144. All the outstanding shares of Class B Common Stock held by The
Hartford will continue to be "restricted securities" as defined in Rule 144 and
may not be resold in the absence of registration under the Securities Act or
pursuant to an exemption from such registration, including, among others, the
exemptions provided by Rule 144. The Company has agreed that it will, upon the
request of The Hartford or any other Rights Holder, except for a limited period
described in "Underwriting", use its best efforts to effect the registration
under the applicable federal and state securities laws of any shares of capital
stock held by The Hartford or any such other Rights Holder, as applicable, or
any of its affiliates (with such rights to be assignable by The Hartford or any
such other Rights Holder under certain circumstances). See "Certain
Relationships and Transactions -- Intercompany Arrangements -- Master
Intercompany Agreement -- Registration Rights".
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are required to be aggregated), including affiliates of the
Company, who has beneficially owned "restricted securities" for at least a year
may sell within any three-month period a number of such shares that does not
exceed the greater of (i) 1% of the total number of outstanding shares of Class
A Common Stock or (ii) the reported average weekly trading volume of the Class A
Common Stock on all national securities exchanges during the four calendar weeks
preceding the date on which notice of the sale is filed with the Commission.
Sales under Rule 144 are also subject to certain manner-of-sale provisions,
notice requirements and the availability of current public information about the
Company. A person who is not deemed to have been an "affiliate" of the Company
at any time during the 90 days preceding a sale, and who has beneficially owned
"restricted securities" for at least two years, may sell such shares under Rule
144(k) without regard to the volume limitations, manner-of-sale provisions or
notice requirements. Sales of "restricted securities" by affiliates, even after
a two-year holding period, must continue to be made in brokers' transactions
subject to the volume limitations described above. As defined in Rule 144, an
"affiliate" of an issuer is a person that directly or indirectly through the use
of one or more intermediaries, controls, is controlled by or is under common
control with, such issuer. For the foregoing purposes, The Hartford, as the
beneficial owner of all the Class B Common Stock, is an "affiliate" of the
Company. The above summary of Rule 144 is not intended to be a complete
description of that rule.
Rule 144A provides a non-exclusive safe harbor exemption from the
registration requirements of the Securities Act for specified resales of
restricted securities to certain institutional investors. In general, Rule 144A
allows unregistered resales of restricted securities to a "qualified
institutional buyer", which generally includes an entity, acting for its own
account or for the account of other qualified institutional buyers, that in the
aggregate owns or invests at least $100 million in securities of unaffiliated
issuers. Rule 144A does not extend an exemption to the offer or sale of
securities that, when issued, were of the same class as securities listed on a
national securities exchange or quoted on an automated quotation system. The
shares of Class B Common Stock outstanding as of the date of this Prospectus
would be eligible for resale under Rule 144A because such shares, when issued,
were not of the same class as any listed or quoted securities. The above summary
of Rule 144A is not intended to be a complete description of that rule.
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The Company intends to file one or more registration statements on Form S-8
pursuant to the Securities Act to register the shares of Class A Common Stock
that will be reserved for issuance under certain of its benefit plans, thus
permitting the resale in the public market, without restriction under the
Securities Act, of any shares of Class A Common Stock issued upon exercise of
options that will be granted by the Company under such benefit plans to
non-affiliates. Any such registration statements will become effective
immediately upon filing. As of the date of this Prospectus, no options to
purchase shares of Class A Common Stock have been granted by the Company to any
of its employees under its benefit plans.
Prior to the Equity Offerings, there has been no public market for the
Class A Common Stock and no prediction can be made as to the effect, if any,
that future sales or the availability of shares for future sales, will have on
the market price of the shares of Class A Common Stock prevailing from time to
time. Sales of substantial amounts of Class A Common Stock or Class B Common
Stock, or the perception that such sales could occur, could adversely affect the
prevailing market prices of the Class A Common Stock, or the ability of the
Company to raise capital through public offerings of equity securities. The
Class A Common Stock has been approved for listing, subject to notice of
issuance, on the NYSE under the symbol "HLI".
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 600,000,000 shares
of Class A Common Stock, par value $.01 per share, 600,000,000 shares of Class B
Common Stock, par value $.01 per share, and 50,000,000 shares of Preferred
Stock, par value $.01 per share. Of the shares of Class A Common Stock,
23,000,000 shares are being offered hereby (or 26,000,000 shares if the
Underwriters' over-allotment options are exercised in full) and 114,000,000
shares are reserved for issuance upon conversion of any of the Class B Common
Stock into Class A Common Stock. 114,000,000 shares of Class B Common Stock are
outstanding and held by The Hartford or one of its directly or indirectly wholly
owned subsidiaries as of the date hereof. None of the shares of Preferred Stock
will be outstanding upon the completion of the Equity Offerings. A description
of various provisions of the Company's Certificate of Incorporation and By-laws
affecting the rights of the Class A Common Stock, Class B Common Stock and
Preferred Stock is set forth below. This description is intended as a summary
and is qualified in its entirety by reference to the Company's Certificate of
Incorporation and By-laws filed as exhibits to the Registration Statement of
which this Prospectus is a part.
CLASS A COMMON STOCK AND CLASS B COMMON STOCK
DIVIDENDS
Holders of Class A Common Stock and Class B Common Stock are entitled to
receive ratably such dividends, if any, as may be declared by the Board of
Directors out of funds legally available for the payment thereof, subject to any
preferential dividend rights of any outstanding Preferred Stock. Cash dividends
may be declared and paid to the holders of Class A Common Stock only if at such
time cash dividends in the same amount per share are declared and paid to the
holders of Class B Common Stock, and vice versa. Dividends payable other than in
cash or Common Stock (or in rights options, warrants or securities convertible
into or exchangeable for Common Stock) will be declared and paid to holders of
Class A Common Stock and Class B Common Stock on a pro rata per share basis.
Dividends consisting of shares of Common Stock, or of rights, options, warrants
or other securities convertible into or exchangeable for such shares, may be
declared and paid to holders of Class A Common Stock only if a like dividend is
declared and paid to holders of Class B Common Stock, and vice versa, and, to
that end, shares of Class A Common Stock, or any rights, options, warrants or
securities convertible into or exchangeable for Class A Common Stock, would be
declared and paid only to holders of shares of Class A Common Stock and shares
of Class B
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Common Stock, or any rights, options, warrants or securities convertible into or
exchangeable for Class B Common Stock, would be declared and paid only to
holders of Class B Common Stock. The Company may not reclassify, subdivide or
combine the shares of either class of Common Stock without at the same time
proportionately reclassifying, subdividing or combining the shares of the other
class.
For a discussion of certain limitations on the payment of dividends by the
Company, see "Risk Factors -- Holding Company Structure; Restrictions on
Dividends", "Certain Relationships and Transactions -- Intercompany
Arrangements -- Master Intercompany Agreement -- Approval of Corporate
Activities".
VOTING RIGHTS
Holders of Class A Common Stock and Class B Common Stock generally have
identical voting rights and vote together (and not as separate classes), except
that holders of Class A Common Stock are entitled to one vote per share while
holders of Class B Common Stock are entitled to five votes per share and the
shares of Class B Common Stock maintain certain conversion rights and transfer
restrictions as described below. Except as required by law or as provided below,
all matters to be voted on by stockholders must be approved by a majority (or,
in the case of the election of directors, by a plurality) of the votes entitled
to be cast in person or by proxy by all shares of Class A Common Stock and Class
B Common Stock, voting together as a single class, subject to any voting rights
granted to holders of any outstanding Preferred Stock. Holders of shares of
Class A Common Stock and Class B Common Stock are not entitled to cumulate their
votes in the election of directors. Except as otherwise provided by law, and
subject to any voting rights granted to holders of any outstanding Preferred
Stock, amendments to the Certificate of Incorporation (including any such
amendment to increase or decrease the authorized shares of any class) must be
approved by a majority of the votes entitled to be cast in person or by proxy by
all outstanding shares of Class A Common Stock and Class B Common Stock, voting
together as a single class, except that certain provisions of the Certificate of
Incorporation may be amended only with the approval of the holders of at least
80% of the combined voting power of the Common Stock then outstanding. See
"Certain Provisions of the Certificate of Incorporation and By-Laws of the
Corporation -- Corporate Opportunities". However, amendments to the Certificate
of Incorporation that would change the powers, preferences and relative
participating, optional or other special rights of the Class A Common Stock or
Class B Common Stock also must be approved by a majority of the outstanding
shares of such class voting as a separate class. The superior voting rights of
the Class B Common Stock described above may discourage unsolicited tender
offers and merger proposals.
CONVERSION
Following the completion of the Equity Offerings, each share of Class B
Common Stock is convertible at any time by the holder thereof at the option of
such holder into one share of Class A Common Stock, except as provided herein.
Subject to the exceptions described in the following sentence, upon the sale or
other transfer (whether by merger, operation of law or otherwise) by a
stockholder of the Company of shares of Class B Common Stock such that any
person or persons, other than such stockholder or any of its affiliates (within
the meaning of the rules and regulations under the Exchange Act), or a Class B
Transferee (as defined below), will have beneficial ownership thereof, such
shares will automatically convert into an equal number of shares of Class A
Common Stock. However, if shares of Class B Common Stock representing 50% or
more of all the then outstanding shares of Common Stock (calculated without
regard to the difference in voting rights between the classes of Common Stock)
are transferred by the holder thereof in a single transaction, or series of
related transactions, to any person or group of affiliated persons not
affiliated with such transferor (a "Class B Transferee"), such shares of Class B
Common Stock so transferred will not automatically convert into shares of Class
A Common Stock upon such transfer.
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Each share of Class B Common Stock retained by such transferor following any
such transfer will automatically convert into a share of Class A Common Stock
upon such transfer. In addition, each share of Class B Common Stock will
automatically convert into one share of Class A Common Stock on the date on
which the number of shares of Class B Common Stock then outstanding is less than
50% of the then outstanding shares of Common Stock.
The provisions of the Company's Certificate of Incorporation described
above are generally designed so that, were The Hartford to reduce its ownership
of shares of the Class B Common Stock to less than 50% of all the then
outstanding shares of Common Stock (calculated without regard to the difference
in voting rights between the classes of Common Stock), its shares of Class B
Common Stock would be automatically converted into Class A Common Stock, thereby
resulting in all holders of Common Stock having identical voting rights other
than any Class B Transferee. However, The Hartford (and any Class B Transferee)
is permitted to transfer shares of Class B Common Stock representing 50% or more
of all the then outstanding shares of Common Stock (calculated without regard to
the difference in voting rights between the classes of Common Stock) to a Class
B Transferee with the effect that such Class B Transferee will succeed to the
ownership of such shares of Class B Common Stock and thus control of the
Company.
OTHER
Upon the liquidation, dissolution or winding up of the Company, whether
voluntary or involuntary, and subject to the rights of the holders of the
Preferred Stock, the net assets of the Company available for distribution to
stockholders of the Company shall be distributed pro rata to the holders of the
Common Stock in accordance with their respective rights and interests and the
Class B Common Stock shall rank pari passu with the Class A Common Stock as to
such distribution.
No shares of either class of Common Stock are subject to redemption or have
preemptive rights to purchase additional shares of Common Stock. However, see
"Certain Relationships and Transactions -- Intercompany Arrangements -- Master
Intercompany Agreement -- Registration Rights".
The outstanding shares of Class B Common Stock are, and the shares of Class
A Common Stock offered by the Company in the Equity Offerings will be, when
issued and paid for, fully paid and non-assessable.
PREFERRED STOCK
The authorized Preferred Stock of the Company is available for issuance
from time to time at the discretion of the Board of Directors without
stockholder approval. The Board of Directors has the authority to prescribe, for
each series of the Preferred Stock it establishes, the number of shares in that
series, the number of votes (if any) to which such shares in that series are
entitled, the dividends payable on such shares in that series, any conversion
rights applicable thereto and the other powers, preferences and relative
participating, optional or other special rights, and any qualifications,
limitations or restrictions of the shares in that series. Depending upon the
rights of such Preferred Stock, the issuance thereof could have an adverse
effect on holders of the Common Stock by delaying or preventing a change of
control of the Company, making removal of the present management of the Company
more difficult or resulting in restrictions upon the payment of dividends and
other distributions to the holders of the Common Stock.
RESTRICTIONS ON OWNERSHIP UNDER INSURANCE LAWS
Although the Certificate of Incorporation and By-laws of the Company do not
contain any provision restricting ownership of the Common Stock, under
applicable state insurance laws and regulations, no person may acquire control
of any of the insurance subsidiaries of the Company or any corporation
controlling such subsidiaries unless such person has filed a statement
containing specified information with appropriate regulatory authorities and
approval for such acquisition is obtained from such authorities. For example,
under the laws of the State of Connecticut, any person
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acquiring, directly by stock ownership or indirectly by revocable proxy or
otherwise, 10% or more of the voting securities of any other person is presumed
to have acquired control of such person, and, as a result, any person who
beneficially acquires 10% or more of the voting securities of the Company's
insurance company subsidiaries or the Company without obtaining the approval of
the Connecticut Insurance Commissioner would be in violation of Connecticut's
insurance holding company laws and may be subject to injunctive action requiring
disposition or seizure of such shares of voting securities and prohibiting the
voting of such shares, as well as other action determined by the applicable
regulatory authority. The application of such state insurance laws may be a
deterrent to any person proposing to acquire control of the Company,
particularly in a hostile transaction.
CERTAIN PROVISIONS OF THE
CERTIFICATE OF INCORPORATION AND
BY-LAWS OF THE COMPANY
TRANSACTIONS WITH INTERESTED PARTIES
The Company's Certificate of Incorporation includes certain provisions
addressing potential conflicts of interest between the Company and The Hartford
and regulating and defining the conduct of certain affairs of the Company as
they may involve The Hartford and its subsidiaries, directors and officers. The
Certificate of Incorporation provides that no contract, agreement, arrangement
or transaction (or amendment, modification or termination thereof) between the
Company and The Hartford or any of its subsidiaries (other than the Company and
its subsidiaries) or between the Company and any entity in which any of the
Company's directors has a financial interest (a "Related Entity"), or between
the Company and any director or officer of the Company, The Hartford or any
subsidiary of the Company or The Hartford or any Related Entity will be void or
voidable for the reason that The Hartford or any subsidiary thereof, any Related
Entity or any director or officer of the Company, The Hartford or any subsidiary
of the Company or The Hartford or any Related Entity is a party thereto, or
because any such director or officer is present at, participates in or votes at
a meeting of the Board of Directors or a committee thereof which authorizes such
contract, agreement, arrangement or transaction (or amendment, modification or
termination thereof), if:
(i) the material facts as to such contract, agreement, arrangement or
transaction (or amendment, modification or termination thereof) are
disclosed or are known to the Board of Directors or the committee thereof
that authorizes such contract, agreement, arrangement or transaction (or
amendment, modification or termination thereof) and the Board of Directors
or such committee in good faith authorizes, approves or ratifies such
contract, agreement, arrangement or transaction (or amendment, modification
or termination thereof) by the affirmative vote of a majority of the
Disinterested Directors (as defined below), even though the number of
Disinterested Directors voting may be less than a quorum;
(ii) the material facts as to such contract, agreement, arrangement or
transaction (or amendment, modification or termination thereof) are
disclosed or are known to the holders of Common Stock entitled to vote
thereon, and the contract, agreement, arrangement or transaction (or
amendment, modification or termination thereof) is specifically approved or
ratified in good faith by a majority of the votes entitled to be cast by
all then outstanding shares of Common Stock present in person or
represented by proxy and not owned by The Hartford or any subsidiary
thereof or a Related Entity, as the case may be; or
(iii) such contract, agreement, arrangement or transaction (or
amendment, modification or termination thereof) is fair as to the Company
at the time it is authorized, approved or ratified by the Board of
Directors, a committee thereof or the stockholders of the Company.
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For purposes hereof, "Disinterested Directors" means the directors of the
Company who are not (i) officers of either the Company or The Hartford or any of
their respective subsidiaries or (ii) directors of The Hartford or any
subsidiary thereof (other than the Company).
CORPORATE OPPORTUNITIES
The Certificate of Incorporation further provides that, subject to any
contract to which the Company is a party and subject to applicable law, The
Hartford or any subsidiary thereof (other than the Company or any subsidiary
thereof) will have the right to: (i) engage in the same or similar business
activities or lines of business as the Company or any subsidiary thereof; (ii)
do business with any client or customer of the Company or any subsidiary
thereof; and (iii) employ or otherwise engage any officer or employee of the
Company or any subsidiary thereof. In addition, in the event that The Hartford
or any of its subsidiaries (other than the Company and its subsidiaries) or the
Company or any of its subsidiaries acquires knowledge of a potential transaction
or matter that may be a corporate opportunity for both The Hartford and the
Company, such person shall have no duty, other than pursuant to the laws of the
State of Delaware, to communicate or present such corporate opportunity to the
Company or The Hartford, as applicable.
CERTAIN AMENDMENTS TO THE CERTIFICATE OF INCORPORATION
Until The Hartford ceases to beneficially own, directly or indirectly, more
than 20% of the number of outstanding shares of Common Stock, the Certificate of
Incorporation requires the affirmative vote of the holders of 80% or more of the
combined voting power of the Common Stock then outstanding, voting together as a
single class, to alter, amend or repeal, or adopt any provision of the
Certificate of Incorporation which is inconsistent with, any provision of the
Certificate of Incorporation (whether directly or indirectly through any merger
of the Company with any other entity) relating to transactions with interested
parties and corporate opportunities (each as described above), as well as the
provision requiring such an 80% vote to effect such an alteration, amendment,
repeal or adoption. Thereafter, under the DGCL, an affirmative vote of 50% or
more of the combined voting power of the Common Stock then outstanding would be
required to effect such an alteration, amendment, repeal or adoption.
