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FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission file number 1-12749
HARTFORD LIFE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1470915
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
200 HOPMEADOW STREET, SIMSBURY, CONNECTICUT 06089
(Address of principal executive offices)
(860) 843-7716
(Registrant's telephone number, including area code)
Securities registered pursuant to section 12(b) of the Act: the following, which
is registered on the New York Stock Exchange, Inc.:
Class A Common Stock, par value $0.01 per share
Securities registered pursuant to Section 12 (g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of February 27, 1998, there were outstanding 25,990,382 shares of Class A
Common Stock, $0.01 par value per share, and 114,000,000 of Class B Common
Stock, $0.01 per share, of the registrant. The aggregate market value of the
shares of the registrant's common equity held by non-affiliates of the
registrant was $1,113,923,187 based on the closing price of $43.06 per share of
the Class A Common Stock on the New York Stock Exchange on February 27, 1998.
Documents Incorporated by Reference:
Portions of the Registrant's definitive proxy statement for its 1998 annual
meeting of shareholders are incorporated by reference in Part III of this Form
10-K.
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[HARTFORD LIFE HARTFORD LIFE, INC. AND ITS SUBSIDIARIES ("HARTFORD
ARTWORK (ELK)] LIFE") IS A LEADING INSURANCE AND FINANCIAL SERVICES
ORGANIZATION PROVIDING PRE-RETIREMENT SAVINGS, ESTATE
PLANNING, EMPLOYEE BENEFITS AND MUTUAL FUND PRODUCTS.
A MAJORITY OWNED SUBSIDIARY OF THE HARTFORD FINANCIAL
SERVICES GROUP, INC., HARTFORD LIFE IS THE NATION'S
LARGEST WRITER OF INDIVIDUAL ANNUITIES AND A TOP
PROVIDER OF BOTH INDIVIDUAL LIFE INSURANCE AND
EMPLOYEE BENEFITS.
CONTENTS
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ITEM DESCRIPTION PAGE
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PART I 1 Business of Hartford Life 2
2 Properties 11
3 Legal Proceedings 11
4 Submission of Matters to a Vote of Security Holders 11
PART II 5 Market for Hartford Life's Common Stock and Related
Stockholder Matters 11
6 Selected Financial Data 12
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
7A Quantitative and Qualitative Disclosures About
Market Risk 32
8 Financial Statements and Supplementary Data 32
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 32
PART III 10 Directors and Executive Officers of Hartford Life 32
11 Executive Compensation 32
12 Security Ownership of Certain Beneficial Owners and
Management 33
13 Certain Relationships and Related Transactions 33
PART IV 14 Exhibits, Financial Statements, Schedules and Reports
on Form 8-K 33
Signatures II-1
Exhibits Index II-2
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PART I
ITEM 1. BUSINESS OF HARTFORD LIFE
(DOLLAR AMOUNTS IN MILLIONS EXCEPT FOR SHARE DATA UNLESS OTHERWISE STATED)
GENERAL
Hartford Life, Inc. and its subsidiaries ("Hartford Life" or the "Company"), an
indirect subsidiary of The Hartford Financial Services Group, Inc. ("The
Hartford"), is headquartered in Simsbury, Connecticut, and is a leading
insurance and financial services company. Hartford Life provides (i) annuity
products, such as individual variable annuities and fixed market value adjusted
("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 sales for the year ended December 31, 1997, the
sixth largest consolidated life insurance company based on statutory assets as
of December 31, 1996, and the second largest writer of group long-term
disability insurance based on premiums written for the nine months ended
September 30, 1997. The Company's strong position in each of its core businesses
provides an opportunity to increase the sale of Hartford Life's products and
services as individuals increasingly save and plan for retirement, protect their
families against disability or death and prepare their estates for an efficient
transfer of wealth between generations.
The Company strives to maintain and enhance its position as a market leader
within the financial services industry and to maximize shareholder value. The
Company has pursued a strategy of 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, one of the most
recognized symbols in the financial services industry. In the past year, the
Company's total assets increased 26% to $101 billion and stockholders' equity
was $2.1 billion as of December 31, 1997. In addition, Hartford Life generated
$4.7 billion in revenues and $306 in net income in 1997.
Distribution
Hartford Life utilizes a multiple channel distribution network which provides a
distinct competitive advantage in selling products and services to a broad
cross-section of customers throughout varying economic and market cycles. In
particular, the Company has developed an extensive network of banks and
broker-dealers, which is one of the largest in the industry, including over
1,350 national and regional broker-dealers and approximately 450 banks. This
broad network has enabled the Company to introduce new products and services in
an effective manner and allows the Company significant opportunity to access its
customer base. Hartford Life sells fixed MVA annuities, variable annuities,
mutual funds, single premium variable life insurance, and retirement plan
services through its broker-dealer and bank distribution systems.
Products
Hartford Life provides its customers an innovative and diverse mix of products
and services directed at serving people's needs throughout the different stages
of their lives and during varying economic cycles. The Company offers a variety
of variable and fixed MVA annuity products with funds managed both internally
and by several outside money managers including Wellington Management Co., LLP
("Wellington") and Putnam Financial Services, Inc. ("Putnam"). The Company
regularly introduces new and innovative products and services to the market. For
example, Hartford Life was the leader in developing and marketing 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 was also a
leader in the introduction of a "managed disability" approach to the group
disability insurance market, which focuses on early claimant intervention in an
effort to facilitate a claimant's return to work and to contain costs.
Customer Service, Technology and Economies of Scale
Hartford Life has achieved advantageous economies of scale and operating
efficiencies due to its growth, attention to expense management and commitment
to customer service and technology. These advantages allow the Company to
competitively price its products for its distribution network and policyholders.
The Company has been able to reduce its individual annuity operating expenses as
a percentage of total individual annuity account value to 25 basis points in
1997 from 28 basis points in 1996 and 31 basis points in 1995. In addition, the
Company utilizes computer technology to enhance communications within the
Company and throughout its distribution network in order to improve the
Company's efficiency in marketing, selling, and servicing its products and as a
result provides high-quality customer service. The Company was recently awarded,
for the second consecutive year, one of the six Quality Tested Service Seals
given by DALBAR Inc., a recognized independent research organization. This award
was also given to one of the Company's strategic partners, Putnam, for the
Putnam Capital Manager Variable Annuity, which is also
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administered through Hartford Life. The DALBAR award is given in recognition of
those organizations who achieve the highest tier of customer service in the
variable annuity industry.