Accordingly, so long as The Hartford beneficially owns more than 20% of the
number of outstanding shares of Common Stock, it can prevent any such
alteration, amendment, repeal or adoption.
In addition, the Certificate of Incorporation requires the affirmative vote
of the holders of at least 80% of the combined voting power of all the then
outstanding shares of Common Stock, voting together as a single class, to alter,
amend or repeal, or adopt any provision of the Certificate of Incorporation
(whether directly or indirectly through any merger of the Company with any other
entity) which is inconsistent with, any provision of the Certificate of
Incorporation relating to the classification of the Board of Directors, the
filling of vacancies on the Board of Directors, the prohibition on the taking of
actions by stockholders by written consent in lieu of a meeting and the calling
of a special meeting of stockholders, as well as the provision requiring such an
80% vote to effect such an alteration, amendment, repeal or adoption.
POTENTIAL LIMITS ON CHANGE OF CONTROL
Certain provisions of the Certificate of Incorporation and By-laws may
delay, defer or prevent a tender offer, proxy contest or other takeover attempt
involving the Company. It is believed that such provisions will enable the
Company to develop its business in a manner that will foster its long-term
growth without disruption caused by the threat of a takeover not deemed by its
Board of Directors to be in the best interests of the Company and its
stockholders. In addition, these provisions also are intended to ensure that the
Board of Directors will have sufficient time to act in what the Board of
Directors believes to be in the best interests of the Company and its
stockholders. However, such provisions could have the effect of making it more
difficult for a third party to undertake, or discouraging a third party from
undertaking, an unsolicited takeover bid or otherwise attempting to obtain
control of the Company or the Board of Directors, although such proposals, if
made, might be
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considered desirable by a majority of the Company's stockholders. Such
provisions also may have the effect of making it more difficult for third
parties to cause the replacement of the current management of the Company
without the concurrence of the Board of Directors. These provisions include (i)
the availability of shares of Preferred Stock for issuance from time to time at
the discretion of the Board of Directors; (ii) prohibitions against stockholders
calling a special meeting of stockholders or acting by written consent in lieu
of a meeting; (iii) the classification of the Board of Directors into three
classes, each of which will serve for different three-year periods; (iv) a
requirement, pursuant to Section 141 of the DGCL, that, due to the
classification of the Board of Directors, directors of the Company may only be
removed for cause; (v) a requirement that certain provisions of the Certificate
of Incorporation may be amended only with the approval of the holders of at
least 80% of the combined voting power of the Common Stock then outstanding;
(vi) requirements for advance notice for raising business or making nominations
at stockholders' meetings; and (vii) the ability of the Board of Directors to
increase the size of the board and to appoint directors to fill newly created
directorships. The Hartford, as owner of more than 80% of the combined voting
power of all classes of voting stock, could sell or otherwise dispose of a
substantial portion of its holdings and still be able to block any tender offer,
proxy contest or other takeover attempt by any third party and certain other
material transactions and matters.
LIMITATION ON LIABILITY
To the fullest extent permitted by applicable law as then in effect, no
director of the Company shall be personally liable to the Company or any of its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
Company or its stockholders; (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law; (iii) under
Section 174 of the DGCL; or (iv) for any transaction from which the director
derived an improper personal benefit.
While the Certificate of Incorporation provides directors with protection
from awards for monetary damages for breaches of their duty of care, it does not
eliminate such duty. Accordingly, the Certificate of Incorporation should have
no effect on the availability of equitable remedies such as an injunction or
recission based on a director's breach of his or her duty of care and does not
eliminate or limit a director's liability arising in connection with causes of
action brought under the federal securities laws. This provision, however, may
discourage or deter stockholders or management from bringing a lawsuit against a
director for a breach of his or her fiduciary duty, though such an action, if
successful, might otherwise have benefited the Company and its stockholders.
The By-laws provide that the Company, to the fullest extent permitted by
applicable law as then in effect, will indemnify any person who was or is
involved in any manner or is threatened to be made so involved in any
threatened, pending or completed investigation, claim, action, suit or
proceeding, by reason of the fact that such person was or is a director,
officer, employee or agent of the Company or was or is serving at the request of
the Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against all expenses,
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such investigation, claim, action, suit or
proceeding. To receive such indemnification under the DGCL as currently in
effect, such a person must have been successful in such investigation, claim,
action, suit or proceeding or acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the
Company.
DELAWARE STATUTE
The Company is a Delaware corporation subject to Section 203 of the DGCL.
Section 203 provides that, subject to certain exceptions specified therein, a
corporation may not engage in any business combination, including mergers or
consolidations or acquisitions of assets or additional shares of the
corporation, with any "interested stockholder" for a period of three years
following the time that such stockholder became an interested stockholder unless
(i) prior to such time, the
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<PAGE> 305
board of directors of the corporation approved either the business combination
or the transaction which resulted in the stockholder becoming an interested
stockholder, (ii) upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested stockholder owned
at least 85% of the voting stock of the corporation outstanding at the time the
transaction commenced (excluding certain shares) or (iii) at or subsequent to
such time, the business combination is approved by the board of directors of the
corporation and authorized at an annual or special meeting of stockholders, and
not by written consent, by the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the interested stockholder.
Except as otherwise specified in Section 203 of the DGCL, an "interested
stockholder" is defined to include (x) any person that is the owner of 15% or
more of the outstanding voting stock of the corporation or is an affiliate or
associate of the corporation and was the owner of 15% or more of the outstanding
voting stock of the corporation at any time within the three-year period
immediately prior to the relevant date and (y) the affiliates and associates of
any such person. Under certain circumstances, Section 203 of the DGCL makes it
more difficult for an interested stockholder to effect various business
combinations with a corporation for the above-referenced three-year period,
although the stockholders may elect to exclude a corporation from the
restrictions imposed thereunder. By virtue of its beneficial ownership of the
Class B Common Stock, The Hartford is in a position to elect to exclude the
Company from the restrictions under Section 203 of the DGCL, although it
currently has no intention to do so.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Class A Common Stock is The Bank
of New York.
VALIDITY OF CLASS A COMMON STOCK
The validity of the Class A Common Stock offered hereby will be passed upon
for the Company by Cravath, Swaine & Moore, New York, New York, and for the
Underwriters by Sullivan & Cromwell, New York, New York.
EXPERTS
The audited consolidated financial statements and financial statement
schedules of the Company and its subsidiaries, as of December 31, 1996 and 1995,
and for each of the years in the three-year period ended December 31, 1996, have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included herein and
elsewhere in the Registration Statement to which this Prospectus relates in
reliance upon the authority of said firm as experts in giving said reports.
Reference is made to said reports which include an explanatory paragraph with
respect to the change in the method of accounting for debt and equity securities
as of January 1, 1994, as discussed in Note 2 of notes to consolidated financial
statements.
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CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS OF CLASS A COMMON STOCK
The following is a general discussion of certain United States federal
income and estate tax consequences of the purchase, ownership and disposition of
Class A Common Stock by a holder that, for United States federal tax purposes,
is not a "United States person" (a "Non-United States Holder"). For purposes of
this discussion, a "United States person" means any person or entity which is
(a) a citizen or resident of the United States, (b) a corporation created or
organized in or under the laws of the United States or of any political
subdivision thereof or (c) an estate or trust that is subject to United States
federal taxation on its income regardless of its source. This summary does not
address all United States federal income and estate tax considerations that may
be relevant to a Non-United States Holder in light of its particular
circumstances or to certain Non-United States Holders that may be subject to
special treatment under United States federal tax laws (i.e., insurance
companies, tax-exempt organizations, financial institutions or broker-dealers).
Furthermore, this summary does not discuss any aspects of foreign, state or
local taxation. This summary is based on current provisions of the Internal
Revenue Code, existing, temporary and proposed United States Treasury
regulations promulgated thereunder and administrative and judicial
interpretations thereof, all of which are subject to change, possibly with
retroactive effect. Each prospective Non-United States Holder is advised to
consult its tax advisor with respect to the tax consequences of purchasing,
owning and disposing of Class A Common Stock.
DIVIDENDS
Dividends paid with respect to the Class A Common Stock to a Non-United
States Holder generally will be subject to withholding of United States federal
income tax at a 30% rate (or such lower rate as may be specified by an
applicable income tax treaty), unless the dividend (i) is effectively connected
with the conduct of a trade or business of the Non-United States Holder within
the United States or (ii) if a tax treaty applies, is attributable to a United
States permanent establishment of the Non-United States Holder. Such U.S.
federal withholding tax will apply without regard to whether a dividend
represents a distribution of current or accumulated earnings and profits of the
Company or a return of basis for U.S. federal income tax purposes. In order to
claim the benefit of an applicable tax treaty rate, a Non-United States Holder
may have to file with the Company or its dividend paying agent an exemption or
reduced treaty rate certificate or letter in accordance with the terms of such
treaty. To the extent that a dividend represents a return of basis for U.S.
federal income tax purposes, a Non-United States Holder may obtain a refund of
any amounts currently withheld with respect to such return of basis by filing an
appropriate claim for a refund with the Internal Revenue Service.
Dividends which are effectively connected with such a United States trade
or business or, if a tax treaty applies, are attributable to such a United
States permanent establishment, are generally subject to tax on a net income
basis (that is, after allowance for applicable deductions) at rates applicable
to United States citizens, resident aliens and domestic United States
corporations and are not generally subject to withholding. Any such effectively
connected dividends received by a Non-United States corporation may also, under
certain circumstances, be subject to an additional "branch profits tax" at a 30%
rate or such lower rate as may be specified by an applicable income tax treaty.
Under current United States Treasury regulations, dividends paid to an
address outside the United States are presumed to be paid to a resident of such
country for purposes of the withholding discussed above (unless the payer has
knowledge to the contrary), and, under the current interpretation of United
States Treasury regulations, for purposes of determining the applicability of a
tax treaty rate. Under recently proposed United States Treasury regulations (the
"Proposed Regulations"), not currently in effect, however, a Non-United States
Holder of Class A Common Stock who wishes to claim the benefit of an applicable
treaty rate would be required to satisfy applicable certification and other
requirements. The Proposed Regulations are proposed to be
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effective for payments made after December 31, 1997. There can be no assurance
that the Proposed Regulations will be adopted or what the provisions will
include if and when adopted in temporary or final form. Certain certification
and disclosure requirements must be complied with in order to be exempt from
withholding under the effectively connected income exemption discussed above.
A Non-United States Holder of Class A Common Stock that is eligible for a
reduced rate of United States tax withholding pursuant to an income tax treaty
may obtain a refund of any excess amounts currently withheld by filing an
appropriate claim for refund with the Internal Revenue Service.
SALE OR DISPOSITION OF CLASS A COMMON STOCK
A Non-United States Holder generally will not be subject to United States
federal income tax on any gain recognized on the sale or other disposition of
Class A Common Stock unless (i) (a) the gain is effectively connected with a
trade or business of the Non-United States Holder in the United States or (b) if
a tax treaty applies, the gain is attributable to a United States permanent
establishment of the Non-United States Holder; (ii) in the case of a Non-United
States Holder who is an individual and holds the Class A Common Stock as a
capital asset, such holder is present in the United States for 183 or more days
in the taxable year of the disposition and either (a) has a "tax home" for
United States federal income tax purposes in the United States or (b) has an
office or other fixed place of business in the United States to which the gain
is attributable; (iii) the Non-United States Holder is subject to tax pursuant
to the provisions of United States federal income tax laws applicable to certain
United States expatriates; or (iv)(a) the Company is or has been a "U.S. real
property holding corporation" for United States federal income tax purposes at
any time during the five-year period ending on the date of the disposition, or,
if shorter, the period during which the Non-United States Holder held the Class
A Common Stock, and (b) assuming that the Class A Common Stock continues to be
"regularly traded on an established securities market" for tax purposes, the
Non-United States Holder holds, directly or indirectly, at any time during the
five-year period ending on the date of disposition, more than 5% of the
outstanding Class A Common Stock. The Company believes it is not currently a
U.S. real property holding corporation and does not anticipate becoming such a
corporation.
If an individual Non-United States Holder falls under clause (i) above,
such individual generally will be taxed on the net gain derived from a sale
under regular graduated United States federal income tax rates. If an individual
Non-United States Holder falls under clause (ii) above, such individual
generally will be subject to a flat 30% tax on the gain derived from a sale,
which may be offset by certain United States capital losses (notwithstanding the
fact that such individual is not considered a resident of the United States).
Thus, Non-United States Holders who have spent (or expect to spend) 183 days or
more in the United States in the taxable year in which they contemplate a sale
of Class A Common Stock are urged to consult their tax advisors as to the tax
consequences of such sale.
If a Non-United States Holder that is a foreign corporation falls under
clause (i) above, it generally will be taxed on its net gain under regular
graduated United States federal income tax rates. Effectively connected gains
realized by a Non-United States corporation may also, under certain
circumstances, be subject to an additional "branch profits tax" at a 30% rate or
such lower rate as may be specified by an applicable income tax treaty.
BACKUP WITHHOLDING AND REPORTING REQUIREMENTS
The Company must report annually to the Internal Revenue Service and to
each Non-United States Holder the amount of dividends paid to, and the tax
withheld with respect to, such holder, regardless of whether any tax was
actually withheld. This information may also be made available to the tax
authorities in the Non-United States Holder's country of residence.
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Under current law, United States backup withholding (which generally is
imposed at a 31% rate) generally will not apply to (i) the payment of dividends
paid on Class A Common Stock to a Non-United States Holder at an address outside
the United States or (ii) the payment of the proceeds of a sale of Class A
Common Stock to or through the foreign office of a broker. However, under the
Proposed Regulations, dividend payments generally will be subject to information
reporting and backup withholding unless applicable certification requirements
are satisfied. In the case of the payment of proceeds from such a sale of Class
A Common Stock through a foreign office of a broker that is a United States
person or a "U.S. related person," however, information reporting (but not
backup withholding) is required with respect to the payment unless the broker
has documentary evidence in its files that the owner is a Non-United States
Holder (and has no actual knowledge to the contrary) and certain other
requirements are met or the holder otherwise establishes an exemption. For this
purpose, a "U.S. related person" is (i) a "controlled foreign corporation" for
United States federal income tax purposes or (ii) a foreign person 50% or more
of whose gross income from all sources for the three-year period ending with the
close of its taxable year preceding the payment (or for such part of the period
that the broker has been in existence) is derived from activities which are
effectively connected with the conduct of a United States trade or business. The
payment of the proceeds of a sale of shares of Class A Common Stock to or
through a United States office of a broker is subject to information reporting
and possible backup withholding at a rate of 31% unless the holder certifies,
among other things, its non-United States status under penalties of perjury or
otherwise establishes an exemption.
Backup withholding is not an additional tax. Amounts withheld under the
backup withholding rules are generally allowable as a refund or credit against
such Non-United States Holder's United States federal income tax liability, if
any, provided that the required information is furnished to the Internal Revenue
Service.
FEDERAL ESTATE TAXES
Class A Common Stock owned or treated as owned by an individual who is not
a citizen or resident of the United States (as defined for United States federal
estate tax purposes) at the time of death will be included in such individual's
gross estate for United States federal estate tax purposes unless an applicable
estate tax treaty provides otherwise.
THE FOREGOING DISCUSSION IS A SUMMARY OF THE PRINCIPAL UNITED STATES
FEDERAL INCOME AND ESTATE TAX CONSEQUENCES OF THE OWNERSHIP, SALE OR OTHER
DISPOSITION OF CLASS A COMMON STOCK BY NON-UNITED STATES HOLDERS. ACCORDINGLY,
INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE UNITED
STATES FEDERAL INCOME TAX CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION OF CLASS
A COMMON STOCK, INCLUDING THE APPLICATION AND EFFECT OF THE LAWS OF ANY STATE,
LOCAL, FOREIGN OR OTHER TAXING JURISDICTION.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants........................................... F-2
Consolidated Statements of Income for each of the three years in the period ended
December 31, 1996............................................................... F-3
Consolidated Balance Sheets as of December 31, 1995 and 1996....................... F-4
Consolidated Statements of Stockholder's Equity for each of the three years in the
period ended December 31, 1996.................................................. F-5
Consolidated Statements of Cash Flows for each of the three years in the period
ended December 31, 1996......................................................... F-6
Notes to Consolidated Financial Statements......................................... F-7
Condensed Consolidated Statements of Income (Unaudited) for the three months ended
March 31, 1996 and 1997......................................................... F-28
Condensed Consolidated Balance Sheets (Unaudited) as of December 31, 1996 and March
31, 1997........................................................................ F-29
Condensed Consolidated Statements of Stockholder's Equity (Unaudited) for the three
months ended March 31, 1997..................................................... F-30
Condensed Consolidated Statements of Cash Flows (Unaudited) for the three months
ended March 31, 1996 and 1997................................................... F-31
Notes to Condensed Consolidated Financial Statements (Unaudited)................... F-32
</TABLE>
F-1
<PAGE> 310
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Hartford Life, Inc.:
We have audited the accompanying consolidated balance sheets of Hartford
Life, Inc. (a Delaware corporation and wholly owned subsidiary of Hartford
Accident and Indemnity Company) and subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of income, stockholder's equity
and cash flows for each of the three years in the period ended December 31,
1996. These consolidated financial statements are the responsibility of Hartford
Life, Inc.'s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Hartford Life, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996 in conformity with generally accepted
accounting principles.
As discussed in Note 2 of notes to consolidated financial statements,
Hartford Life, Inc. adopted a new accounting standard promulgated by the
Financial Accounting Standards Board, changing its method of accounting, as of
January 1, 1994, for debt and equity securities.
/s/ ARTHUR ANDERSEN LLP
Hartford, Connecticut
February 10, 1997
F-2
<PAGE> 311
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
REVENUES
Premiums and other considerations...................... $2,139 $2,643 $3,069
Net investment income.................................. 1,403 1,451 1,534
Net realized capital gains (losses).................... 1 (4) (219)
------ ------ ------
TOTAL REVENUES...................................... 3,543 4,090 4,384
------ ------ ------
BENEFITS, CLAIMS AND EXPENSES
Benefits, claims and claim adjustment expenses......... 2,254 2,395 2,727
Amortization of deferred policy acquisition costs...... 149 205 241
Dividends to policyholders............................. 419 675 635
Interest expense....................................... 29 35 55
Other insurance expense................................ 469 554 695
------ ------ ------
TOTAL BENEFITS, CLAIMS AND EXPENSES................. 3,320 3,864 4,353
------ ------ ------
INCOME BEFORE INCOME TAX EXPENSE......................... 223 226 31
Income tax expense....................................... 72 76 7
------ ------ ------
NET INCOME..................................... $ 151 $ 150 $ 24
====== ====== ======
PRO FORMA NET INCOME PER SHARE (UNAUDITED)............... $ .19
======
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of the above statements.
F-3
<PAGE> 312
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------
1995 1996
------- -------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, available for sale, at fair value (amortized cost
$16,156 and $15,659).............................................. $16,139 $15,711
Equity securities, available for sale, at fair value................. 63 119
Policy loans, at outstanding balance................................. 3,380 3,839
Other investments, at cost........................................... 490 161
------- -------
TOTAL INVESTMENTS................................................. 20,072 19,830
------- -------
Cash................................................................... 70 72
Premiums and amounts receivable........................................ 157 170
Reinsurance recoverable................................................ 5,855 5,839
Deferred policy acquisition costs...................................... 2,220 2,800
Deferred income tax.................................................... 443 543
Other assets........................................................... 849 909
Separate account assets................................................ 36,296 49,770
------- -------
TOTAL ASSETS...................................................... $65,962 $79,933
======== ========
LIABILITIES
Future policy benefits................................................. $ 3,554 $ 4,026
Other policyholder funds............................................... 22,764 22,213
Other liabilities...................................................... 1,439 1,757
Allocated Advances from parent......................................... 732 893
Separate account liabilities........................................... 36,296 49,770
------- -------
TOTAL LIABILITIES................................................. 64,785 78,659
------- -------
STOCKHOLDER'S EQUITY
Preferred Stock, par value $.01 per share; 50,000,000 shares
authorized; no shares issued and outstanding.........................
Common Stock, par value $.01 per share, 1,000 shares authorized; 100
shares issued and outstanding........................................ -- --
Class A Common Stock, par value $.01 per share,
600,000,000 shares authorized; no shares issued and outstanding......
Class B Common Stock, par value $.01 per share,
600,000,000 shares authorized; no shares issued and outstanding......
Capital surplus........................................................ 585 585
Net unrealized capital (loss) gain on investments, net of tax.......... (44) 29
Retained earnings...................................................... 636 660
------- -------
TOTAL STOCKHOLDER'S EQUITY........................................ 1,177 1,274
------- -------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY........................ $65,962 $79,933
======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of the above statements.
F-4
<PAGE> 313
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(IN MILLIONS)
<TABLE>
<CAPTION>
NET
UNREALIZED
CAPITAL
CLASS CLASS GAIN (LOSS)
A B ON TOTAL
PREFERRED COMMON COMMON COMMON CAPITAL INVESTMENTS, RETAINED STOCKHOLDER'S
STOCK STOCK STOCK STOCK SURPLUS NET OF TAX EARNINGS EQUITY
--------- ------ ------ ------ ------- -------------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993...... $ -- $ -- $ -- $ -- $ 355 $ (6) $ 576 $ 925
Net income...................... -- -- -- -- -- -- 151 151
Dividends declared on common
stock......................... -- -- -- -- -- -- (17) (17)
Capital contribution............ -- -- -- -- 50 -- -- 50
Change in net unrealized capital
gain (loss) on investments,
net of tax(1)................. -- -- -- -- -- (724) -- (724)
Translation adjustments......... -- -- -- -- -- -- 1 1
--- --- --- ---- ----- ----- ------
BALANCE, DECEMBER 31, 1994...... -- -- -- -- 405 (730) 711 386
Net income...................... -- -- -- -- -- -- 150 150
Dividends declared on common
stock......................... -- -- -- -- -- -- (226) (226)
Capital contribution............ -- -- -- -- 180 -- -- 180
Change in net unrealized capital
gain (loss) on investments,
net of tax.................... -- -- -- -- -- 686 -- 686
Translation adjustments......... -- -- -- -- -- -- 1 1
--- --- --- ---- ----- ----- ------
BALANCE, DECEMBER 31, 1995...... -- -- -- -- 585 (44) 636 1,177
Net income...................... -- -- -- -- -- -- 24 24
Change in net unrealized capital
gain (loss) on investments,
net of tax.................... -- -- -- -- -- 73 -- 73
--- --- --- ---- ----- ----- ------
BALANCE, DECEMBER 31, 1996...... $ -- $ -- $ -- $ -- $ 585 $ 29 $ 660 $1,274
=== === === ==== ===== ===== ======
</TABLE>
- ---------------
(1) The 1994 change in net unrealized capital gain (loss) on investments, net of
tax, includes a gain of $103 due to the adoption of SFAS No. 115 as
discussed in Note 2(b) of notes to consolidated financial statements.
The accompanying notes to consolidated financial statements
are an integral part of the above statements.
F-5
<PAGE> 314
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income................................................ $ 151 $ 150 $ 24
Adjustments to net income:
Depreciation and amortization............................. 35 17 12
Net realized capital (gains) losses on sale of
investments............................................. (1) 4 219
Increase in premiums receivable........................... (21) (27) (13)
Increase in other liabilities............................. 201 171 433
Change in receivables, payables and accruals.............. 102 (266) 2
(Decrease) increase in accrued taxes...................... (65) 35 (90)
Increase in deferred income taxes......................... (109) (104) (137)
Increase in deferred policy acquisition costs............. (470) (390) (580)
Increase in liability for future policy benefits.......... 371 654 472
(Increase) decrease in reinsurance recoverable and related
assets.................................................. (5) 22 (4)
------- ------- -------
CASH PROVIDED BY OPERATING ACTIVITIES................ 189 266 338
------- ------- -------
INVESTING ACTIVITIES
Purchases of fixed maturity investments................... (9,968) (6,950) (7,045)
Sales of fixed maturity investments....................... 6,262 5,494 4,018
Maturities and principal paydowns of fixed maturity
investments............................................. 2,069 1,847 2,890
Purchase of other investments............................. (1,530) (928) (391)
Sales of other investments................................ 167 64 284
Net sales (purchases) of short-term investments........... 181 (189) 302
------- ------- -------
CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES..... (2,819) (662) 58
------- ------- -------
FINANCING ACTIVITIES
Increase in Allocated Advances from parent................ 100 -- 115
Capital contribution...................................... 50 -- --
Dividends paid............................................ (17) -- (19)
Net receipts from (disbursements for) investment and
universal life-type contracts credited to (charged from)
policyholder accounts................................... 2,523 431 (490)
------- ------- -------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES..... 2,656 431 (394)
------- ------- -------
Net increase in cash...................................... 26 35 2
Impact of foreign exchange................................ (1) 1 --
Cash -- beginning of year................................. 9 34 70
------- ------- -------
CASH -- END OF YEAR.................................. $ 34 $ 70 $ 72
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
CASH PAID DURING THE YEAR FOR:
Income taxes.............................................. $ 257 $ 173 $ 166
Interest.................................................. $ 29 $ 35 $ 55
SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION
Capital contribution...................................... $ -- $ 180 $ --
Dividends................................................. $ -- $ 207 $ --
Increase in Allocated Advances from parent for other
assets.................................................. $ -- $ -- $ 46
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of the above statements.
F-6
<PAGE> 315
HARTFORD LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN MILLIONS)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Hartford Life, Inc. (the "Company") was formed on December 13, 1996 and
capitalized on December 16, 1996 with the contribution of all the outstanding
common stock of Hartford Life and Accident Insurance Company ("Hartford Life and
Accident"). The Company is a direct subsidiary of Hartford Accident and
Indemnity Company ("Hartford Accident and Indemnity") and is ultimately a
subsidiary of Hartford Fire Insurance Company ("Hartford Fire"). Hartford Fire
is an indirect wholly owned subsidiary of ITT Hartford Group, Inc. ("The
Hartford"). On December 19, 1995, ITT Industries, Inc. (formerly ITT
Corporation) ("ITT") distributed all the outstanding shares of capital stock of
The Hartford to ITT stockholders of record on such date (the transactions
relating to such distribution are referred to herein as the "ITT Spin-Off"). As
a result of the ITT Spin-Off, The Hartford became an independent, publicly
traded company. The Company is a holding company and as such has no material
business of its own.
The Company is a leading insurance and financial services company with
operations that provide: (a) annuity products such as individual variable
annuities and fixed market value adjusted annuities, deferred compensation and
retirement plan services and mutual funds for savings and retirement needs; (b)
life insurance for income protection and estate planning; and (c) employee
benefits products such as group life and group disability insurance.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements present the financial
position, results of operations and cash flows of Hartford Life, Inc. and
Hartford Life and Accident and subsidiaries on the basis of historical cost, in
a manner similar to pooling of interests accounting. Hartford Life and Accident
directly owns all the outstanding shares of capital stock of ITT Hartford Life
of Canada Insurance Company and Hartford Life Insurance Company, which in turn
owns all outstanding shares of ITT Hartford Life and Annuity Insurance Company
and ITT Hartford International Life Reassurance Corporation.
These financial statements present the financial position, results of
operations and cash flows of the Company as if it were a separate entity for all
periods presented. All material intercompany transactions and balances between
the Company and its subsidiaries have been eliminated. The consolidated
financial statements are prepared on a basis of generally accepted accounting
principles which differ materially from the statutory accounting prescribed by
various insurance regulatory authorities.
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CHANGES IN ACCOUNTING PRINCIPLES
On November 14, 1996, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 96-12, "Recognition of Interest Income and Balance Sheet
Classification of Structured Notes". This Issue requires companies to record
income on certain structured securities on a retrospective interest method. The
Company adopted EITF No. 96-12 for structured securities
F-7
<PAGE> 316
HARTFORD LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS)
acquired after November 14, 1996. Adoption of EITF No. 96-12 did not have a
material effect on the Company's financial condition or results of operations.
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation", which was effective in 1996. As permitted by SFAS No.
123, the Company continued to measure compensation costs of employee stock
option plans (relating to options on common stock of The Hartford) using the
intrinsic value method prescribed by Accounting Principles Board Opinion No. 25.
As of February 10, 1997, the Company had not adopted an employee stock
compensation plan. Certain officers of the Company participate in The Hartford's
stock option plan. Compensation costs allocated by The Hartford to the Company,
as well as pro forma compensation costs as determined under SFAS No. 123, were
immaterial to the results of operations for 1995 and 1996.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities". This statement
established criteria for determining whether transferred assets should be
accounted for as sales or secured borrowings. Subsequently, in December 1996,
the FASB issued SFAS No. 127, "Deferral of Effective Date of Certain Provisions
of FASB Statement No. 125", which defers the effective date of certain
provisions of SFAS No. 125 for one year. Adoption of SFAS No. 125 is not
expected to have a material effect on the Company's financial condition or
results of operations.
Effective January 1, 1994, the Company adopted SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities". The new standard
requires, among other things, that securities be classified as
"held-to-maturity", "available-for-sale" or "trading" based on the Company's
intentions with respect to the ultimate disposition of the security and its
ability to effect those intentions. The classification determines the
appropriate accounting carrying value (cost basis or fair value) and, in the
case of fair value, whether the fair value difference from cost, net of tax,
impacts stockholder's equity directly or is reflected in the Consolidated
Statements of Income. Investments in equity securities had previously been and
continue to be recorded at fair value with the corresponding after-tax impact
included in stockholder's equity. Under SFAS No. 115, the Company's fixed
maturity investments are classified as "available-for-sale" and, accordingly,
these investments are reflected at fair value with the corresponding impact
included as a component of stockholder's equity designated as "Net unrealized
capital gain (loss) on investments, net of tax". As with the underlying
investment security, unrealized capital gains and losses on derivative financial
instruments are considered in determining the fair value of the portfolios. The
impact of adoption was an increase to stockholder's equity of $103. The
Company's cash flows were not impacted by this change in accounting principle.
In February 1997, FASB issued SFAS No. 128, "Earnings per Share". This
statement establishes standards for computing and presenting earnings per share
("EPS") and applies to entities with publicly held common stock or potential
common stock. This statement simplifies the standards for computing earnings per
share previously found in APB Opinion No. 15, "Earnings per Share", and makes
them comparable to international EPS standards. It replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual presentation
of basic and diluted EPS on the face of the income statement for all entities
with complex capital structures and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation. This statement is effective for financial
statements for both interim and annual periods ending after December 15, 1997.
The Company has not yet quantified the effect of adopting this statement.
F-8
<PAGE> 317
HARTFORD LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS)
REVENUE RECOGNITION
Revenues for universal life policies and investment products consist of
policy charges for the cost of insurance, policy administration and surrender
charges assessed to policy account balances and are recognized in the period in
which services are provided. Premiums for traditional life insurance policies
are recognized as revenues when they are due from policyholders.
FUTURE POLICY BENEFITS AND OTHER POLICYHOLDER FUNDS
Liabilities for future policy benefits are computed by the net level
premium method using interest rate assumptions varying from 3% to 11% and
withdrawal and mortality assumptions appropriate at the time the policies were
issued. Health reserves, which are the result of sales of group long-term and
short-term disability, stop loss, Medicare supplement and individual disability
products, are stated at amounts determined by estimates on individual cases and
estimates of unreported claims based on past experience. Liabilities for
universal life-type and investment contracts are stated at policyholder account
values before surrender charges.
DEFERRED POLICY ACQUISITION COSTS
Policy acquisition costs, including commissions and certain underwriting
expenses associated with acquiring business, are deferred and amortized over the
estimated lives of the contracts, generally 20 years. Generally, acquisition
costs are deferred and amortized using the retrospective deposit method. Under
the retrospective deposit method, acquisition costs are amortized in proportion
to the present value of expected gross profits from surrender charges,
investment, mortality and expense margins. Actual gross profits can vary from
management's estimates resulting in increases or decreases in the rate of
amortization. Management periodically updates these estimates, when appropriate,
and evaluates the recoverability of the deferred acquisition cost asset. When
appropriate, management revises its assumptions on the estimated gross profits
of these contracts and the cumulative amortization for the books of business are
reestimated and readjusted by a cumulative charge or credit to income.
The Company's other insurance expense includes the following:
<TABLE>
<CAPTION>
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Commissions...................................................... $ 623 $ 705 $ 949
Deferred acquisition costs....................................... (628) (633) (836)
Other............................................................ 474 482 582
----- ----- -----
Total expense............................................... $ 469 $ 554 $ 695
====== ====== ======
</TABLE>
POLICYHOLDER REALIZED CAPITAL GAINS AND LOSSES
Realized capital gains and losses on security transactions associated with
the Company's immediate participation guaranteed contracts are excluded from
revenues and deferred, since under the terms of the contracts the realized gains
and losses will be credited to policyholders in future years as they are
entitled to receive them.
F-9
<PAGE> 318
HARTFORD LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS)
FOREIGN CURRENCY TRANSLATION
Foreign currency translation gains and losses are reflected in
stockholder's equity. Balance sheet accounts are translated at the exchange
rates in effect at each year end and income statement accounts are translated at
the average rates of exchange prevailing during the year. The national
currencies of international operations are generally their functional
currencies.
INVESTMENTS
The Company's investments in fixed maturities include bonds, redeemable
preferred stock and commercial paper which are classified as
"available-for-sale" and accordingly are carried at fair value with the
after-tax difference from cost reflected as a component of stockholder's equity
designated as "Net unrealized capital gain (loss) on investments, net of tax".
Equity securities, which include common and non-redeemable preferred stocks, are
carried at fair value with the after-tax difference from cost reflected in
stockholder's equity. Policy and mortgage loans are each carried at their
outstanding balance which approximates fair value. Investments in partnerships
and trusts are carried at cost. Net realized capital gains (losses), after
deducting the policyholders' share, are reported as a component of revenue and
are determined on a specific identification basis.