Risk Management
Hartford Life's product designs, prudent underwriting standards, and risk
management techniques protect it against disintermediation risk and greater than
expected mortality and morbidity. As of December 31, 1997, the Company minimized
its exposure to risks associated with early surrender through liabilities which
were non-guaranteed, supported by policy loans, possessed market value
adjustments or surrender charges, or contained non-surrenderability provisions.
As a result, 99% of the Company's insurance liabilities were protected and 97%
of the Company's individual annuity account value was subject to surrender
charges. The Company also enforces disciplined claims management to protect
against greater than expected mortality and morbidity experience and regularly
monitors its underwriting, mortality and morbidity assumptions to determine if
experience remains consistent with assumptions and pricing.
Brand Name and Financial Strength
The Hartford Stag Logo is one of the most recognized symbols in the insurance
and financial services industry. This brand recognition, coupled with a strong
balance sheet and sound ratings, has enabled the Company to establish the
reputation and financial strength necessary to maintain distribution
relationships, enhance strategic alliances, and generate new customer sales.
Pursuant to a Master Intercompany Agreement with The Hartford, the Company has
been granted a perpetual non-exclusive license to use the Stag Logo in
connection with the sale of Hartford Life's products and services. However, in
the event that The Hartford reduces its beneficial ownership below 50% of the
combined voting power of the Company's then outstanding securities, the license
may be revoked upon the later of the fifth anniversary of the date of
consummation of the Company's Initial Public Offering ("IPO") of its Class A
Common Stock or one year after receipt by the Company of written notice of The
Hartford's intention to revoke the license.
BUSINESS SEGMENTS
Hartford Life operates in three principal business segments: Annuity, Individual
Life Insurance and Employee Benefits. The Company also maintains a Guaranteed
Investment Contracts segment, which is primarily comprised of guaranteed rate
contract business written prior to 1995 ("Closed Book GRC") and a Corporate
Operation through which it reports net investment income on assets representing
surplus not assigned to any of its business segments and certain other revenues
and expenses not specifically allocable to any of its business segments. The
following is a description of each segment, including a discussion of principal
products, methods of distribution, and competitive environments. Additional
information on Hartford Life's business segments may be found in the
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") on pages 13 to 18 and Note 17 of Notes to Consolidated
Financial Statements.
ANNUITY
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 a variety of products within this segment, reflecting the
diverse nature of the market. These products include fixed and variable
annuities, certain deferred compensation and retirement plan services for
municipal governments and corporations, structured settlements, mutual funds,
investment management services and certain other financial products. The Annuity
segment distributes its products primarily through broker-dealers and financial
institutions for individual sales, and primarily through internal personnel of
the Company for institutional sales. Growth in the Company's assets over the
last several years has been driven primarily by its sales of variable annuities.
New sales and market appreciation, net of surrenders, have increased the Annuity
segment account value to $67.0 billion at December 31, 1997 from $50.8 billion
at December 31, 1996. The Annuity segment generated revenues of $1.3 billion and
$1.0 billion and net income of $202 and $145 in 1997 and 1996, respectively.
Individual Annuity
The Company is the market leader in the annuity industry and was the number one
writer of individual variable annuities for the years ended December 31, 1997
and 1996, with total individual annuity sales of $10.2 billion and $9.8 billion,
respectively. The Company sells both variable and fixed annuity products, with
single and flexible premium payment options, through a wide distribution network
of broker-dealers and other financial institutions. Individual variable annuity
sales were $9.7 billion and $9.3 billion in 1997 and 1996, respectively, and the
Company held an 11% market share as of December 31, 1997, according to
information compiled by Variable Annuity Research and Data Service ("VARDS"). In
each of the last two years, the Company has sold approximately 66% of its
individual annuities through broker-dealers and 34% of its individual annuities
through banks.
Individual annuity account value totaled $56.3 billion, with individual variable
annuity account value representing $46.9 billion which has grown significantly
from $9.7 billion at December 31, 1993. Approximately 92% of the individual
variable annuity
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account value was held in non-guaranteed separate accounts at December 31, 1997.
The Company earns fees for managing annuity assets (based on its account value)
and maintaining policyholder accounts, which totaled over 1 million as of
December 31, 1997. 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 the Company has achieved such earnings in each of the past five years.
With respect to 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. These products offer the policyholder a variety of equity and fixed
income options. Deposits of varying amounts may be made at regular or irregular
intervals and the value of these assets fluctuates in accordance with the
investment performance of the funds selected by the policyholder. To encourage
persistency, the Company's individual 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 growth of the Company's individual variable annuity
account value has been considerable for the past several years, due to strong
sales, market appreciation and low levels of surrenders.
The assets underlying the Company's variable annuities are managed both
internally and by outside money managers, while the Company provides all policy
administration services. The Company utilizes a select group of money managers,
such as Wellington, Putnam, and Dean Witter InterCapital, Inc., who have an
interest in the continued growth in sales of the Company's products and greatly
enhance the marketability of its annuities and the strength of its product
offerings. Two of the industry's four leading variable annuities, The Director
and Putnam Capital Manager Variable Annuity (based on sales for the year ended
1997) are sponsored by Hartford Life and are managed in part by Wellington and
Putnam, respectively.
Fixed MVA annuities are fixed rate annuity contracts which guarantee a specific
sum of money will be paid in the future, either as a lump sum or as monthly
income. In the event that a policyholder surrenders a policy prior to the end of
the guarantee period, the MVA feature increases or decreases the cash surrender
value of the annuity in respect of any interest rate decreases or increases,
respectively, thereby protecting the Company from losses due to higher interest
rates at the time of surrender. The amount of payment will not fluctuate due to
adverse changes in the Company's investment return, mortality experience or
expenses. The Company's primary fixed MVA annuities have terms of one, three,
five, six, seven, eight, nine, or ten years with an average term of
approximately seven years. Account value of fixed MVA annuities have remained
stable at approximately $9.0 billion at December 31, 1997 and 1996.