The Company's accounting policy for impairment recognition requires
recognition of an other than temporary impairment charge on a security if it is
determined that the Company is unable to recover all amounts due under the
contractual obligations of the security. In addition, for securities expected to
be sold, an other than temporary impairment charge is recognized if the Company
does not expect the fair value of a security to recover to cost or amortized
cost prior to the expected date of sale. Once an impairment charge has been
recorded, the Company then continues to review the other than temporarily
impaired security for appropriate valuation on an ongoing basis. During 1996, it
was determined that certain individual securities within the investment
portfolio supporting the Company's block of traditional guaranteed rate
contracts written prior to 1995 ("Closed Book GRC") could not recover to
amortized cost prior to sale. Therefore, an other than temporary impairment loss
of $88 after tax was recorded.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses a variety of derivative financial instruments including,
swaps, caps, floors, forwards and exchange traded-financial futures and options
as part of an overall risk management strategy. These instruments are used as a
means of hedging exposure to price, foreign currency and/or interest rate risk
on anticipated investment purchases or existing assets and liabilities. The
Company does not hold or issue derivative financial instruments for trading
purposes. The Company's accounting for derivative financial instruments used to
manage risk is in accordance with the concepts established in SFAS No. 80,
Accounting for Futures Contracts, SFAS No. 52, Foreign Currency Translation,
American Institute of Certified Public Accountants Statement of Position 86-2,
Accounting for Options, and various EITF pronouncements. Written options are, in
all cases, used in conjunction with other assets and derivatives as part of the
Company's asset/liability management strategies. Derivative instruments are
carried at values consistent with the asset or liability being hedged.
Derivatives used to hedge fixed maturities or equities are carried at fair value
with the after-tax difference from cost reflected in stockholder's equity.
Derivatives used to hedge other invested assets or liabilities are carried at
cost.
Derivatives must be designated at inception as a hedge and measured for
effectiveness both at inception and on an ongoing basis. The Company's minimum
correlation threshold for hedge designation is 80%. If correlation, which is
assessed monthly and measured based on a rolling three
F-10
<PAGE> 319
HARTFORD LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS)
month average, falls below 80%, hedge accounting will be terminated. Derivatives
used to create a synthetic asset must meet synthetic accounting criteria
including designation at inception and consistency of terms between the
synthetic and the instrument being replicated. Interest rate swaps are the
primary type of derivatives used to convert London interbank offered quotations
for U.S. dollar deposits ("LIBOR") based variable rate instruments to fixed rate
instruments. Synthetic instrument accounting, consistent with industry practice,
provides that the synthetic asset is accounted for like the financial instrument
it is intended to replicate. Derivatives which fail to meet risk management
criteria are marked to market with the impact reflected in the Consolidated
Statements of Income.
Gains or losses on financial futures contracts entered into in anticipation
of the future receipt of product cash flows are deferred and, at the time of the
ultimate purchase, reflected as an adjustment to the cost basis of the purchased
asset. Gains or losses on futures used in invested asset risk management are
deferred and adjusted into the cost basis of the hedged asset when the futures
contracts are closed, except for futures used in duration hedging which are
deferred and are adjusted into the cost basis on a quarterly basis. The
adjustments to the cost basis are amortized into investment income over the
remaining asset life.
Open forward commitment contracts are marked to market through
stockholder's equity. Such contracts are recorded at settlement by recording the
purchase of the specified securities at the previously committed price. Gains or
losses resulting from the termination of the forward commitment contracts before
the delivery of the securities are recognized immediately in the Consolidated
Statements of Income as a component of net investment income.
The cost of purchased options and/or premiums received on covered written
options, entered into as part of an asset/liability management strategy, is/are
adjusted into the cost basis of the underlying asset or liability and amortized
over the remaining life of the hedge. Gains or losses on expiration or
termination of the hedge are adjusted into the basis of the underlying asset or
liability and amortized over the remaining asset life. The Company had not
written any options as of December 31, 1995 and 1996.
Interest rate swaps involve the periodic exchange of payments without the
exchange of underlying principal or notional amounts. Net receipts or payments
are accrued and recognized over the life of the swap agreement as an adjustment
to income. Should the swap be terminated, the gain or loss is adjusted into the
basis of the asset or liability and amortized over the remaining life. Should
the hedged asset be sold or liability terminated without terminating the swap
position, any swap gains or losses are immediately recognized in earnings.
Interest rate swaps purchased in anticipation of an asset purchase (an
"anticipatory transaction") are recognized consistent with the underlying asset
components such that the settlement component is recognized in the Consolidated
Statements of Income while the change in market value is recognized as an
unrealized gain or loss.
Premiums paid on purchased floor or cap agreements and the premium received
on issued floor or cap agreements (used for risk management) are adjusted into
the basis of the applicable asset and amortized over the asset life. Gains or
losses on termination of such positions are adjusted into the basis of the asset
or liability and amortized over the remaining asset life. Net payments are
recognized as an adjustment to income or basis adjusted and amortized depending
on the specific hedge strategy.
Forward exchange contracts and foreign currency swaps are accounted for in
accordance with SFAS No. 52.
F-11
<PAGE> 320
HARTFORD LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS)
RELATED PARTY TRANSACTIONS
Transactions of the Company with Hartford Accident and Indemnity and its
affiliates relate principally to tax settlements, reinsurance, insurance
coverage, rental and service fees and payment of dividends and capital
contributions. In addition, certain affiliated insurance companies purchased
group annuity contracts from the Company to fund pension costs and claim
annuities to settle casualty claims. Substantially all general insurance
expenses related to the Company, including rent and employee benefit plan
expenses, are initially paid by Hartford Fire. Direct expenses are allocated to
the Company using specific identification, and indirect expenses are allocated
using other applicable methods. Indirect expenses include those for corporate
areas which, depending on type, are allocated based on either a percentage of
direct expenses or on utilization. Indirect expenses allocated to the Company by
The Hartford were $46, $51, and $45 in 1994, 1995, and 1996, respectively.
Management of the Company believes that the methods used are reasonable. In
addition, the Company was charged its share of costs allocated to The Hartford
by ITT prior to the ITT Spin-Off, which were immaterial in 1994 and 1995.
Included in other liabilities is $44 and $61 due The Hartford as of December 31,
1995 and 1996, respectively.
The Company cedes approximately $24,000 of individual and group life
insurance in force to companies affiliated with The Hartford (and paid premiums
of $3 but did not pay or receive any commissions in respect thereto) and assumes
approximately $122 of premiums relating to stop loss and short-term disability
written by a number of The Hartford's property-casualty subsidiaries (and,
consistent with industry practice, reimbursed the ceding Company $12 for
commissions and $3 for premium taxes incurred as a result of writing these
policies).
On June 30, 1995, the ownership of ITT Lyndon Insurance Company was
transferred to the Company via a capital contribution of $180, representing the
net assets of such company.
DIVIDENDS TO POLICYHOLDERS
Certain life insurance policies contain dividend payment provisions that
enable the policyholder to participate in the earnings of the life insurance
subsidiaries of the Company. The participating insurance in force accounted for
28%, 23%, and 25% in 1994, 1995, and 1996, respectively, of total insurance in
force.
3. EVENTS SUBSEQUENT TO DATE OF AUDITORS' REPORT -- PRO FORMA INFORMATION
(UNAUDITED)
On February 7, 1997, the Company declared a dividend of $1,184 payable to
its direct parent, Hartford Accident and Indemnity. As a result, the Company
borrowed $1,084 on February 18, 1997, pursuant to a $1,300 line of credit, with
interest payable at the two-month Eurodollar rate plus 15 basis points (5.65% at
the inception of the borrowing) (for a description of the line of credit and the
calculation of the applicable Eurodollar rate, see Note 15), which, together
with a promissory note in the amount of $100, was paid as a dividend to Hartford
Accident and Indemnity on February 20, 1997. Of the $1,184 dividend, $893
constituted a repayment of the portion of The Hartford's third-party
indebtedness internally allocated, for financial reporting purposes, to the
Company's life insurance subsidiaries (the "Allocated Advances"). The principal
on this promissory note is due and payable February 19, 1998, together with
interest payable at the two-month Eurodollar rate (determined as described in
Note 15 in respect of the above-referenced line of credit) plus 15 basis points
(initially 5.60% upon the execution of this promissory note).
On April 3, 1997, the Company reclassified the authorized shares of common
stock, par value $.01 per share, of the Company into Class B Common Stock, par
value $.01 per share (the "Class B
F-12
<PAGE> 321
HARTFORD LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS)
Common Stock"), and authorized the Class A Common Stock, par value $.01 per
share (the "Class A Common Stock") and the preferred stock, par value $.01 per
share (the "Preferred Stock"). Holders of Class A Common Stock and Class B
Common Stock are entitled to receive ratably such dividends, if any, as may be
declared by the Board of Directors, subject to any preferential dividend rights
of any outstanding Preferred Stock, and generally have identical voting rights
and vote together (and not as separate classes), except that holders of Class A
Common Stock are entitled to one vote per share while holders of Class B Common
Stock are entitled to five votes per share. Also, each share of Class B Common
Stock is convertible into a share of Class A Common Stock at any time at the
option of the holder and will automatically convert into a share of Class A
Common Stock (i) upon the transfer of such share Class B Common Stock by the
holder thereof to a non-affiliate (except where the shares of Class B Common
Stock so transferred represent 50% or more of all the outstanding shares of
Common Stock, calculated without regard to the difference in voting rights
between the classes of Common Stock) or (ii) in the event that the number of
shares of outstanding Class B Common Stock is less than 50% of all the Common
Stock then outstanding.
On April 4, 1997, the Company declared and paid a dividend of $25 to
Hartford Accident and Indemnity in the form of a promissory note in such amount.
The principal on this promissory note is due and payable April 3, 1998, together
with interest payable at the one-month Eurodollar rate (determined as described
in Note 15 in respect of the above-referenced line of credit) plus 15 basis
points (initially 5.84% upon the execution of this promissory note).
Pro forma net income per share data is presented only for the year ended
December 31, 1996, as such information for earlier periods would not be
meaningful. Pro forma net income per share data is calculated based upon the
shares of Class B Common Stock owned by The Hartford immediately prior to the
Equity Offerings (see Note 15) plus an assumed issuance of Class A Common Stock
in the Equity Offerings (the number of shares that, based on the midpoint of the
range of the estimated initial public offering prices and the estimated
underwriting discounts and expenses payable by the Company, would result in net
proceeds equal to the excess of the amount of the February and April 1997
dividends over the 1996 earnings and the Allocated Advances from parent).
4. INVESTMENTS
COMPONENTS OF NET INVESTMENT INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1994 1995 1996
------- ------ ------
<S> <C> <C> <C>
Interest income................................... $ 1,345 $1,450 $1,546
Income from other investments..................... 69 13 3
------ ------ ------
Gross investment income........................... 1,414 1,463 1,549
Less: Investment expenses......................... 11 12 15
------ ------ ------
NET INVESTMENT INCOME............................. $ 1,403 $1,451 $1,534
====== ====== ======
</TABLE>
F-13
<PAGE> 322
HARTFORD LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS)
COMPONENTS OF NET REALIZED CAPITAL GAINS (LOSSES)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
---------------------------------
1994 1995 1996
------- ------ ------
<S> <C> <C> <C>
Fixed maturities.................................. $ (37) $ 30 $ (214)
Equity securities................................. (9) (6) 2
Real estate and other............................. 47 (26) (4)
Less: Decrease in liability to policyholders for
realized capital gains.......................... -- (2) (3)
------- ------ ------
NET REALIZED CAPITAL GAINS (LOSSES)............... $ 1 $ (4) $ (219)
======== ====== ======
</TABLE>
COMPONENTS OF NET UNREALIZED CAPITAL GAINS (LOSSES) ON EQUITY SECURITIES
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
---------------------------------
1994 1995 1996
------- ------ ------
<S> <C> <C> <C>
Gross unrealized gains............................ $ 3 $ 4 $ 7
Gross unrealized losses........................... (11) (2) (1)
------- ------ ------
Net unrealized capital (losses) gains............. (8) 2 6
Deferred income tax (asset) liability............. (3) -- 2
------- ------ ------
Net unrealized capital (losses) gains,
after-tax....................................... (5) 2 4
Balance beginning of year......................... (6) (5) 2
------- ------ ------
CHANGE IN NET UNREALIZED CAPITAL GAINS (LOSSES) ON
EQUITY SECURITIES............................... $ 1 $ 7 $ 2
======== ====== ======
</TABLE>
COMPONENTS OF NET UNREALIZED CAPITAL (LOSSES) GAINS ON FIXED MATURITIES
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------------
1994 1995 1996
------- ------ ------
<S> <C> <C> <C>
Gross unrealized gains................................ $ 174 $ 581 $ 425
Gross unrealized losses............................... (1,333) (598) (373)
Unrealized losses (gains) credited to policyholders... 43 (53) (13)
------- ------ ------
Net unrealized capital (losses) gains................. (1,116) (70) 39
Deferred income tax (asset) liability................. (391) (24) 14
------- ------ ------
Net unrealized capital (losses) gains, after-tax...... (725) (46) 25
Balance beginning of year............................. 103 (725) (46)
------- ------ ------
CHANGE IN NET UNREALIZED CAPITAL (LOSSES) GAINS ON
FIXED MATURITIES.................................... $ (828) $ 679 $ 71
======== ====== ======
</TABLE>
F-14
<PAGE> 323
HARTFORD LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS)
COMPONENTS OF FIXED MATURITIES INVESTMENTS
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1995
-------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
U.S. government and government agencies and
authorities (guaranteed and sponsored)........ $ 554 $ 5 $ (9) $ 550
U.S. government and government agencies and
authorities (guaranteed and sponsored) --
asset-backed.................................. 3,880 230 (407) 3,703
States, municipalities and political
subdivisions.................................. 202 4 (3) 203
International governments....................... 364 21 (4) 381
Public utilities................................ 1,027 31 (2) 1,056
All other corporate including international..... 4,682 190 (98) 4,774
All other corporate -- asset-backed............. 3,421 81 (63) 3,439
Short-term investments.......................... 1,088 -- -- 1,088
Certificates of deposit......................... 938 19 (12) 945
------- --- ----- -------
TOTAL FIXED MATURITIES.......................... $16,156 $581 $ (598) $16,139
======= === ===== =======
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
-------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
U.S. government and government agencies and
authorities (guaranteed and sponsored)........ $ 194 $ 13 $ (4) $ 203
U.S. government and government agencies and
authorities (guaranteed and sponsored) --
asset-backed.................................. 2,167 165 (138) 2,194
States, municipalities and political
subdivisions.................................. 423 6 (11) 418
International governments....................... 380 19 (4) 395
Public utilities................................ 967 13 (9) 971
All other corporate including international..... 5,477 137 (125) 5,489
All other corporate -- asset-backed............. 4,151 57 (60) 4,148
Short-term investments.......................... 765 -- -- 765
Certificates of deposit......................... 1,135 15 (22) 1,128
------- ---- ----- -------
TOTAL FIXED MATURITIES.......................... $15,659 $425 $ (373) $15,711
======= ==== ===== =======
</TABLE>
The amortized cost and fair value of fixed maturities at December 31, 1996,
by maturity, are shown below. Asset-backed securities, including mortgage-backed
securities and collateralized mortgage obligations, are distributed to maturity
year based on the Company's estimates of the rate of future prepayments of
principal over the remaining life of such securities. These estimates are
developed using prepayment speeds reported in broker consensus data. Such
estimates are derived from prepayment speeds experienced at the interest rate
levels projected for the underlying mortgages and can be expected to vary from
actual experience. Expected maturities differ from contractual maturities due to
call or prepayment provisions.
F-15
<PAGE> 324
HARTFORD LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS)
<TABLE>
<CAPTION>
MATURITY AMORTIZED COST FAIR VALUE
---------------------------------------------------------- -------------- ----------
<S> <C> <C>
One year or less.......................................... $ 2,920 $ 2,936
Over one year through five years.......................... 6,646 6,705
Over five years through ten years......................... 3,993 3,982
Over ten years............................................ 2,100 2,088
------- -------
TOTAL........................................... $ 15,659 $ 15,711
======= =======
</TABLE>
Sales of fixed maturities excluding short-term fixed maturities for the
years ended December 31, 1994, 1995 and 1996 resulted in proceeds of $6,262,
$5,494 and $4,018, respectively, resulting in gross realized capital gains of
$79, $111 and $102, respectively, and gross realized capital losses (including
investment writedowns) of $116, $81 and $316, respectively, not including
policyholder gains and losses. Sales of equity securities for the years ended
December 31, 1994, 1995 and 1996 resulted in proceeds of $58, $42 and $74,
respectively, resulting in gross realized capital gains of $5, $0 and $2,
respectively, and gross realized capital losses of $14, $6 and $0, respectively,
not including policyholder gains and losses.
CONCENTRATION OF CREDIT RISK
As of December 31, 1996, the Company had a reinsurance recoverable of
$3,800 from Mutual Benefit Life Assurance Corporation ("Mutual Benefit"),
supported by assets in a security trust of $3,800 (including policy loans of
$3,300). The risk of Mutual Benefit becoming insolvent is mitigated by the
reinsurance agreement's requirement that the assets be kept in a security trust
with the Company as sole beneficiary.
The Company has invested in the securities of a single issuer in amounts
greater than 10% of stockholder's equity. The table below details the issuer and
the amount invested by the Company, as of December 31, 1996. Excluding these
investments and investments in U.S. government and agencies, the Company has no
other significant concentrations of credit risk in fixed maturities.
<TABLE>
<CAPTION>
AMORTIZED FAIR
ISSUER COST VALUE RATING
- -------------------------------------------- --------- ----- -------------------------
<S> <C> <C> <C>
MBNA Credit Card............................ $ 180 $ 181 BBB-AAA
Green Tree Financial Corporation............ $ 175 $ 175 A-AAA
Province of Quebec.......................... $ 152 $ 158 A+ (Standard and Poor's)
Traveler's Group, Inc....................... $ 160 $ 160 A+ (Standard and Poor's)
Finova Capital.............................. $ 136 $ 137 A- (Standard and Poor's)
Ford Motor Corporation...................... $ 143 $ 144 A+ (Standard and Poor's)
Sears, Roebuck and Co. ..................... $ 131 $ 131 BBB - A-
</TABLE>
DERIVATIVE INVESTMENTS
Derivatives play an important role in facilitating the management of
interest rate risk, in creating opportunities to develop asset packages which
efficiently fund product obligations, in hedging against indexation risks which
affect the value of certain liabilities, and in adjusting investment risk
characteristics when dictated by significant changes in market risks. As an end
user of derivatives, the Company uses a variety of derivative financial
instruments, including swaps, caps, floors, forwards and exchange traded
financial futures and options in order to hedge exposure to price, foreign
currency and/or interest rate risk on anticipated investment purchases or
existing assets and liabilities. The notional amounts of derivative contracts
represent the basis upon which pay and
F-16
<PAGE> 325
HARTFORD LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS)
receive amounts are calculated and are not reflective of credit risk for
derivative contracts. Credit risk for derivative contracts is limited to the
amounts calculated to be due to the Company on such contracts. The Company
believes it maintains prudent policies regarding the financial stability and
credit standing of its major counterparties and typically requires credit
enhancement provisions to further limit its credit risk for derivative
contracts. Many of these derivative contracts are bilateral agreements that are
not assignable without the consent of the relevant counterparty. Notional
amounts pertaining to derivative financial instruments totaled $9,627 and
$10,877 at December 31, 1995 and 1996, respectively ($7,919 and $8,249 related
to life insurance investments and $1,708 and $2,628 related to life insurance
liabilities at December 31, 1995 and 1996, respectively).
The following table summarizes the Company's derivatives, segregated by
major categories, as of December 31, 1995 and 1996.
<TABLE>
<CAPTION>
AMOUNTS HEDGED (NOTIONAL AMOUNTS) (EXCLUDING LIABILITY HEDGES)
---------------------------------------------------------------------
PURCHASED
TOTAL ISSUED OPTIONS, INTEREST FOREIGN TOTAL
CARRYING CAPS & CAPS & RATE CURRENCY NOTIONAL
VALUE FLOORS(C) FLOORS(D) FUTURES(E) SWAPS(H) SWAPS(F) AMOUNT
-------- --------- --------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
1995
Asset-backed securities (excluding
inverse floaters and
anticipatory)................... $ 6,375 $ 118 $ 3,433 $ 323 $ 290 $ -- $4,164
Inverse floaters(A)............... 770 560 354 18 681 -- 1,613
Anticipatory(G)................... (3) -- -- 478 240 -- 718
Other bonds and notes............. 7,909 33 66 323 798 186 1,406
Short-term investments............ 1,088 -- -- -- -- -- --
------- ------ ------ ------ ------ ---- ------
TOTAL FIXED MATURITIES.... 16,139 711 3,853 1,142 2,009 186 7,901
Equity securities, policy loans
and other investments........... 3,933 -- -- -- 18 -- 18
------- ------ ------ ------ ------ ---- ------
TOTAL INVESTMENTS......... $20,072 $ 711 $ 3,853 $1,142 $2,027 $186 $7,919
======= ====== ====== ====== ====== ==== ======
TOTAL DERIVATIVES -- FAIR
VALUE(B)................ $ (32) $ 47 $ -- $ (113) $(24) $ (122)
====== ====== ====== ====== ==== ======
</TABLE>
F-17
<PAGE> 326
HARTFORD LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS)
<TABLE>
<CAPTION>
AMOUNTS HEDGED (NOTIONAL AMOUNTS) (EXCLUDING LIABILITY HEDGES)
---------------------------------------------------------------------
PURCHASED
TOTAL ISSUED OPTIONS, INTEREST FOREIGN TOTAL
CARRYING CAPS & CAPS & RATE CURRENCY NOTIONAL
VALUE FLOORS(C) FLOORS(D) FUTURES(E) SWAPS(H) SWAPS(F) AMOUNT
-------- --------- --------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
1996
Asset-backed securities (excluding
inverse floaters and
anticipatory)................... $ 5,939 $ 500 $ 2,454 $ -- $ 941 $ -- $3,895
Inverse floaters(A)............... 404 98 856 -- 346 -- 1,300
Anticipatory(G)................... -- -- -- 287 105 -- 392
Other bonds and notes............. 8,603 456 747 50 1,265 125 2,643
Short-term investments............ 765 -- -- -- -- -- --
------- ------ ------ ------ ------ ---- ------
TOTAL FIXED MATURITIES.... 15,711 1,054 4,057 337 2,657 125 8,230
Equity securities, policy loans
and other investments........... 4,119 -- -- -- 19 -- 19
------- ------ ------ ------ ------ ---- ------
TOTAL INVESTMENTS......... $19,830 $ 1,054 $ 4,057 $ 337 $2,676 $125 $8,249
======= ====== ====== ====== ====== ==== ======
TOTAL DERIVATIVES -- FAIR
VALUE(B)................ $ (10) $ 35 $ -- $ (27) $ (9) $ (11)
====== ====== ====== ====== ==== ======
</TABLE>
- ---------------
(A) Inverse floaters are variations of collateralized mortgage obligations for
which the coupon rates move inversely with an index rate such as LIBOR. The
risk to principal is considered negligible as the underlying collateral for
the securities is guaranteed or sponsored by government agencies. To address
the volatility risk created by the coupon variability, the Company uses a
variety of derivative instruments, primarily interest rate swaps and
purchased caps and floors.
(B) The fair value of derivative instruments including swaps, caps, floors,
futures, options and forward commitments was determined using dealer quoted
prices, for 1995, and using a pricing model which is validated through
quarterly comparison to dealer quoted prices, for 1996.
(C) The 1995 data includes issued caps of $475 with a weighted average strike
rate of 8.5% (ranging from 7.0% to 10.4%) and over 85% maturing in 2000
through 2004. In addition, issued floors totaled $236, a weighted average
strike rate of 8.1% (ranging from 5.3% to 10.9%) and mature through 2007
with 76% maturing by 2004. The 1996 data includes issued caps of $433 with a
weighted average strike rate of 8.21% (ranging from 7.0% to 9.5%) and over
93% maturing in 2000 through 2005. In addition, issued floors totaled $621,
have a weighted average strike rate of 5.16% (ranging from 4.875% to 7.85%)
with all of them maturing by the end of 2005.
(D) The 1995 data includes purchased floors of approximately $2,100 and
purchased caps of approximately $1,800. The floors have a weighted average
strike price of 5.7% (ranging from 3.7% to 6.8%) and over 87% mature in 1997
through 1999. The caps have a weighted average strike price of 7.6% (ranging
from 4.5% to 10.1%) and over 82% mature in 1997 through 2000. The 1996 data
includes purchased floors of approximately $2,600, purchased options of $10
and purchased caps of approximately $1,400. The floors have a weighted
average strike rate of 5.77% (ranging from 3.70% to 7.85%) and over 95%
mature in the years 1997 through 2001. The options mature in 1997. The caps
have a weighted average of 7.68% (ranging from 4.40% to 10.125%) and over
77% of them mature in the years 1997 through 2001.
(E) As of December 31, 1995 and 1996, over 95% and 71% respectively, of the
notional futures contracts expire within one year.
(F) As of December 31, 1995 and 1996, over 25% and 42%, respectively, of the
Company's foreign currency swaps expire within one year; the balance mature
over the succeeding 4 to 5 years.
(G) Deferred gains and losses on anticipatory transactions are included in the
carrying value of bond investments in the Consolidated Balance Sheets. At
the time of the ultimate purchase, they are reflected as a basis adjustment
to the purchased asset. At December 31, 1995, the Company had $12.9 in net
deferred gains for futures, interest rate swaps and purchased options. The
Company basis adjusted $12.6 of the deferred gains in 1996. At December 31,
1996, the Company had $5.7 in net deferred gains for futures, interest rate
swaps and purchased options. The Company expects to basis adjust the $5.7 of
deferred gains in 1997.
(H) For additional information on the Company's interest rate swaps, see the
table on page F-19.
The following table summarizes the maturities by notional value of interest
rate swaps outstanding at December 31, 1995 and 1996, and the related weighted
average interest pay rate or receive rate. The variable rates represent spot
rates (primarily 90-day LIBOR) as of December 31,
F-18
<PAGE> 327
HARTFORD LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS)
1996. Such variable rates have been calculated assuming that the spot rates
remain unchanged throughout the life of the interest rate swaps.
<TABLE>
<CAPTION>
LATEST
1996 1997 1998 1999 2000 THEREAFTER TOTAL MATURITY
----- ----- ----- ----- ----- ---------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995
PAY FIXED/RECEIVE VARIABLE
Notional value.................... $ 15 $ 50 $ -- $ 453 $ 31 $ 229 $ 778 2004
Weighted average pay rate......... 4.95% 7.28% -- 8.10% 7.11% 7.78% 7.85%
Weighted average receive rate..... 5.81% 5.94% -- 5.75% 5.70% 5.88% 5.80%
PAY VARIABLE/RECEIVE FIXED
Notional value.................... $ 120 $ 68 $ 25 $ 25 $ 35 $ 295 $ 568 2007
Weighted average pay rate......... 5.89% 8.63% 5.93% -- 5.88% 4.35% 5.41%
Weighted average receive rate..... 2.78% 7.87% 4.00% -- 6.48% 6.66% 5.56%
PAY VARIABLE/RECEIVE DIFFERENT
VARIABLE
Notional value.................... $ 161 $ 18 $ 36 $ 12 $ 200 $ 254 $ 681 2004
Weighted average pay rate......... 5.51% 6.19% 3.65% 3.45% 4.53% 16.26% 5.59%
Weighted average receive rate..... 6.48% 8.10% 5.58% 5.16% 6.81% 5.91% 6.55%
Total interest rate swaps......... $ 296 $ 136 $ 61 $ 490 $ 266 $ 778 $2,027 2007
Total weighted average pay rate... 5.64% 7.78% 4.58% 7.57% 5.01% 6.40% 6.51%
Total weighted average receive
rate............................ 4.94% 7.19% 4.94% 5.44% 6.64% 6.30% 5.91%
</TABLE>
<TABLE>
<CAPTION>
LATEST
1997 1998 1999 2000 2001 THEREAFTER TOTAL MATURITY
----- ----- ----- ----- ----- ---------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996
PAY VARIABLE/RECEIVE FIXED
Notional value.................... $ -- $ 50 $ 165 $ 35 $ 162 $ 334 $ 746 2016
Weighted average pay rate......... -- 5.7% 5.8% 5.5% 5.5% 5.6% 5.6%
Weighted average receive rate..... -- 3.2% 1.5% 6.5% 6.3% 6.7% 5.2%
PAY FIXED/RECEIVE VARIABLE
Notional value.................... $ 86 $ 25 $ 486 $ 74 $ 582 $ 399 $1,652 2007
Weighted average pay rate......... 7.5% -- 6.4% 6.7% 7.0% 6.8% 6.8%
Weighted average receive rate..... 5.6% -- 5.6% 5.7% 6.2% 5.8% 5.9%
PAY VARIABLE/RECEIVE DIFFERENT
VARIABLE
Notional value.................... $ 19 $ 15 $ -- $ 200 $ -- $ 44 $ 278 2007
Weighted average pay rate......... 5.9% 5.7% -- 6.4% -- 12.9% 7.4%
Weighted average receive rate..... 3.7% 5.5% -- 5.0% -- 6.4% 5.2%
Total interest rate swaps......... $ 105 $ 90 $ 651 $ 309 $ 744 $ 777 $2,676 2016
Total weighted average pay rate... 7.2% 5.7% 6.2% 6.4% 6.7% 6.6% 6.5%
Total weighted average receive
rate............................ 5.2% 3.8% 4.4% 5.4% 6.2% 6.3% 5.6%
</TABLE>
In addition, interest rate sensitivity related to certain Company insurance
liabilities was altered primarily through interest rate swap agreements. The
notional amount of the liability agreements in which the Company generally pays
one variable rate in exchange for another was approximately $2,500 at December
31, 1995 and 1996. As of December 31, 1996, the weighted average pay rate was
5.6% and the weighted average receive rate was 6.5%. These agreements mature at
various times through 2001.
F-19
<PAGE> 328
HARTFORD LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS)
A reconciliation between notional amounts at December 31, 1995 and 1996 by
derivative type and strategy is as follows:
<TABLE>
<CAPTION>
BY DERIVATIVE TYPE
-----------------------------------------------
12/31/95 12/31/96
NOTIONAL MATURITIES/ NOTIONAL
AMOUNT ADDITIONS TERMINATIONS AMOUNT
--------- --------- ------------ --------
<S> <C> <C> <C> <C>
Caps............................................... $ 2,284 $ 1,293 $ 1,715 $ 1,862
Floors............................................. 2,380 2,184 1,165 3,399
Options............................................ -- 10 -- 10
Swaps/Forwards..................................... 3,821 4,292 2,844 5,269
Futures............................................ 1,142 3,776 4,581 337
------ ------- ------- -------
TOTAL.................................... $ 9,627 $ 11,555 $ 10,305 $ 10,877
====== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
BY STRATEGY
-----------------------------------------------
12/31/95 12/31/96
NOTIONAL MATURITIES/ NOTIONAL
AMOUNT ADDITIONS TERMINATIONS AMOUNT
--------- --------- ------------ --------
<S> <C> <C> <C> <C>
Liability.......................................... $ 1,708 $ 2,057 $ 1,137 $ 2,628
Anticipatory....................................... 718 2,117 2,443 392
Asset.............................................. 3,037 1,572 2,229 2,380
Portfolio.......................................... 4,164 5,809 4,496 5,477
------ ------- ------- -------
TOTAL.................................... $ 9,627 $ 11,555 $ 10,305 $ 10,877
====== ======= ======= =======
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, 1995 DECEMBER 31, 1996
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
<S> <C> <C> <C> <C>
ASSETS
Fixed maturities.................................... $ 16,139 $16,139 $ 15,711 $15,711
Equity securities................................... 63 63 119 119
Policy loans........................................ 3,380 3,380 3,839 3,839
Mortgage loans...................................... 271 271 2 2
Investments in partnerships and trust............... 180 194 66 68
Other............................................... 39 39 93 119
LIABILITIES
Other policy benefits............................... $ 12,727 $12,767 $ 11,707 $11,469
Allocated Advances.................................. 732 732 893 893
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument: fair value for fixed maturities and
equity securities approximate those quotations published by applicable stock
exchanges or received from other reliable sources; policy and mortgage loan
carrying amounts approximate fair value; investments in partnerships and trusts
are based on external market valuations from partnership and trust managements;
fair value of derivative instruments, including swaps, caps, floors, futures,
and forward commitments, is determined by using a pricing model which is
validated through quarterly comparison to dealer quoted
F-20
<PAGE> 329
HARTFORD LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS)
market prices; and other policy benefits payable for investment type contracts
are determined by estimating future cash flows discounted at the yearend market
rate.
5. INCOME TAX
The Company and The Hartford have entered into a tax sharing agreement
under which each member in the consolidated U.S. federal income tax return will
make payments between them such that, with respect to any period, the amount of
taxes to be paid by the Company, subject to certain adjustments, generally will
be determined as though the Company were to file separate federal, state and
local income tax returns.
As long as The Hartford continues to beneficially own, directly or
indirectly, at least 80% of the combined voting power and 80% of the value of
the outstanding capital stock of the Company, the Company will be included for
federal income tax purposes in the consolidated group of which The Hartford is
the common parent. It is the current intention of The Hartford and its
subsidiaries to continue to file a single consolidated federal income tax
return. The Company will continue to remit (receive from) The Hartford a current
income tax provision (benefit) computed in accordance with such tax sharing
agreement. The Company's effective tax rate was 32%, 34% and 23% in 1994, 1995
and 1996, respectively.
Income tax expense was as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Current......................................................... $ 202 $ 213 $ 134
Deferred........................................................ (130) (137) (127)
----- ----- -----
TOTAL................................................. $ 72 $ 76 $ 7
===== ===== =====
</TABLE>
A reconciliation of the tax provision at the U.S. federal statutory rate to
the provision for income taxes is as follows:
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED
DECEMBER 31,
-----------------
1994 1995 1996
--- --- ---
<S> <C> <C> <C>
Tax provision at U.S. statutory rate................................... $78 $79 $11
Tax-exempt income...................................................... (4) (3) (2)
Foreign tax credit..................................................... -- (4) --
Other.................................................................. (2) 4 (2)
---- ---- ----
TOTAL........................................................ $72 $76 $ 7
==== ==== ====
</TABLE>
Income taxes paid were $257, $173, and $166 in 1994, 1995 and 1996,
respectively. The current tax refund due from The Hartford was $16 and $59 as of
December 31, 1995 and 1996, respectively.