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. The other funds are managed by Hartford
Investment Management Company, a wholly owned subsidiary of The Hartford. The
Company has entered into agreements with over 400 financial services firms to
distribute these mutual funds. During 1997, the Company had mutual fund sales of
$869 bringing total mutual fund assets to $972 as of December 31, 1997. The fund
family was recognized as the fastest growing, non-proprietary mutual fund family
in 1997, according to Strategic Insight, an industry research association. In
addition, in January 1998, the fund family was also recognized as the fastest
non-proprietary mutual fund family to reach $1.0 billion in assets when it
reached that level in less than eighteen months of existence.
Group Annuity
The Company is among the top 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"). The Company also provides products and services to plans created
under Section 401(k) and 403(b) of the Internal Revenue Code.
The Company presently administers approximately 900 Section 457 plans for
governmental entities. Traditionally, Section 457 plans 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 Section
457 plans. Generally, the Company manages the fixed income plans and certain
other outside money managers act as advisors to the equity funds offered in
Section 457 plans administered by the Company.
The Company also sells structured settlement contracts, which provide for
periodic payments to an injured person or survivor for a generally determinable
number of years typically in settlement of a claim under a liability policy in
lieu of a lump sum settlement. The Company's structured settlements are sold
through The Hartford's property-casualty insurance operations as well as
specialty brokers. The Company also markets other annuity contracts for special
purposes such as the funding of terminated defined benefit pension plans.
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Total sales in the Group Annuity area were $820 in 1997, and were primarily
responsible for the increase in account value to $10.7 billion as of December
31, 1997. Sales of Section 457 products were $151 in 1997 increasing Section 457
account value to $5.7 billion as of December 31, 1997. In addition, sales of
structured settlements and terminal funding products were $287 and $239 in 1997,
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 in an effort to achieve the broadest distribution possible while
maintaining a variable cost structure. The success of the Company's marketing
and distribution system depends on its product offerings, fund performance,
successful utilization of external wholesaling organizations, relationships with
broker-dealers and banks (through which the sale of the Company's individual
annuities to customers is consummated) and quality of customer service.
The Company maintains a network of approximately 1,350 broker-dealers and
approximately 450 banks (including 23 of the 25 largest banks in the United
States) through the use of wholesaling organizations and strategic alliances.
The agreements covering 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 also uses this distribution network to sell products other than
individual annuities, including single premium variable life products, Section
401(k) plan services and mutual funds. The Company also 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.
Competition
The Annuity segment competes with numerous other insurance companies as well as
certain banks, securities brokerage firms, investments advisors and other
financial intermediaries marketing annuities, mutual funds and other
retirement-oriented products. Some of these companies have greater financial
strength and resources than Hartford Life. In particular, national banks may
become more significant competitors in the future for insurers who sell
annuities as a result of recent court decisions and regulatory actions. Product
sales are affected by competitive factors such as investment performance
ratings, product design, visibility in the marketplace, financial strength
ratings, distribution capabilities, levels of charges and credited rates,
reputation, and customer service. Also, since the Company does not have a career
agency force, competition also exists for distributors of its products. This
competition is primarily based on the variety and quality of products offered,
compensation, services provided to and relationships developed with
broker-dealers and other distributors.
INDIVIDUAL LIFE INSURANCE
The Individual Life Insurance segment sells a variety of products and the
Company's in force business primarily consists of variable life, universal life,
interest-sensitive whole life, and term life insurance products. The Company's
in force block also includes whole life, which was sold in prior years, and
modified guaranteed whole life, which was acquired from Fidelity Bankers Life
Insurance Company in 1993 and Pacific Standard Life Insurance Company in 1994.
In this segment, the Company focuses particularly on the high-end estate and
business planning markets and is among the top five writers of individual life
insurance based on average face value per policy. In addition, the Company is
among the top five writers of individual variable life for the nine months ended
September 30, 1997, based on the Tillinghast Value Variable Life Survey. Life
insurance in force increased to $55.4 billion from $52.1 billion at December 31,
1997 and 1996, respectively. New annualized weighted premiums were $140 in 1997,
an increase of $10, or 8% over prior year. Growth in sales was primarily
attributable to the Company's variable life product, which increased $23, or
31%, to $98 in 1997. The Individual Life segment generated revenues of $510, an
increase of $38, or 8%, over prior year and net income of $56 in 1997 as
compared to $44 in 1996. In addition, account values in this segment grew $555,
or 17%, to $3.8 billion as of December 31, 1997 due to strong sales of the
variable life product.
In 1997, variable life products represented 70% of new annualized weighted
premium for this segment. Variable life insurance provides a return linked to an
underlying portfolio and the Company allows policyholders to determine their
desired asset mix among a variety of underlying mutual funds. As the return on
the investment portfolio increases or decreases, as the case may be, the death
benefit or surrender value of the variable life policy may increase or decrease.
The Company's single premium variable life product provides a death benefit to
the policy beneficiary based on a single premium deposit. The Company's
second-to-die products are distinguished from other products in that two lives
are insured rather than one, and the policy proceeds are paid upon the second
death of the two insureds. Second-to-die policies are used in individual estate
planning, often to fund estate taxes for a married couple.
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Universal life and interest-sensitive whole life insurance coverages provide
life insurance with adjustable rates of return based on current interest rates.
The Company offers both flexible and fixed premium policies and provides
policyholders with flexibility in the available coverage, the timing and amount
of premium payments and the amount of the death benefit, provided there are
sufficient policy funds to cover all policy charges for the coming period.
Universal life and interest-sensitive whole life represented 24% of new
annualized premium sales of individual life insurance in 1997. The Company also
sells universal life insurance policies with a second-to-die feature similar to
that of the variable life insurance product offered.
The Company also offers individual term life insurance, but has had a limited
presence in that market. During 1997, the Company developed a new term insurance
product to sell through its bank and broker-dealer distribution channels.
Marketing and Distribution
The primary Individual Life Insurance distribution system is focused on products
designed for high-end estate and business planning. 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 an extensive
network of licensed life insurance agents. High-end sales also occur, in certain
regions, through a group of independent life insurance marketing organizations,
each of which maintains a separate marketing agreement with the Company. In
addition, other distribution relationships exist to provide incremental sales of
life insurance products for both estate planning and basic protection against
lost income from death. Furthermore, sales of single premium variable life are
generated through the individual annuity distribution system. During 1997, 61%
of total sales were produced by the sales office system, 11% resulted from the
individual annuity distribution system with the remaining 28% of sales generated
by other life insurance distribution relationships.