F-21
<PAGE> 330
HARTFORD LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS)
Deferred tax assets (liabilities) included the following:
<TABLE>
<CAPTION>
AS OF DECEMBER
31,
-----------------
1995 1996
---- ----
<S> <C> <C>
Tax return deferred acquisition costs............................... $405 $524
Financial statement deferred acquisition costs and reserves......... 181 (260)
Employee benefits................................................... 13 15
Unrealized loss (gain) on investments............................... 24 (16)
Investments and other............................................... (180) 280
---- ----
TOTAL..................................................... $443 $543
==== ====
</TABLE>
Prior to the Tax Reform Act of 1984, the Life Insurance Company Income Tax
Act of 1959 permitted the deferral from taxation of a portion of statutory
income under certain circumstances. In such circumstances, the deferred income
was accumulated in a "Policyholders' Surplus Account" and will be taxable in the
future only under conditions which management considers to be remote; therefore,
no federal income taxes have been provided on this deferred income. The balance
for tax return purposes of the Policyholders' Surplus Account as of December 31,
1996 was $37.
6. REINSURANCE
The Company cedes insurance to non-affiliated insurers in order to limit
its maximum loss. Such transfer does not relieve the Company of its primary
liability. The Company also assumes insurance from other insurers. Group life
and accident and health insurance business is reinsured to unaffiliated
companies.
Insurance net retained premiums were comprised of the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Gross premiums................................................ $1,989 $2,348 $3,077
Insurance assumed............................................. 334 608 405
Insurance ceded............................................... (184) (313) (413)
------ ------ ------
TOTAL............................................... $2,139 $2,643 $3,069
====== ====== ======
</TABLE>
Reinsurance recoveries, which reduced death and other benefits, for the
years ended December 31, 1994, 1995 and 1996 approximated $113, $162 and $239,
respectively.
Also in December 1994, the Company ceded to a third party approximately
$1,000 in individual variable annuities on a modified coinsurance basis. In
December 1995, the Company ceded approximately $1,200 in individual variable
annuities on a modified coinsurance basis to a third party. The Company, and
thereby the coinsurer, does not retain the investment risk with respect to its
variable annuity contracts. The policyholder elects the investment options and
all investment gains and losses are then credited to the policyholder's account.
In addition, the liability structure of the variable annuity contracts does not
contain significant actuarial risk of mortality or morbidity. These transactions
did not have a material impact on consolidated net income.
In May 1994, the Company assumed the life insurance policies and the
individual annuities of Pacific Standard with reserves and account values of
approximately $434. The Company received cash and investment-grade assets to
support the life insurance and individual annuity contract obligations assumed.
F-22
<PAGE> 331
HARTFORD LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS)
7. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
The Company's employees are included in Hartford Fire's noncontributory
defined benefit pension plans. These plans provide pension benefits that are
based on years of service and the employee's compensation during the last ten
years of employment. The Company's funding policy is to contribute annually an
amount between the minimum funding requirements set forth in the Employee
Retirement Income Security Act of 1974, as amended, and the maximum amount that
can be deducted for federal income tax purposes. Generally, pension costs are
funded through the purchase of the Company's group pension contracts. The cost
to the Company was approximately $7, $6 and $7 in 1994, 1995 and 1996,
respectively.
The Company also provides, through Hartford Fire, certain health care and
life insurance benefits for eligible retired employees. A substantial portion of
the Company's employees may become eligible for these benefits upon retirement.
The Company's contribution for health care benefits will depend on the retiree's
date of retirement and years of service. In addition, the plan has a defined
dollar cap which limits average Company contributions. The Company has prefunded
a portion of the health care and life insurance obligations through trust funds
where such prefunding can be accomplished on a tax effective basis.
Postretirement health care and life insurance benefits expense, allocated by The
Hartford, was immaterial to the results of operations for 1994, 1995 and 1996,
respectively.
The assumed rate of future increases in the per capita cost of health care
(the health care trend rate) was 9.3% for 1996, decreasing ratably to 6.0% in
the year 2001. Increasing the health care trend rates by one percent per year
would have an immaterial impact on the accumulated postretirement benefit
obligation and the annual expense. To the extent that the actual experience
differs from the inherent assumptions, the effect will be amortized over the
average future service of the covered employees.
8. ALLOCATED ADVANCES FROM PARENT
For financial reporting purposes, the Company has treated certain amounts
previously allocated by The Hartford to the Company's life insurance
subsidiaries as Allocated Advances from parent. Such Allocated Advances were not
treated as liabilities or indebtedness for tax and statutory accounting
purposes. Cash received in respect of Allocated Advances was used to support the
growth of the life insurance subsidiaries and was treated as surplus for
statutory accounting purposes. Interest expense represents the expense
internally allocated to the Company with respect to the Allocated Advances based
on The Hartford's actual (third party) external borrowing costs. Interest
expense paid was treated as dividends for tax and statutory accounting purposes.
The weighted average interest rate paid by the Company was 6.5%, 6.8%, and 7.1%
in 1994, 1995 and 1996, respectively.
9. BUSINESS SEGMENT INFORMATION
The Company sells financial products such as fixed and variable annuities,
retirement plan services, and life and disability insurance on both an
individual and a group basis. The Company divides its businesses into four
segments: Annuity, Individual Life Insurance, Employee Benefits and Guaranteed
Investment Contracts. In addition, the Company also maintains a Corporate
Operation. The Annuity segment offers individual variable annuities and fixed
market value adjusted annuities, deferred compensation and retirement plan
services, mutual funds, investment management services and other financial
products. The Individual Life Insurance segment sells a variety of individual
life insurance products, including variable life, universal life and
interest-sensitive whole life policies.
F-23
<PAGE> 332
HARTFORD LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS)
The Employee Benefits segment sells group insurance products, including group
life and group disability insurance and corporate-owned life insurance, and
engages in certain international operations. The Guaranteed Investment Contracts
segment sells a limited amount of guaranteed investment contracts and contains
Closed Book GRC. Through its Corporate Operation, the Company reports items that
are not directly allocable to any of its business segments. Included in the
Corporate Operation are: (i) unallocated income and expense, (ii) the Company's
group medical business, which it exited in 1993, and (iii) certain other items
not directly allocable to any segment. Net realized capital gains and losses are
recognized in the period of realization, but are allocated to the segments
utilizing durations of the segment portfolios.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
REVENUES
Annuity............................................. $ 594 $ 720 $ 973
Individual Life Insurance........................... 391 408 472
Employee Benefits................................... 1,986 2,515 2,833
Guaranteed Investment Contracts..................... 481 378 34
Corporate Operation................................. 91 69 72
------- ------- -------
TOTAL REVENUES................................. $ 3,543 $ 4,090 $ 4,384
======= ======= =======
INCOME BEFORE INCOME TAX EXPENSE
Annuity............................................. $ 129 $ 168 $ 224
Individual Life Insurance........................... 40 58 68
Employee Benefits................................... 81 101 115
Guaranteed Investment Contracts..................... 2 (103) (346)
Corporate Operation................................. (29) 2 (30)
------- ------- -------
INCOME BEFORE INCOME TAX EXPENSE............... $ 223 $ 226 $ 31
======= ======= =======
ASSETS
Annuity............................................. $29,837 $39,673 $52,967
Individual Life Insurance........................... 2,808 3,173 3,968
Employee Benefits................................... 9,346 15,137 16,297
Guaranteed Investment Contracts..................... 7,337 6,069 4,533
Corporate Operation................................. 955 1,910 2,168
------- ------- -------
TOTAL ASSETS................................... $50,283 $65,962 $79,933
======= ======= =======
</TABLE>
10. STATUTORY NET INCOME AND SURPLUS
A significant percentage of the consolidated statutory surplus is
permanently reinvested or is subject to various state regulatory restrictions
which limit the payment of dividends without prior approval. The total amount of
statutory dividends which may be paid by the insurance subsidiaries of the
Company in 1997, without prior approval, is estimated to be $132. Statutory net
income and surplus as of and for the years ended December 31 were:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER
31,
------------------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Statutory net income................................. $ 74 $ 113 $ 171
====== ====== ======
Statutory surplus.................................... $1,088 $1,224 $1,320
====== ====== ======
</TABLE>
The insurance subsidiaries of the Company prepare their statutory financial
statements in accordance with accounting practices prescribed by the State of
Connecticut Insurance Department and the State of New Jersey Insurance
Department. Prescribed statutory accounting practices
F-24
<PAGE> 333
HARTFORD LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS)
include publications of the National Association of Insurance Commissioners, as
well as state laws, regulations, and general administrative rules.
11. SEPARATE ACCOUNTS
The Company maintained separate account assets and liabilities totaling
$36,296 and $49,770 at December 31, 1995 and 1996, respectively, which are
reported at fair value. Separate account assets are segregated from other
investments, and investment income and gains and losses accrue directly to the
policyholder. Separate accounts reflect two categories of risk assumption: non-
guaranteed separate accounts of approximately $25,900 and $39,400 at December
31, 1995 and 1996, respectively, wherein the policyholder assumes the investment
risk, and guaranteed separate account assets of approximately $10,400 at
December 31, 1995 and 1996, wherein the Company contractually guarantees either
a minimum return or account value to the policyholder. Included in the
non-guaranteed category are policy loans of approximately $1,700 and $2,000 at
December 31, 1995 and 1996, respectively. Investment income (including
investment gains and losses) and interest credited to policyholders on separate
account assets are not reflected in the Consolidated Statements of Income.
Separate account management fees, net of minimum guarantees, were $256, $387 and
$538 in 1994, 1995 and 1996, respectively.
The guaranteed separate accounts include modified guaranteed individual
annuity and modified guaranteed life insurance. The average credited interest
rate on these contracts was 6.53% at December 31, 1996. The assets that support
these liabilities were comprised of approximately $10,200 in fixed maturities at
December 31, 1996. The portfolios are segregated from other investments and are
managed so as to minimize liquidity and interest rate risk. In order to minimize
the risk of disintermediation associated with early withdrawals, individual
annuity and modified guaranteed life insurance contracts carry a graded
surrender charge as well as a market value adjustment. Additional investment
risk is hedged using a variety of derivatives of approximately $100 in carrying
value and $2,400 in notional amounts at December 31, 1996.
12. CLAIM RESERVES
The following table displays the development of the claim reserves
(included in future policy benefits on the Consolidated Balance Sheets)
resulting primarily from group disability products as of December 31, 1995 and
1996:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------
1995 1996
------ ------
<S> <C> <C>
CLAIM RESERVES, JANUARY 1...................................... $1,115 $1,254
------ ------
Less: Reinsurance recoverable, January 1....................... 38 35
------ ------
Incurred expenses related to:
Current year................................................. 632 799
Prior year................................................... (28) (66)
------ ------
Total incurred............................................ 604 733
------ ------
Paid expenses related to:
Current year................................................. 227 236
Prior year................................................... 235 273
------ ------
Total paid................................................ 462 509
------ ------
Add: Reinsurance recoverable, December 31...................... 35 53
------ ------
CLAIM RESERVES, DECEMBER 31.................................... $1,254 $1,496
====== ======
</TABLE>
F-25
<PAGE> 334
HARTFORD LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS)
13. COMMITMENTS AND CONTINGENCIES
Under insurance guaranty fund laws existing in each state, the District of
Columbia and Puerto Rico, insurers licensed to do business can be assessed by
state insurance guaranty associations for certain obligations of insolvent
insurance companies to policyholders and claimants. Recent regulatory actions
against certain large life insurers encountering financial difficulty have
prompted various state insurance guaranty associations to begin assessing life
insurance companies for the deemed losses. Most of these laws do provide,
however, that an assessment may be excused or deferred if it would threaten an
insurer's solvency and further provide annual limits on such assessments. A
large part of the assessments paid by the Company's insurance subsidiaries
pursuant to these laws may be used as credits for a portion of the Company's
insurance subsidiaries' premium taxes. The Company paid guaranty fund
assessments of approximately $11, $13 and $12 in 1994, 1995 and 1996,
respectively, of which $5, $7 and $6 were estimated to be creditable against
premium taxes.
The Company is a defendant in various lawsuits arising in the ordinary
course of business. In the opinion of management, the resolution of these
matters is not expected to have a material adverse effect on the Company's
business, financial position, or results of operations.
The rent paid to Hartford Fire for the space occupied by the Company was
$11 in 1994, 1995, and 1996. The Company expects to pay annual rent of $12 in
each of 1997, 1998, and 1999, $21 in each of 2000 and 2001, and $175 thereafter
over the remaining term of the sublease, which expires on December 31, 2009.
Rental expense is recognized on a level basis over the term of the sublease and
amounted to approximately $14 in 1994, 1995 and 1996.
14. QUARTERLY RESULTS FOR 1996 AND 1995 (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
----------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------------- ----------- -------------- ---------------
1996 1995 1996 1995 1996 1995 1996 1995
------ ------ ---- ---- ----- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues...................... $1,303 $1,065 $987 $896 $ 817 $1,062 $1,277 $1,067
Benefits, claims, and expenses... 1,264 1,030 944 857 931 1,025 1,221 1,028
------ ------ ---- ---- ----- ------ ------ ------
Net income.................... $ 39 $ 35 $ 43 $ 39 $(114) $ 37 $ 56 $ 39
====== ====== ===== ===== ====== ====== ====== ======
</TABLE>
15. SUBSEQUENT EVENTS
On February 10, 1997, the Company filed a Registration Statement with the
Securities and Exchange Commission relating to the U.S. and international
offerings of shares of Class A Common Stock (the "Equity Offerings")
representing up to 20% ownership of the Company. After completion of the Equity
Offerings, The Hartford would own all of the shares of Class B Common Stock
(after reclassification of the Company's common stock into Class B Common
Stock). The Company intends to use the estimated net proceeds of the Equity
Offerings to make a capital contribution to its insurance subsidiaries, to
reduce its third-party indebtedness and for other general corporate purposes.
The Hartford has advised the Company that its current intent is to continue
to beneficially own at least 80% of the Company, but it is under no contractual
obligation to do so, except for a limited period. Provided that The Hartford
continues to beneficially own at least 80% of the combined voting power or the
value of the outstanding capital stock of the Company, the Company will be
included for federal income tax purposes in the controlled group of which The
Hartford is the common parent.
F-26
<PAGE> 335
HARTFORD LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS)
Each member of a controlled group is jointly and severally liable for pension
funding and pension termination liabilities of each other member of the
controlled group, as well as certain benefit plan taxes. Accordingly, the
Company could be liable for pension funding, pension termination liabilities and
certain other pension-related excise taxes as well as other taxes of another
member of The Hartford controlled group in the event any such liability is
incurred, and not discharged, by such other member.
In connection with the proposed Equity Offerings, the Company plans to
enter into formal agreements, including a master intercompany agreement,
investment management agreements and a new tax sharing agreement, with The
Hartford covering such matters as corporate services, approval of certain
corporate activities, registration rights, owned and leased space, allocation of
expenses, taxes and liabilities, investment advisory services, use of trademarks
and certain other corporate matters. As part of the master intercompany
agreement, the Company would agree to remit to The Hartford 30% of any shared
liabilities for which The Hartford is responsible in respect of the ITT
Spin-Off, 30% of any taxes which may be assessed to The Hartford relating to the
ITT Spin-Off and will indemnify The Hartford for certain other tax liabilities.
As of December 31, 1996, there was no known liability associated with the ITT
Spin-Off. Such agreements are meant to maintain the relationship between the
Company and The Hartford in a manner consistent in all material respects with
past practice. As a result, management believes these agreements should not have
a material impact on the results of operations of the Company.
In addition, under insurance company holding laws, agreements between the
Company's insurance subsidiaries and The Hartford must be fair and reasonable
and may be subject to the approval of applicable insurance commissioners. The
agreements will be intended to maintain the relationship between the Company and
The Hartford in a manner generally consistent with past practices. However, none
of these arrangements will result from arm's-length negotiations and, therefore,
the prices charged to the Company and its subsidiaries for services provided
under these arrangements may be higher or lower than prices that may be charged
by third parties.
On February 10, 1997, the Company entered into a $1,300 unsecured
short-term credit facility with a syndicate of four banks. Interest on
borrowings will be equal to a Eurodollar rate determined by taking the average
one, two, three or six-month rate (based upon the applicable interest period
selected by the Company) at which deposits in U.S. dollars are offered by each
of the four participating lenders in London, England to prime banks in the
London interbank market, plus an applicable margin (based upon the Company's
current public debt ratings). Borrowings must be repaid by February 9, 1998.
F-27
<PAGE> 336
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS
ENDED MARCH 31,
-------------------
1996 1997
------ ------
<S> <C> <C>
REVENUES
Premiums and other considerations.................................... $ 941 $ 679
Net investment income................................................ 362 375
Net realized capital gains (losses).................................. -- 1
------ ------
TOTAL REVENUES.................................................... 1,303 1,055
------ ------
BENEFITS, CLAIMS AND EXPENSES
Benefits, claims and claim adjustment expenses....................... 651 659
Amortization of deferred policy acquisition costs.................... 66 83
Dividends to policyholders........................................... 286 54
Interest expense..................................................... 11 16
Other insurance expense.............................................. 230 143
------ ------
TOTAL BENEFITS, CLAIMS AND EXPENSES............................... 1,244 955
------ ------
INCOME BEFORE INCOME TAX EXPENSE....................................... 59 100
Income tax expense..................................................... 20 37
------ ------
NET INCOME................................................... $ 39 $ 63
====== ======
Pro forma net income per share......................................... $ 0.51
======
</TABLE>
The accompanying notes to condensed consolidated financial statements
(unaudited) are an integral part of the above statements.