Competition
The Individual Life Insurance segment competes with over 2,000 life insurance
companies in the United States, as well as other financial intermediaries
marketing insurance products. Competitive factors related to this segment are
primarily the breadth and quality of life insurance products offered,
competitiveness of pricing, relationships with third-party distributors and the
quality of underwriting and customer service.
EMPLOYEE BENEFITS
The Employee Benefits segment consists of two areas of operation: (a) Group
Insurance and (b) 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
accident and other special risk coverages to employers and associations. The
Company also offers disability underwriting, administration, claims processing
services and reinsurance to other insurers and self-funded employer plans. The
Specialty Insurance Operations unit consists of the Company's corporate owned
life insurance ("COLI") business and international operations in South America.
Group Insurance
The Company provides life, disability, and other group insurance coverage to
large and small employers across the United States. According to the latest
results published by the Life Insurance Marketing and Research Association
("LIMRA"), the Company is the second largest provider of group disability
insurance for the nine months ended September 30, 1997. The Company sells its
product line to employers through brokers and consultants and to multiple
employer groups through its relationships with trade associations. In the
disability market, the Company focuses on strong underwriting and claims
management to derive a competitive advantage. In the group insurance market, all
policies sold are term insurance, generally with one- or two-year rate
guarantees. This allows the Company to make adjustments in rate or terms of its
policies in order to minimize the adverse effect of various market trends. The
Group Insurance operation generated premiums of $1.5 billion in 1997 of which
$653 was attributable to group disability coverage and $504 was attributable to
group life coverage. Included in the 1997 results are group disability and group
life premiums of $88 and $16, respectively, related to the acquisition of a
block of business from the United States branch of Confederation Life Insurance
Company. At December 31, 1997, the Company's consolidated balance sheet included
disability reserves of $1.5 billion and group life reserves of $451. Group
Insurance net income increased $13 to $58 in 1997 as compared to 1996.
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. The Company is continuing to expand its
operations in the "small" and "medium case" group markets emphasizing name
recognition and reputation as well as the Company's managed disability approach
to claims and administration. The Company's efforts in the group disability
market focus on early intervention, return-to-work programs, reduction of
long-term disability claims,
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and successful rehabilitation. The Company also works with disability claimants
to improve the receipt rate of Social Security offsets (i.e. reducing payment of
benefits by the amount of Social Security payments received).
The Company has concentrated on a managed disability approach, which emphasizes
early claimant intervention in an effort to facilitate a disabled claimant's
return to work and thereby contain costs. This approach, coupled with an
individualized approach to claim servicing, and an incentive to contain costs,
leads to an overall reduction in the cost of disability coverage for employers.
The Company's short-term disability benefit plans provide a weekly benefit
amount (typically 60% to 70% of the employee's earned income up to a specified
maximum benefit) to insured employees when they are unable to work due to an
accident or illness. Long-term disability insurance provides a monthly benefit
for those periods of time not covered by a short-term disability benefits plan
when insured employees are unable to work due to disability. Employees may
receive total or partial disability benefits. Most of these policies usually
begin providing benefits following a 90- or 180-day waiting period and continue
providing benefits until the employee reaches age 65-70. Long-term disability
benefits are paid monthly and are limited to a portion, generally 50-70%, of the
employee's earned income up to a specified maximum benefit.
Group term life insurance provides term coverage to employees and their
dependents for a specified period and has no accumulation of cash values. The
Company offers innovative options for its basic group life insurance coverage,
including portability of coverage and a living benefit option, whereby
terminally ill policyholders can receive death benefits prior to their death.
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 Company is a leader in the COLI market, which is life insurance purchased by
a company on the lives of its employees, with the company named as the
beneficiary under the policy. Until the Health Insurance Portability Act of 1996
("HIPA Act of 1996"), the Company sold two principal types of COLI, leveraged
and variable products. Leveraged COLI is a fixed premium life insurance policy
owned by a company or a trust sponsored by a company. The HIPA Act of 1996
phases out the deductibility of interest on policy loans under COLI by the end
of 1998, thus eliminating all future sales of leveraged COLI. 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. During 1997, the
Company recorded $3.6 billion of deposits of new variable COLI business,
increasing total account value to $12.3 billion at December 31, 1997 compared to
$8.5 billion at December 31, 1996. The Specialty Insurance Operation generated
revenues of $944 and $1.4 billion and net income of $27 and $33 in 1997 and
1996, respectively. The decline in revenues is primarily related to the impact
of the HIPA Act of 1996 on leveraged COLI sales and the decline in net income is
due to a $6 operating loss related to the Company's international start-up
operations.
In addition, the Company acquired the leveraged COLI business of Mutual Benefit
Life Insurance Company ("MBL") in 1992, and currently cedes approximately $5.0
billion of leveraged COLI business to MBL Assurance Company, the
successor-in-interest to MBL ("MBLAC"). Pursuant to the original reinsurance
agreements, MBLAC is required to secure 100% of the coinsurance liabilities in
certain trust accounts held for the benefit of the Company.
In 1994, the Company initiated an international strategy to expand its business
opportunities into certain emerging insurance markets. As part of that strategy,
the Company invested in ITT Hartford Sudamericana Holding, S.A. ("Suda"), with a
group of Argentine individuals with insurance industry experience. The Company
initially owned 55% of Suda and increased its ownership to 60% in 1995. Suda
operates several subsidiaries devoted to life insurance, retirement annuities
and pensions. In addition, Suda entered into a joint venture with Banco de
Galicia y Buenos Aires, S.A. to operate an insurance business in a number of
countries throughout South America. In November of 1997, as part of a financial
and managerial restructuring, the Company purchased the remaining 40% interest
in Suda from its local shareholders. The Company has also formed two Brazilian
joint ventures with Itaboria 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. As of December 31,
1997, the Company had invested approximately $100 of start-up capital in all its
existing international operations.
Competition
Competitive factors in the group and specialty insurance markets primarily are
the variety and quality of products offered, the Company's relationships with
its third-party distributors and the quality of customer service. The Employee
Benefits segment competes with numerous other insurance companies and other
financial intermediaries marketing insurance products.