F-28
<PAGE> 337
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
-------------------------- -----------
DECEMBER 31, MARCH 31, MARCH 31,
1996 1997 1997
------------ --------- -----------
<S> <C> <C> <C>
ASSETS
Investments:
Fixed maturities, available for sale, at fair value
(amortized cost $15,659 and $15,697)............. $ 15,711 $15,550 $15,550
Equity securities, available for sale, at fair
value............................................ 119 107 107
Policy loans, at outstanding balance................ 3,839 3,757 3,757
Other investments, at cost.......................... 161 179 179
------------ --------- -----------
TOTAL INVESTMENTS................................ 19,830 19,593 19,593
------------ --------- -----------
Cash.................................................. 72 82 82
Premiums and amounts receivable....................... 170 163 163
Reinsurance recoverable............................... 5,839 5,750 5,750
Deferred policy acquisition costs..................... 2,800 2,930 2,930
Deferred income tax................................... 543 584 584
Other assets.......................................... 909 987 987
Separate account assets............................... 49,770 51,413 51,413
------------ --------- -----------
TOTAL ASSETS..................................... $ 79,933 $81,502 $81,502
=========== ======== ==========
LIABILITIES
Future policy benefits................................ $ 4,026 $ 4,227 $ 4,227
Other policyholder funds.............................. 22,213 21,590 21,590
Other liabilities..................................... 1,757 2,164 2,164
Borrowings under line of credit....................... -- 1,084 1,084
Short-term debt due parent............................ -- 100 125
Allocated Advances from parent........................ 893 -- --
Separate account liabilities.......................... 49,770 51,413 51,413
------------ --------- -----------
TOTAL LIABILITIES................................ 78,659 80,578 80,603
------------ --------- -----------
STOCKHOLDER'S EQUITY
Preferred Stock, par value $.01 per share; 50,000,000
shares authorized; no shares issued and
outstanding.........................................
Common Stock, par value $.01 per share, 1,000 shares
authorized; 100 shares issued and outstanding....... -- -- --
Class A Common Stock, par value $.01 per share,
600,000,000 shares authorized; no shares issued and
outstanding.........................................
Class B Common Stock, par value $.01 per share,
600,000,000 shares authorized; 114,000,000 shares
issued and outstanding, pro forma................... 1
Capital surplus....................................... 585 585 584
Net unrealized capital gain (loss) on investments, net
of tax.............................................. 29 (93) (93)
Retained earnings..................................... 660 432 407
------------ --------- -----------
TOTAL STOCKHOLDER'S EQUITY....................... 1,274 924 899
------------ --------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY....... $ 79,933 $81,502 $81,502
=========== ======== ==========
</TABLE>
The accompanying notes to condensed consolidated financial statements
(unaudited) are an integral part of the above statements.
F-29
<PAGE> 338
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
NET
UNREALIZED
CLASS CLASS CAPITAL
A B GAIN(LOSS) ON TOTAL
PREFERRED COMMON COMMON COMMON CAPITAL INVESTMENTS, RETAINED STOCKHOLDER'S
STOCK STOCK STOCK STOCK SURPLUS NET OF TAX EARNINGS EQUITY
--------- ------- ------ ------ ------- -------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996.... $ -- $ -- $ -- $ -- $ 585 $ 29 $ 660 $ 1,274
Net income.................... -- -- -- -- -- -- 63 63
Dividend declared February 20,
1997........................ -- -- -- -- -- -- (291) (291)
Change in net unrealized
capital gain (loss) on
investments, net of tax..... -- -- -- -- -- (122) -- (122)
----- ----- ----- ----- ----- ----- ----- -----
BALANCE, MARCH 31, 1997....... -- -- -- -- 585 (93) 432 924
Issuance of Class B Common
Stock....................... -- -- -- 1 (1) -- -- --
Dividend declared April 4,
1997........................ -- -- -- -- -- -- (25) (25)
----- ----- ----- ----- ----- ----- ----- -----
PRO FORMA BALANCE, MARCH 31,
1997........................ $ -- $ -- $ -- $ 1 $ 584 $ (93) $ 407 $ 899
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
The accompanying notes to condensed consolidated financial statements
(unaudited) are an integral part of the above statements.
F-30
<PAGE> 339
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
1996 1997
------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net income............................................................ $ 39 $ 63
Adjustments to net income:
Depreciation and amortization......................................... 8 7
Net realized capital gains on sale of investments..................... -- (1)
Increase in premiums receivable....................................... 2 8
Increase in other liabilities......................................... 336 389
Change in receivables, payables and accruals.......................... 86 (36)
Increase (decrease) in accrued taxes.................................. 73 (9)
(Decrease) increase in deferred income taxes.......................... (83) 23
Increase in deferred policy acquisition costs......................... (96) (131)
Increase in liability for future policy benefits...................... 76 200
Decrease (increase) in reinsurance recoverable and related assets..... 11 (90)
------- -------
CASH PROVIDED BY OPERATING ACTIVITIES............................ 452 423
------- -------
INVESTING ACTIVITIES
Purchases of fixed maturity investments............................... (1,812) (1,935)
Sales of fixed maturity investments................................... 748 1,177
Maturities and principal paydowns of fixed maturity investments....... 672 764
Purchase of other investments......................................... (489) (45)
Sales of other investments............................................ 179 164
Net sales (purchases) of short-term investments....................... 222 (121)
------- -------
CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES................. (480) 4
------- -------
FINANCING ACTIVITIES
Increase in short-term debt........................................... -- 1,084
Decrease in Allocated Advances from parent............................ -- (893)
Dividends paid........................................................ (19) (191)
Net receipts from (disbursements for) investment and universal
life-type contracts credited to (charged from) policyholder
accounts............................................................ 55 (417)
------- -------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES................. 36 (417)
------- -------
Net increase in cash.................................................. 8 10
Impact of foreign exchange............................................ -- --
Cash -- beginning of period........................................... 70 72
------- -------
CASH -- END OF PERIOD............................................ $ 78 $ 82
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
CASH PAID DURING THE PERIOD FOR:
Income taxes.......................................................... $ 128 $ 11
Interest.............................................................. $ 11 $ 16
SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION
Dividends............................................................. $ -- $ 100
</TABLE>
The accompanying notes to condensed consolidated financial statements
(unaudited) are an integral part of the above statements.
F-31
<PAGE> 340
HARTFORD LIFE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN MILLIONS)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Hartford
Life, Inc. (the "Company") have been prepared in accordance with generally
accepted accounting principles for interim periods. In the opinion of
management, these statements include all normal recurring adjustments necessary
to present fairly the financial position, results of operations and cash flows
for the periods presented. For a description of accounting policies, see Note 1
of notes to consolidated financial statements for the year ended December 31,
1996 included elsewhere in this Prospectus.
2. STOCK OFFERING
On February 10, 1997, the Company filed a Registration Statement with the
Securities and Exchange Commission relating to the U.S. and international
offerings of shares of Class A Common Stock (the "Equity Offerings")
representing up to 20% ownership of the Company. After completion of the Equity
Offerings, ITT Hartford Group, Inc. ("The Hartford") would own all of the shares
of Class B Common Stock (after reclassification of the Company's common stock
into Class B Common Stock on April 3, 1997). The Company intends to use the
estimated net proceeds of the Equity Offerings to make a capital contribution to
its insurance subsidiaries, to reduce its third-party indebtedness and for other
general corporate purposes.
3. DEBT
On February 7, 1997, the Company declared a dividend of $1,184 payable to
its direct parent, Hartford Accident and Indemnity Company ("Hartford Accident
and Indemnity"). As a result, the Company borrowed $1,084 on February 18, 1997,
pursuant to a $1,300 line of credit, with interest payable at the two-month
Eurodollar rate plus 15 basis points (5.65% at the inception of the borrowing)
(for a description of the line of credit and the calculation of the applicable
Eurodollar rate, see Note 15 of notes to consolidated financial statements for
the year ended December 31, 1996, included elsewhere in this Prospectus), which,
together with a promissory note in the amount of $100, was paid as a dividend to
Hartford Accident and Indemnity on February 20, 1997. Of the $1,184 dividend,
$893 constituted a repayment of the portion of The Hartford's third-party
indebtedness internally allocated, for financial reporting purposes, to the
Company's life insurance subsidiaries (the "Allocated Advances"). The principal
on this promissory note is due and payable February 19, 1998, together with
interest payable at the two-month Eurodollar rate (determined as described
above) plus 15 basis points (initially 5.60% upon the execution of this
promissory note).
4. PRO FORMA INFORMATION
On April 3, 1997, the Company reclassified the authorized shares of common
stock, par value $.01 per share, of the Company into Class B Common Stock, par
value $.01 per share (the "Class B Common Stock") and authorized the Class A
Common Stock, par value $.01 per share (the "Class A Common Stock") and the
preferred stock, par value $.01 per share (the "Preferred Stock"). Holders of
Class A Common Stock and Class B Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the Board of Directors, subject to
any preferential dividend rights of any outstanding Preferred Stock, and
generally have identical voting rights and vote together (and not as separate
classes), except that holders of Class A Common Stock are entitled to one vote
per share while holders of Class B Common Stock are entitled to five votes per
share. Also, each share of Class B Common Stock is convertible into a share of
Class A
F-32
<PAGE> 341
HARTFORD LIFE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN MILLIONS)
Common Stock at any time at the option of the holder and will automatically
convert into a share of Class A Common Stock (i) upon the transfer of such share
of Class B Common Stock by the holder thereof to a non-affiliate (except where
the shares of Class B Common Stock so transferred represent 50% or more of all
the outstanding shares of Common Stock, calculated without regard to the
difference in voting rights between the classes of Common Stock) or (ii) in the
event that the number of shares of outstanding Class B Common Stock is less than
50% of all the Common Stock then outstanding.
On April 4, 1997, the Company declared and paid a dividend of $25 to
Hartford Accident and Indemnity in the form of a promissory note in such amount.
The principal on this promissory note is due and payable April 3, 1998, together
with the interest payable at the one-month Eurodollar rate (determined as
described above) plus 15 basis points (initially 5.84% upon the execution of
this promissory note).
The pro forma balance sheet and pro forma statement of stockholder's equity
reflect the above transactions as if they had occurred on March 31, 1997.
Pro forma net income per share data is calculated based upon the shares of
Class B Common Stock owned by The Hartford immediately prior to the Equity
Offerings plus an assumed issuance of Class A Common Stock in the Equity
Offerings (the number of shares that, based on the midpoint of the range of the
estimated initial public offering prices and the estimated underwriting
discounts and expenses payable by the Company, would result in net proceeds
equal to the excess of the amount of the February and April 1997 dividends over
the earnings for the year ended December 31, 1996 and the three months ended
March 31, 1997 and the Allocated Advances from parent).
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<PAGE> 342
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to each of the U.S. Underwriters named below, and
each of such U.S. Underwriters, for whom Goldman, Sachs & Co., Dean Witter
Reynolds Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan
Stanley & Co. Incorporated and Smith Barney Inc. are acting as representatives,
has severally agreed to purchase from the Company, the respective number of
shares of Class A Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
CLASS A
UNDERWRITER COMMON STOCK
- ------------------------------------------------------------------------------ ------------
<S> <C>
Goldman, Sachs & Co. ......................................................... 2,520,800
Dean Witter Reynolds Inc. .................................................... 2,520,800
Merrill Lynch, Pierce, Fenner & Smith Incorporated............................ 2,520,800
Morgan Stanley & Co. Incorporated............................................. 2,520,800
Smith Barney Inc. ............................................................ 2,520,800
Advest, Inc. ................................................................. 230,000
Sanford C. Bernstein & Co., Inc. ............................................. 230,000
J.C. Bradford & Co. .......................................................... 230,000
Conning & Company............................................................. 230,000
Credit Suisse First Boston Corporation........................................ 368,000
Dain Bosworth Incorporated.................................................... 230,000
Dowling & Partners Securities, LLC............................................ 92,000
A. G. Edwards & Sons, Inc. ................................................... 368,000
Fox-Pitt, Kelton Inc. ........................................................ 230,000
Interstate/Johnson Lane Corporation........................................... 92,000
Janney Montgomery Scott Inc. ................................................. 92,000
Edward D. Jones & Co., L.P. .................................................. 368,000
Legg Mason Wood Walker, Incorporated.......................................... 230,000
Lehman Brothers Inc. ......................................................... 368,000
Neuberger & Berman, LLC....................................................... 92,000
PaineWebber Incorporated...................................................... 368,000
Piper Jaffray Inc. ........................................................... 230,000
Principal Financial Securities, Inc. ......................................... 230,000
Prudential Securities Incorporated............................................ 368,000
Raymond James & Associates, Inc. ............................................. 230,000
The Robinson-Humphrey Company, Inc. .......................................... 230,000
Stephens Inc. ................................................................ 230,000
Sutro & Co. Incorporated...................................................... 230,000
Wheat, First Securities, Inc. ................................................ 230,000
----------
Total.................................................................... 18,400,000
==========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the U.S.
Underwriters are committed to take and pay for all the shares offered hereby, if
any are taken.
The U.S. Underwriters propose to offer the shares of Class A Common Stock
in part directly to the public at the initial public offering price set forth on
the cover page of this Prospectus and in part to certain securities dealers at
such price less a concession of $1.00 per share. The U.S. Underwriters may
allow, and such dealers may reallow, a concession not in excess of $.10 per
share to certain brokers and dealers. After the shares of Class A Common Stock
are released for sale to the public, the offering price and other selling terms
may from time to time be varied by the representatives.
The Company has entered into an underwriting agreement (the "International
Underwriting Agreement") with the underwriters of the International Offering
(the "International Underwriters")
U-1
<PAGE> 343
providing for the concurrent offer and sale of 4,600,000 shares of Class A
Common Stock in an international offering outside the United States. The
offering price and aggregate underwriting discounts and commissions per share
for the two offerings are identical. The closing of the offering made hereby is
a condition to the closing of the International Offering, and vice versa. The
representatives of the International Underwriters are Goldman Sachs
International, Dean Witter International Ltd., Merrill Lynch International,
Morgan Stanley & Co. International Limited and Smith Barney Inc.
Pursuant to an Agreement between the U.S. and International Underwriting
Syndicates (the "Agreement Between") relating to the two offerings, each of the
U.S. Underwriters named herein has agreed that, as a part of the distribution of
the shares offered hereby and subject to certain exceptions, it will offer, sell
or deliver the shares of Class A Common Stock, directly or indirectly, only in
the United States of America (including the States and the District of
Columbia), its territories, its possessions and other areas subject to its
jurisdiction (the "United States") and to U.S. persons, which term shall mean,
for purposes of this paragraph: (a) any individual who is a resident of the
United States or (b) any corporation, partnership or other entity organized in
or under the laws of the United States or any political subdivision thereof and
whose office most directly involved with the purchase is located in the United
States. Each of the International Underwriters has agreed pursuant to the
Agreement Between that, as a part of the distribution of the shares offered as a
part of the International Offering, and subject to certain exceptions, it will
(i) not, directly or indirectly, offer, sell or deliver shares of Class A Common
Stock (a) in the United States or to any U.S. persons or (b) to any person who
it believes intends to reoffer, resell or deliver the shares in the United
States or to any U.S. persons and (ii) cause any dealer to whom it may sell such
shares at any concession to agree to observe a similar restriction.
Pursuant to the Agreement Between, sales may be made between the U.S.
Underwriters and the International Underwriters of such number of shares of
Class A Common Stock as may be mutually agreed. The price of any shares so sold
shall be the initial public offering price, less an amount not greater than the
selling concession.
The Company has granted the U.S. Underwriters an option exercisable for 30
days after the date of this Prospectus to purchase up to an aggregate of
2,400,000 additional shares of Class A Common Stock solely to cover
over-allotments, if any. If the U.S. Underwriters exercise their over-allotment
option, the U.S. Underwriters have severally agreed, subject to certain
conditions, to purchase approximately the same percentage thereof that the
number of shares to be purchased by each of them, as shown in the foregoing
table, bears to the 23,000,000 shares of Class A Common Stock offered. The
Company has granted the International Underwriters a similar option to purchase
up to an aggregate of 600,000 additional shares of Class A Common Stock.
At the request of the Company, up to 700,000 shares of Class A Common Stock
being offered in the Equity Offerings are being reserved for sale to employees
(other than international employees) of the Company, The Hartford and their
respective affiliates, and the respective directors thereof, at the initial
public offering price. A limited group of individuals purchasing reserved shares
of Class A Common Stock may be required to agree not to sell, offer or otherwise
dispose of any of such shares of Class A Common Stock for a period of up to five
months after the date of this Prospectus.
The Company, The Hartford, certain subsidiaries of The Hartford and certain
executive officers and directors of the Company have agreed, subject to certain
exceptions, that, during the period beginning on the date of this Prospectus and
continuing to and including the date 180 days after the date of this Prospectus,
they will not offer, sell, contract to sell, file a registration statement with
respect to or otherwise dispose of, directly or indirectly, any Common Stock (or
any securities convertible into or exercisable or exchangeable for Common Stock)
or grant any options or warrants to purchase Common Stock, without the prior
written consent of the representatives of the Underwriters, except for the
shares of Class A Common Stock offered in connection with the Equity Offerings.