7
<PAGE> 9
GUARANTEED INVESTMENT CONTRACTS
The Guaranteed Investment Contracts segment consists of guaranteed rate contract
("GRC") business that is supported by assets held in either the Company's
general account or a guaranteed separate account. Historically, a significant
majority of these contracts were sold as general account contracts with fixed
rate 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.
The Company internally segregates the GRC segment into distinct blocks of
business which are separately managed. The Company's GRC business written prior
to 1995 is referred to as Closed Book GRC. Management expects no material income
or loss from the Guaranteed Investment Contracts segment in the future.
OTHER MATTERS
ORGANIZATION
Hartford Life, Inc., a Delaware corporation, was formed in December, 1996 as a
direct subsidiary of Hartford Accident and Indemnity Company ("HA&I") and an
indirect subsidiary of The Hartford. On December 19, 1995, ITT Industries, Inc.
(formerly ITT Corporation) ("ITT") distributed all of its outstanding shares of
The Hartford to ITT shareholders of record in an action known herein as the
"Distribution". As a result of the Distribution, The Hartford became an
independent, publicly traded company. On February 10, 1997, Hartford Life filed
a registration statement, as amended, with the Securities and Exchange
Commission, relating to the IPO. Pursuant to the IPO on May 22, 1997, the
Company sold to the public 26 million shares representing approximately 18.6% of
the equity ownership in the Company. Additional information regarding the IPO
may be found in Note 3 of Notes to Consolidated Financial Statements and within
the "Initial Public Offering" discussion within the Capital Resources and
Liquidity section of the MD&A.
As a holding company, Hartford Life, Inc. has no significant business operations
of its own and, therefore, relies on the dividends from its insurance company
subsidiaries, which are primarily domiciled in Connecticut, as the principal
source of cash to meet its obligations (primarily debt obligations). Additional
information regarding the cash flow and liquidity needs of Hartford Life, Inc.
may be found in the Capital Resources and Liquidity section of the MD&A.
LIFE RESERVES
In accordance with applicable insurance regulations under which Hartford Life
operates, life insurance subsidiaries of the Company establish and carry as
liabilities actuarially determined reserves which are calculated to meet
Hartford Life's future obligations. Reserves for life insurance and disability
contracts are based on actuarially recognized methods using prescribed morbidity
and mortality tables in general use in the United States, which are modified to
reflect Hartford Life's actual experience when appropriate. These reserves are
computed at amounts that, with additions from premiums to be received and with
interest on such reserves compounded annually at certain assumed rates, are
expected to be sufficient to meet the Company's policy obligations at their
maturities or in the event of an insured's death. Reserves also include unearned
premiums, premium deposits, claims reported but not yet paid, claims incurred
but not reported and claims in the process of settlement. Reserves for assumed
reinsurance are computed on bases essentially comparable to direct insurance
reserves.
For Hartford Life's universal life and interest-sensitive whole life policies,
reserves are set according to premiums collected, plus interest credited, less
charges. Other fixed death benefit and individual life reserves are based on
assumed investment yield, persistency, mortality and morbidity as per commonly
used actuarial tables, expenses and margins for adverse deviations. For the
Company's group disability policies, the level of reserves is based on a variety
of factors including particular diagnoses, termination rates and benefit
payments.
The persistency of Hartford Life's annuity and other interest-sensitive life
insurance reserves is enhanced by policy restrictions on the withdrawal of
funds. Withdrawals in excess of allowable penalty-free amounts are assessed a
surrender charge during a penalty period, which is usually at least seven years.
Such surrender charge is initially a percentage of the accumulation value, which
varies by product, and generally decreases gradually during the penalty period.
Surrender charges are set at levels to protect the Company from loss on early
terminations and to reduce the likelihood of policyholders terminating their
policies during periods of increasing interest rates, thereby lengthening the
effective duration of policy liabilities and improving the Company's ability to
maintain profitability on such policies.
Hartford Life's reserves comply in all material respects with state insurance
department statutory accounting practices; however, in the Company's
consolidated financial statements, life insurance reserves are determined in
accordance with generally accepted accounting principles, which may vary from
statutory accounting practices.
8
<PAGE> 10
REGULATION AND PREMIUM RATES
Insurance companies are subject to comprehensive and detailed regulation and
supervision throughout the United States. The extent of such regulation varies,
but generally has its source in statutes which delegate regulatory, supervisory
and administrative powers to state insurance departments. Such powers relate to,
among other things, the standards of solvency which must be met and maintained;
the licensing of insurers and their agents; the nature of and limitations on
investments; premium rates; claim handling and trade practices; restrictions on
the size of risks which may be insured under a single policy; deposits of
securities for the benefit of policyholders; approval of policy forms; periodic
examinations of the affairs of companies; annual and other reports required to
be filed on the financial condition of companies or for other purposes; fixing
maximum interest rates on life insurance policy loans and minimum rates for
accumulation of surrender values; and the adequacy of reserves and other
necessary provisions for unearned premiums, unpaid claims and claim adjustment
expenses and other liabilities, both reported and unreported.
Most states have enacted legislation which regulates insurance holding company
systems such as Hartford Life. This legislation provides that each insurance
company in the system is required to register with the insurance department of
its state of domicile and furnish information concerning the operations of
companies within the holding company system which may materially affect the
operations, management or financial condition of the insurers within the system.
All transactions within a holding company system affecting insurers must be fair
and equitable. Notice to the insurance departments is required prior to the
consummation of transactions affecting the ownership or control of an insurer
and of certain material transactions between an insurer and any entity in its
holding company system. In addition, certain of such transactions cannot be
consummated without the applicable insurance department's prior approval.
RATINGS
Reference is made to the Capital Resources and Liquidity section of the MD&A
under "Ratings".
RISK-BASED CAPITAL
Reference is made to the Capital Resources and Liquidity section of the MD&A
under "Risk-Based Capital".
LEGISLATIVE INITIATIVES
Reference is made to the Regulatory Initiatives and Contingencies section of the
MD&A.
REINSURANCE
In accordance with normal industry practice, Hartford Life is involved in both
the cession and assumption of insurance with other insurance and reinsurance
companies. At December 31, 1997, the maximum amount of life insurance retained
on any one life by any of the life operations is approximately $2.5, excluding
accidental death benefits.
INVESTMENT OPERATIONS
The Company's investment operations are managed by its investment strategy group
which reports directly to senior management of the Company. Hartford Life's
investments have been separated into specific portfolios which support specific
classes of product liabilities. The investment strategy group works closely with
the product lines to develop investment guidelines, including duration targets,
asset allocation and convexity constraints, asset/liability mismatch tolerances
and return objectives, to ensure that the product line's individual risk and
return objectives are met. The Company's primary investment objective for its
general account and guaranteed separate accounts is to maximize after-tax
returns consistent with acceptable risk parameters, including the management of
the interest rate sensitivity of invested assets to that of policyholder
obligations.
For further discussion of Hartford Life's investment operations and the
Company's approach to managing investment risk, see the Investments section and
Capital Markets Risk Management section of the MD&A, as well as Note 4 to the
Consolidated Financial Statements.
EMPLOYEES
Hartford Life had approximately 4,000 employees at February 28, 1998, primarily
in the United States and Canada.
9
<PAGE> 11
EXECUTIVE OFFICERS OF HARTFORD LIFE
Information about the executive officers of Hartford Life who are also directors
and/or nominees for election as directors is set forth in Hartford Life's 1998
Proxy Statement. Listed below are the Company's executive officers:
LOWNDES A. SMITH, 58, 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 served as 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.
JOHN P. GINNETTI, 52, 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.
THOMAS M. MARRA, 39, 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 a fellow of the Society of Actuaries.
RAYMOND P. WELNICKI, 49, 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.
GREG A. BOYKO, 46, is Senior Vice President, Chief Financial Officer and
Treasurer. He joined Hartford Life in 1995 as Controller and was elected Vice
President in 1996. In November 1997, Mr. Boyko assumed responsibility for the
Company's international operations. He previously worked at ING America Life
Insurance Company where he held the position of Senior Vice President and Chief
Financial Officer. His prior experience included positions at Connecticut Mutual
Life Insurance Company ("CML"), where he progressed from Controller of CML to
Chief Financial Officer of Connecticut Mutual Insurance Services. Mr. Boyko
holds a Juris Doctor degree and is a Certified Public Accountant, Chartered Life
Underwriter and Chartered Financial Consultant. He is a member of the
Connecticut and American Bar Associations and the Connecticut Society of
Certified Public Accountants.
LYNDA GODKIN, 43, 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.
CRAIG R. RAYMOND, 36, is Vice President and Chief Actuary. Since joining
Hartford Life in 1985, Mr. Raymond has held actuarial 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.
ANN M. DE RAISMES, 47, is Vice President and Director of Human Resources. Ms. de
Raismes 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.
DAVID M. ZNAMIEROWSKI, 37, 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.
LIZABETH H. ZLATKUS, 39, is Vice President and Director of Group Life and
Disability. Ms. Zlatkus has 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 at Peat, Marwick, Mitchell & Company. She became a
Certified Public Accountant in 1982.
10
<PAGE> 12
WILLIAM A. GODFREY, 39, is Vice President and Director of Information
Technology. Mr. Godfrey joined the senior 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.
ROBERT F. NOLAN, 43, 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.
WALTER C. WELSH, 50, 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.
ITEM 2. PROPERTIES
Hartford Life occupies office space in Simsbury, Connecticut, leased from a
third party by Hartford Fire Insurance Company ("Hartford Fire"), an indirect
subsidiary of The Hartford. Expenses associated with these offices are allocated
on a direct and indirect basis to Hartford Life and its subsidiaries by Hartford
Fire.
ITEM 3. LEGAL PROCEEDINGS
Hartford Life is involved in pending and threatened litigation in the normal
course of its business in which claims for monetary and punitive damages have
been asserted. Although there can be no assurances, management, at the present
time, does not anticipate that the ultimate liability arising from such pending
or threatened litigation will have a material effect on the financial condition
or operating results of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders of Hartford Life during
the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR HARTFORD LIFE'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Hartford Life's Class A Common Stock is traded on the New York Stock Exchange
("NYSE") under the trading symbol "HLI". Hartford Accident and Indemnity
Insurance Company ("HA&I"), an indirect wholly-owned subsidiary of The
Hartford, holds all of the shares of Class B Common Stock. As such, the Class B
Common Stock is not listed on any exchange and there is no established public
trading market for it.
The following table presents high and low closing prices for the Class A Common
Stock of Hartford Life on the NYSE for the periods indicated, and the quarterly
dividends declared per share:
<TABLE>
<CAPTION>
1997 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock Price
High N/A $37.50 $41.75 $45.31
Low N/A 32.13 33.94 34.63
Dividends Declared (1) - - 0.09 0.09
- --------------------------------------------------------------------------------
</TABLE>
(1) Dividends declared exclude amounts paid to Hartford Life's parent prior to
the Company's initial public offering.
N/A - Not applicable
At February 27, 1998, there were approximately 530 shareholders of record of
Hartford Life's Class A common stock and HA&I was the only holder of Class B
common stock.
In 1998, Hartford Life expects to continue to pay quarterly dividends on its
common stock of $0.09 per share. Dividend decisions will be based on and
affected by a number of factors, including the operating results and financial
requirements of Hartford Life on a stand-alone basis and the impact of
regulatory restrictions discussed in the Liquidity Requirements section of the
MD&A.
There are also various legal limitations governing the extent to which Hartford
Life's insurance subsidiaries may extend credit, pay dividends or otherwise
provide funds to Hartford Life, Inc. as discussed in the Capital Resources and
Liquidity section of the MD&A under "Liquidity Requirements".