U-2
<PAGE> 344
The representatives of the Underwriters have informed the Company that they
do not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed 5% of the total number of shares of Class A
Common Stock offered by them.
Prior to the Equity Offerings, there has been no public market for the
shares of Class A Common Stock. The initial public offering price was negotiated
among the Company and the representatives of the U.S. Underwriters and the
International Underwriters. Among the factors considered in determining the
initial public offering price of the Class A Common Stock, in addition to
prevailing market conditions, were the Company's historical performance,
estimates of the business potential and earnings prospects of the Company, an
assessment of the Company's management and the consideration of the above
factors in relation to market valuation of companies in related businesses.
In connection with the Equity Offerings, the Underwriters may purchase and
sell the Class A Common Stock in the open market. These transactions may include
over-allotment and stabilizing transactions and purchases to cover syndicate
short positions created by the Underwriters in connection with the Equity
Offerings. Stabilizing transactions consist of certain bids or purchases for the
purpose of preventing or retarding a decline in the market price of the Class A
Common Stock; and syndicate short positions created by the Underwriters involve
the sale by the Underwriters of a greater number of shares of Class A Common
Stock than they are required to purchase from the Company in the Equity
Offerings. The Underwriters also may impose a penalty bid, whereby selling
concessions allowed to syndicate members or other broker-dealers in respect of
the Class A Common Stock sold in the Equity Offerings for their account may be
reclaimed by the syndicate if such securities are repurchased by the syndicate
in stabilizing or covering transactions. These activities may stabilize,
maintain or otherwise affect the market price of the Class A Common Stock, which
may be higher than the price that might otherwise prevail in the open market;
and these activities, if commenced, may be discontinued at any time. These
transactions may be effected on the NYSE, in the over-the-counter market or
otherwise.
The Class A Common Stock has been approved for listing, subject to notice
of issuance, on the NYSE under the trading symbol "HLI". In order to meet one of
the requirements for listing the Class A Common Stock on the NYSE, the
Underwriters will be required to undertake to sell lots of 100 or more shares to
a minimum of 2,000 beneficial holders.
Certain of the Underwriters have provided from time to time, and expect to
provide in the future, investment banking services to The Hartford and/or the
Company and their respective affiliates, for which such Underwriters have
received and will receive customary fees and commissions. In addition, certain
of the Underwriters distribute a number of the Company's products for which they
receive customary compensation. An affiliate of Dean Witter Reynolds Inc.
provides money management services for certain of the Company's products for
which it receives customary compensation.
The Company and The Hartford have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act.
U-3
<PAGE> 345
GLOSSARY OF SELECTED INSURANCE AND OTHER TERMS
The following Glossary includes definitions of certain insurance-related
terms as well as terms relating specifically to the Company and should be read
in conjunction with the terms defined elsewhere in this Prospectus.
ACCOUNT VALUE: The amount of money held in either a general account or
separate account of an insurance company to support policyholder liabilities.
ACCRUAL SECURITIES: A type of CMO the holder of which receives higher
principal amounts of bonds, in lieu of cash, for interest earned until all the
principal amounts of bonds preceding the accrual tranche have been fully repaid.
At such time, this security begins receiving both interest and principal in
cash.
ANNUITANT: A person who receives an income benefit from an annuity for
life or for a specified period.
ABS: Investment-grade securities representing undivided ownership
interests in a pool of financial assets, such as credit card receivables, auto
loans, equipment leases and bank loans.
AVR: Under statutory accounting practices, the asset valuation reserve is
a liability on a life insurance company's statutory financial statements
beginning with such company's statutory financial statements for 1992. AVR
establishes statutory reserves for debt securities, preferred stock, common
stock, mortgage loans, equity real estate and joint ventures and other invested
assets. AVR generally captures all net realized and unrealized capital gains and
losses on such assets, other than those resulting from changes in interest
rates. AVR has no effect on financial statements prepared in conformity with
GAAP.
BASIS POINT: The smallest measure used in quoting yields on bills, notes
and bonds. One basis point is .01%, or one one-hundredth of one percent of
yield. Thus, if a bond's yield increases from 8.00% to 8.50%, it would be said
to have risen 50 basis points.
CEDING: The reinsuring of all or a portion of an insurer's risk with
another insurer.
COLI: A fixed premium individual or group life insurance policy owned by a
company or a trust sponsored by a company. The proceeds from such a policy may
be used to help fund general corporate liabilities such as deferred compensation
plans or post-retirement obligations.
CMO: A mortgage-backed obligation secured by the cash flow of a pool of
mortgages. Regular principal and interest payments made by borrowers are
separated into different payment streams, creating several bonds that repay
invested capital at different rates.
CONVEXITY: A measure of the shape of the price/yield curve. Convexity
helps explain the difference between the prices estimated by standard duration
and the actual market prices of a security resulting from a change in
market-required yield.
COST OF INSURANCE: The mortality charges assessed against certain life
insurance policies such as universal life.
CREDITED RATES: Interest rates applied (i.e., credited) to life insurance
policies and annuity contracts, whether contractually guaranteed or currently
declared for a specified period, as outlined in the policy or contract.
DPAC: Deferred policy acquisition costs include commissions and certain
other underwriting, policy issuance and selling expenses which vary with and are
directly related to the production of
G-1
<PAGE> 346
business. These acquisition costs are deferred and later amortized in proportion
to either revenues or gross profits when reported in financial statements
prepared in conformity with GAAP.
DISINTERMEDIATION: The risk to a financial institution of a loss due to
the movement of policyholder funds at book (i.e., without a market value
adjustment) when interest rates are higher than at contract inception.
DURATION: A measure expressed in years of the price sensitivity of a
financial instrument to changes in interest rates.
FIXED MVA ANNUITIES: Fixed rate annuity contracts that guarantee that a
specific sum of money will be paid in the future, either as a lump sum or as
monthly income, to an annuitant. In the event of surrender prior to the
specified period, the MVA feature adjusts the surrender value of the contract
thereby protecting the Company from losses due to higher interest rates at the
time of surrender provided that the Company has appropriately matched its
portfolio of assets and liabilities. The amount of such payments will not
fluctuate due to adverse changes in the Company's investment return, mortality
experience or expenses.
FLOATER: Debt instrument with a variable coupon, paying a rate indexed to
any of a variety of rates, typically short term.
GENERAL ACCOUNT: All assets of an insurer other than those allocated to a
separate account. An insurer's general account consists of the assets held in
the general account of the insurer. The insurer bears the investment risk on the
invested assets of the general account.
GUARANTEED SEPARATE ACCOUNT: Assets held in an insurer's separate account,
where the insurer provides some form of guarantee on the rate credited to the
policy. This guarantee is backed by the general account assets of the insurer.
Assets held in guaranteed separate accounts usually contain a market value
adjustment to protect the insurer against disintermediation risk.
GENERAL INSURANCE EXPENSES: Costs incurred by an insurance company other
than agent commissions, other premium-related expenses and taxes; mainly the
administrative expense of running the company.
IMR: The interest maintenance reserve was adopted by the NAIC in December
1991 to be established under statutory accounting practices as a liability or a
non-admitted asset on a life insurer's statutory financial statements beginning
with the insurer's statutory financial statements for 1992. IMR applies to all
types of fixed income investments (bonds, preferred stocks, MBSs and mortgage
loans). IMR captures the net gains or losses from changes in the overall level
of interest rates which are realized upon the sale of investments and amortizes
these net realized capital gains or losses into income over the remaining life
of each investment sold. IMR has no effect on financial statements prepared in
conformity with GAAP.
IN FORCE: Insurance policies in effect.
INSURANCE GUARANTY FUNDS: Funds created in all fifty states, the District
of Columbia and Puerto Rico by law to cover funding shortfalls in paying claims
of insolvent insurance companies. These funds are maintained by assessments of
insurance companies operating in a particular state in proportion to their
business written in that state.
INTEREST-ONLY SECURITIES: Securities representing only the interest
payments of CMOs or MBS based on an underlying pool of mortgages. The interest
payments are "stripped" from the principal repayment obligation and can
represent the interest from an entire pool of mortgages or can be tranches
within a CMO.
INVERSE FLOATER: Mortgage-backed bond, usually part of a CMO, bearing an
interest rate that moves inversely with a specified index.
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<PAGE> 347
LEVERAGED COLI: A fixed premium life insurance policy owned by a company
or a trust sponsored by a company. This general account policy provides cash
flow flexibility and optimizes certain tax advantages for a company or trust by
allowing it to borrow the policy cash value and receive certain interest
deductions on the policy loans.
MBS: An investment grade security backed by a pool of mortgages or trust
deeds.
MODIFIED GUARANTEED LIFE INSURANCE: Certain blocks of life insurance
policies, which have provisions protecting the Company from disintermediation
risk, assumed by the Company in connection with the rehabilitation of certain
insurance companies.
MORBIDITY: The relative incidence of disability or sickness due to disease
or physical impairment.
MORTALITY: The relative incidence of death.
MVA: The market value adjustment feature in the Company's fixed annuity
products that adjusts the surrender value of a contract in the event of
surrender prior to the end of the contract period to protect the Company against
losses due to higher interest rates at the time of surrender.
NEW ANNUALIZED WEIGHTED PREMIUM: An internal measure the Company developed
to measure new sales on an equivalent basis period-to-period and
product-to-product. For example, the premium for a new single premium life
insurance policy sold is divided by ten.
NON-GUARANTEED SEPARATE ACCOUNT: Assets held in an insurer's separate
account as to which the insurer does not guarantee any minimum return to the
policyholder. Rather, any investment income and net realized capital gains and
losses with respect to these assets accrue directly to the policyholder.
PAC: A CMO security, also known as a planned amortization class security,
which amortizes with a predetermined sinking fund as long as prepayments on the
underlying collateral remain within a broad range of speeds, providing the
holder with an enhanced degree of cash flow certainty.
PERSISTENCY: The rate, expressed as a percentage of the number of policies
remaining in force over the previous year, at which insurance policies or
annuity contracts remain in force.
POLICY: A life or disability or other insurance policy or annuity contract
issued by the Company's insurance subsidiaries.
PREMIUMS: The amount that a policy owner is charged, reflecting the
expectation of profit, loss or risk. The insurance company assumes certain risks
of the insured (e.g., mortality, morbidity) in exchange for a premium payment.
Premiums are calculated utilizing actuarial models and assumptions.
PREMIUM EQUIVALENTS: Claims and administration fees on self-funded
disability business.
PRINCIPAL-ONLY SECURITIES: Securities representing only the principal
repayment obligations of CMOs or MBS based on an underlying pool of mortgages.
The principal repayment obligations are "stripped" from the interest payments
and can represent the principal from an entire pool of mortgages or can be
tranches within a CMO.
REINSURANCE: The practice whereby one party (the reinsurer or assuming
company), in consideration of a premium paid to such party, agrees to indemnify
another party, called the ceding company. Reinsurance provides a primary insurer
with three major benefits: it reduces net liability on individual risks; it
helps to protect against losses; and it provides a primary insurer with
additional underwriting capacity in that the primary insurer can accept larger
risks and can expand the volume of business it writes with lower amounts of
capital.
RESERVES: Liabilities established by insurers that generally represent the
estimated discounted present value of the net cost of claims, payments or
contract liabilities and the related expenses that the insurer will ultimately
be required to pay in respect of insurance or annuities it has written.
SEPARATE ACCOUNTS: Investment accounts maintained by an insurer to which
funds have been allocated for certain policies under provisions of relevant
state insurance law. The investments in
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<PAGE> 348
each separate account are maintained separately from those in other separate
accounts and the general account.
SEQUENTIAL-PAY SECURITIES: Bonds, also known as sequentials, that start to
pay principal when the principal and interest of classes with an earlier
priority have been fully repaid.
SINGLE PREMIUM VARIABLE LIFE INSURANCE: Investment-oriented life insurance
policy structured similarly to variable life insurance, except that a single
premium payment is made at the initiation of the policy rather than fixed
premiums throughout the term of the policy.
STATUTORY ACCOUNTING PRACTICES: Accounting practices prescribed or
permitted by an insurer's domiciliary state insurance regulatory authorities for
purposes of financial reporting to regulators. Statutory accounting practices
emphasize solvency rather than operating results that match revenues and
expenses during an accounting period.
STATUTORY ASSETS: Assets determined in accordance with statutory
accounting principles. This valuation methodology is generally considered very
conservative, but is deemed most appropriate by regulators in evaluating
solvency.
STATUTORY CAPITAL AND SURPLUS: The excess of statutory admitted assets
over statutory liabilities as shown on an insurer's statutory financial
statements.
STATUTORY RESERVE: Amounts established by state insurance law that an
insurer must have available to provide for future obligations with respect to
all policies. Statutory reserves are liabilities on the balance sheet of
financial statements prepared in conformity with statutory accounting practices.
STRUCTURED SETTLEMENT CONTRACTS: Contracts providing for periodic payments
to an injured person for a determinable number of years or for life, typically
in settlement of a claim under a property-casualty insurance policy.
SURRENDER CHARGE: The fee charged to a policy owner when a life insurance
policy or annuity is surrendered for its cash value prior to the end of the
surrender charge period. Such charge is intended to recover all or a portion of
policy acquisition costs and act as a deterrent to early surrender. Surrender
charges typically decrease over a set period of time as a percentage of the
account value in relation to the anticipated amortization of the deferred policy
acquisition costs.
TERM LIFE INSURANCE: Life insurance protection during a certain number of
years but expiring without policy cash value if the insured survives the stated
period.
THIRD-PARTY ADMINISTRATOR: An entity that processes insurance or
self-funded claims for, and/or provides administrative services to, companies or
associations that have purchased insurance coverage, including stop loss
insurance, for a fee.
UNDERWRITING: The process of examining, accepting or rejecting insurance
risks, and classifying those accepted, in order to charge an appropriate premium
for each accepted risk. The underwriter is expected to select business that will
produce an average risk of loss no greater than that anticipated for the class
of business. In the life insurance industry, underwriter may also mean an agent
or other field representative who is referred to as a "field underwriter".
UNIVERSAL LIFE INSURANCE: A form of life insurance where an insurance
account is maintained for each insurance policy. Premiums, net of specified
expenses, are credited to the account, as is interest, generally at a rate
determined from time to time by the insurer. Specific charges are made against
the account for the cost of insurance protection and for the insurer's expenses.
The universal life form allows considerable flexibility as to the amount and
timing of premium payments and for the level of death benefits provided.
VARIABLE ANNUITIES: Annuities in which premium payments are used to
purchase accumulation units. The value of a unit fluctuates in accordance with
the investment experience of a separate account; variable annuity contracts
typically include a general account guaranteed interest investment option. At
the time of the payment of benefits to the annuitant, the annuitant may
generally elect from a number of payment options that provide either fixed or
variable benefit payments.
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<PAGE> 349
VARIABLE COLI: A separate account COLI policy where the benefits payable
upon surrender of the policy or the death of certain of the policyholder's
employees vary to reflect the investment experience of the separate account
supporting such policy.
VARIABLE LIFE INSURANCE: Investment-oriented life insurance policy that
offers fixed premiums and a minimum death benefit and provides a return linked
to an underlying portfolio of securities that may be either in the general or
separate account of the insurer. The portfolio typically is a group of mutual
funds established by the insurer as a separate account, with the policyholder
given investment discretion in choosing among the investment alternatives
provided. In general, the better the total return on the investment portfolio,
the higher the death benefit or account value of the variable life policy.
WHOLE LIFE INSURANCE: Permanent life insurance offering guaranteed death
benefits and guaranteed cash values.
YIELD CURVE: A spectrum of measures that compares the interest rate yields
on securities of the same credit quality but with varying maturities ranging
from the shortest to the longest available.
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<PAGE> 350
=======================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information....................... 2
Prospectus Summary.......................... 3
Risk Factors................................ 14
Company Financing Plan...................... 24
Capitalization.............................. 25
Use of Proceeds............................. 26
Dividend Policy............................. 26
Dilution.................................... 27
Selected Consolidated Financial Data........ 28
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................ 32
Business.................................... 57
Management.................................. 92
Security Ownership of Management............ 114
Certain Relationships and Transactions...... 115
Shares Eligible for Future Sale............. 123
Description of Capital Stock................ 124
Certain Provisions of the Certificate of
Incorporation and By-Laws of the Company.. 127
Validity of Class A Common Stock............ 130
Experts..................................... 130
Certain United States Federal Tax
Consequences to Non-United States Holders
of Class A Common Stock................... 131
Index to Consolidated Financial
Statements................................ F-1
Underwriting................................ U-1
Glossary of Selected Insurance and Other
Terms..................................... G-1
</TABLE>
------------------
THROUGH AND INCLUDING JUNE 15, 1997 (THE 25TH DAY AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE CLASS A COMMON STOCK,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
=======================================================
=======================================================
23,000,000 SHARES
HARTFORD LIFE, INC.
CLASS A COMMON STOCK
(PAR VALUE $.01 PER SHARE)
------------------
PROSPECTUS
------------------
GOLDMAN, SACHS & CO.
DEAN WITTER REYNOLDS INC.
MERRILL LYNCH & CO.
MORGAN STANLEY & CO.
INCORPORATED
SMITH BARNEY INC.
REPRESENTATIVES OF THE UNDERWRITERS
=======================================================