11
<PAGE> 13
ITEM 6. SELECTED FINANCIAL DATA
(IN MILLIONS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
General account invested assets $ 20,970 $19,830 $20,072 $18,078 $15,866
Separate account assets (1) 69,362 49,770 36,296 22,847 16,314
All other assets 10,648 10,333 9,594 9,324 7,454
-------- ------- ------- ------- -------
TOTAL ASSETS $100,980 $79,933 $65,962 $50,249 $39,634
-------- ------- ------- ------- -------
Policy liabilities $ 26,078 $26,239 $26,318 $25,208 $20,863
Separate account liabilities (1) 69,362 49,770 36,296 22,847 16,314
Allocated Advances from parent (2) -- 893 732 525 425
Debt (2) 700 -- -- -- --
All other liabilities 2,696 1,757 1,439 1,283 1,107
-------- ------- ------- ------- -------
TOTAL LIABILITIES $ 98,836 $78,659 $64,785 $49,863 $38,709
-------- ------- ------- ------- -------
STOCKHOLDERS' EQUITY (3) $ 2,144 $ 1,274 $ 1,177 $ 386 $ 925
- ------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA
Total revenues $ 4,699 $ 4,384 $ 4,090 $ 3,543 $ 2,922
Total expenses 4,393 4,360 3,940 3,392 2,792
-------- ------- ------- ------- -------
NET INCOME (4) $ 306 $ 24 $ 150 $ 151 $ 130
- ------------------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE DATA
PRO FORMA BASIC EARNINGS PER SHARE (5) $ 2.28 $ 0.19 $ -- $ -- $ --
PRO FORMA DILUTED EARNINGS PER SHARE (5) $ 2.28 $ 0.19 $ -- $ -- $ --
DIVIDENDS DECLARED PER COMMON SHARE (6) $ 0.18 $ -- $ -- $ -- $ --
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes both non-guaranteed and guaranteed separate accounts.
(2) For financial reporting purposes, the Company has treated certain amounts
previously allocated by The Hartford Financial Services Group, Inc. ("The
Hartford") to the Company's life insurance subsidiaries as Allocated Advances
from parent. Cash received in respect of Allocated Advances from parent was used
to support the growth of the life insurance subsidiaries. For further
information see the "Debt" discussion in the Capital Resources and Liquidity
section of the Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") and also see Note 7 of Notes to Consolidated
Financial Statements.
(3) Stockholders' equity beginning December 31, 1994 reflects the adoption of
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". 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
stockholders' equity.
(4) 1996 includes a $169 third quarter charge related to Closed Book GRC (see
the discussions related to Closed Book GRC in the "Guaranteed Investment
Contracts" discussion within the MD&A).
(5) In 1997, the Company adopted SFAS No. 128, "Earnings per Share". Pro forma
basic earnings per share is calculated based upon the weighted average number of
common shares outstanding during the respective periods. Pro forma diluted
earnings per share are determined on the assumption that stock options were
exercised upon issuance. For periods prior to the Company's Initial Public
Offering ("IPO") (May 22, 1997), outstanding shares are based upon 114 million
shares of Class B Common Stock owned by The Hartford plus an assumed issuance of
11 million shares of Class A Common Stock (the number of shares that, based upon
the IPO price and the 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). For the period subsequent to the closing of the IPO,
outstanding shares are based upon 114 million shares of Class B Common Stock
owned by The Hartford plus approximately 26 million shares of Class A Common
Stock owned by the public. See Note 9 of Notes to Consolidated Financial
Statements for further explanation associated with earnings per share for
periods prior to the IPO.
(6) Dividends per common share represent amounts paid subsequent to the
Company's IPO. In the third and fourth quarters of 1997, Hartford Life declared
and paid a dividend of $0.09 per share of common stock totaling $25. In 1998,
Hartford Life expects to continue paying quarterly dividends on its common stock
of $0.09 per share. The table does not include dividends paid to the parent in
periods prior to the IPO. For further explanation see the "Dividends" discussion
within the Capital Resources and Liquidity section of the MD&A.
12
<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE STATED)
MANAGEMENT'S DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES BEGINNING ON PAGE F-1.
Certain statements contained in this discussion, other than statements of
historical fact, are forward-looking statements. These statements are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 and include estimates and assumptions related to economic,
competitive, and legislative developments. These forward-looking statements are
subject to change and uncertainty which are, in many instances, beyond the
Company's control and have been made based upon management's expectations and
beliefs concerning future developments and their potential effect on Hartford
Life, Inc. and subsidiaries ("Hartford Life" or the "Company"). There can be no
assurance that future developments will be in accordance with management's
expectations or that the effect of future developments on Hartford Life will be
those anticipated by management. Actual results could differ materially from
those expected by the Company, depending on the outcome of certain factors,
including those described in the forward-looking statements.
Certain reclassifications have been made to prior year financial information to
conform to the current year presentation.
INDEX
Consolidated Results of Operations 13
Annuity 15
Individual Life Insurance 16
Employee Benefits 17
Guaranteed Investment Contracts 18
Reserves 19
Investments 19
Capital Markets Risk Management 21
Capital Resources and Liquidity 28
Regulatory Initiatives and Contingencies 31
Effect of Inflation 32
CONSOLIDATED RESULTS OF OPERATIONS
Hartford Life 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 a group and an
individual basis.
The Company derives its revenues principally from: (a) asset management fees on
separate accounts and mortality and expense fees; (b) fully insured premiums;
(c) net investment income on general account assets; and (d) certain other fees
earned by the Company. Asset management fees and mortality and expense fees are
primarily generated from separate account assets which are deposited with the
Company through the sale of variable annuity and variable life products. Premium
revenues are derived primarily from the sale of group life and group disability
insurance products. Hartford Life's operating expenses primarily consist of
interest credited to policyholders on general account liabilities, insurance
benefits provided, dividends to policyholders, costs of selling and servicing
the various products offered by the Company, and other general business
expenses. Hartford Life's profitability depends largely on the amount of assets
under management, the adequacy of product pricing and underwriting discipline,
and its ability to earn target spreads between earned investment rates on
general account assets and credited rates to customers.
OPERATING SUMMARY
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums and other considerations $3,163 $ 3,069 $ 2,643
Net investment income 1,536 1,534 1,451
Net realized capital losses -- (219) (4)
- ----------------------------------------------------------------------------------------------------
TOTAL REVENUES 4,699 4,384 4,090
------ ------- -------
Benefits, claims and claim adjustment expenses 2,671 2,727 2,395
Amortization of deferred policy acquisition costs 345 241 205
Dividends to policyholders 241 635 675
Other expenses 962 750 589
- ----------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 4,219 4,353 3,864
------ ------- -------
INCOME BEFORE INCOME TAX EXPENSE 480 31 226
Income tax expense 174 7 76
- ----------------------------------------------------------------------------------------------------
NET INCOME $ 306 $ 24 $ 150
------ ------- -------
</TABLE>
13
<PAGE> 15
Revenues increased $315, or 7%, to $4.7 billion in 1997 from $4.4 billion in
1996. Revenues were impacted by the Health Insurance Portability and
Accountability Act of 1996 ("HIPA Act of 1996"), which phases out the
deductibilty of interest expense on policy loans by the end of 1998, virtually
eliminating all new sales of leveraged corporate owned life insurance ("COLI"),
and by the Guaranteed Investment Contracts segment ("GIC"), which had a loss of
$225 in 1996, primarily related to a closed block of guaranteed rate contract
business ("Closed Book GRC"). Excluding COLI and GIC, revenues increased $490,
or 16%, to $3.5 billion in 1997 as compared to $3.0 billion 1996. This growth
was driven by premiums and other considerations related to the Annuity segment
and the Group Insurance operation of the Employee Benefits segment. Annuity
premiums and other considerations increased $230 in 1997, primarily resulting
from increased variable annuity fee income, which grew $198, or 54%, in 1997 as
compared to 1996. Average variable annuity account value increased $13.1
billion, or 49%, to $39.7 billion in 1997. This solid growth in average account
value was due to strong variable annuity sales of $9.7 billion and significant
stock market appreciation. Premium revenue related to the Group Insurance
operation of the Employee Benefits segment increased $209, or 16%, in 1997 due
to strong sales of $480, a 17% increase over 1996, and good persistency.
Revenues increased $294, or 7%, to $4.4 billion in 1996 from $4.1 billion on
1995. Excluding COLI and GIC, revenues increased $549, or 22%, to $3.0 billion
in 1996 as compared to $2.4 billion 1995. This increase was driven by increases
in premiums and other considerations, which included an increase in fees from
the Annuity segment of $216, as the separate account assets grew due to sales
growth and market appreciation, as well as increased premiums and other
considerations of $226 from the Group Insurance operation due to strong sales
and renewals.
Total benefits, claims and expenses decreased $134 in 1997 as compared to 1996.
Excluding COLI and GIC for the reasons described above, total benefits, claims
and expenses increased $391, or 15%, to $3.0 billion in 1997 as compared to $2.6
billion in 1996. Benefits, claims and claim adjustment expenses related to the
Group Insurance operation increased $161, or 14%, reflecting the growth in that
operation's group life and group disability business. Amortization of deferred
policy acquisition costs ("DPAC") increased $105 in 1997 primarily due to the
Annuity segment, which increased $76, or 44%, as a result of strong sales in
both 1997 and 1996. Also, other business expenses increased $157 in 1997 as
compared to 1996. Total benefits, claims and expenses increased $489 in 1996 as
compared to 1995. Excluding COLI and GIC, total benefits, claims and expenses
increased $508, or 24%, to $2.6 billion in 1996 as compared to $2.1 billion in
1995. This increase was related to increased benefits, claims and claim
adjustment expenses of approximately $205, $99, and $49 related to the Group
Insurance operation, the Annuity segment and the Individual Life Insurance
segment, respectively, as these blocks of business all experienced strong
growth. Also, increased prior year sales and total account value in the Annuity
segment caused an increase in amortization of DPAC of $57 in 1996 as compared to
1995.
Net income totaled $306 in 1997 as compared to $24 in 1996 and $150 in 1995. The
1996 results include a $225 net loss related to GIC, which when excluded,
results in an increase in 1997 net income of $57, or 23%, over comparable 1996
results. The improvement in earnings, excluding GIC, for both comparative
periods is primarily related to increased fee income earned on the Annuity
segment's growing block of separate account assets due to strong sales and
significant market appreciation and earnings growth in the Individual Life
Insurance segment and Group Insurance operation of the Employee Benefits
segment. Partially offsetting improved earnings in the principal segments were
increased losses of $19 in the Corporate Operation due to the increased capital
allocated to the other segments to fund their growth and higher interest expense
due to increased indebtedness in connection with the Company's Initial Public
Offering ("IPO").
Management believes that it has developed and implemented strategies to maintain
and enhance its position as a market leader within the financial services
industry, to continue the Company's asset growth, and to maximize shareholder
value. Hartford Life's strong market position in each of its primary businesses,
coupled with the growth potential management believes exists in its markets,
provides opportunities to increase sales of the Company's products and services
as individuals increasingly save and plan for retirement, protect themselves and
their families against disability or death and prepare their estates for an
efficient transfer of wealth between generations.
SEGMENT RESULTS
The Company operates in three principal segments: Annuity, Individual Life
Insurance, and Employee Benefits as well as a Guaranteed Investments Contracts
segment, which is primarily comprised of guaranteed rate contract business
written prior to 1995. The Company also maintains a Corporate Operation through
which it reports items that are not directly allocable to any of its business
segments.
Below is a summary of net income (loss) by segment.
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------
<S> <C> <C> <C>
ANNUITY $ 202 $ 145 $ 113
INDIVIDUAL LIFE INSURANCE 56 44 37
EMPLOYEE BENEFITS 85 78 67
GUARANTEED INVESTMENT
CONTRACTS -- (225) (67)
CORPORATE OPERATION (37) (18) --
- ------------------------------------------------------------------------
NET INCOME $ 306 $ 24 $ 150
- ------------------------------------------------------------------------
</TABLE>
14
<PAGE> 16
ANNUITY
OPERATING SUMMARY
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums and other considerations $ 769 $539 $323
Net investment income 502 434 397
Net realized capital gains -- -- --
- ----------------------------------------------------------------------------------------------
TOTAL REVENUES 1,271 973 720
--------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 445 416 317
Amortization of deferred policy acquisition costs 250 174 117
Dividends to policyholders -- -- --
Other expenses 262 159 118
- ----------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 957 749 552
--------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 314 224 168
Income tax expense 112 79 55
- ----------------------------------------------------------------------------------------------
NET INCOME $ 202 $145 $113
--------------------------------------------------------------------------------------
</TABLE>
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.
This segment consists of two areas of operation: Individual Annuity and Group
Annuity. The variety of products sold within this segment reflects the diverse
nature of the market. These products include, in the Individual Annuity
operation, individual variable annuities, fixed market value adjusted ("MVA")
annuities, and mutual funds; and in the Group Annuity operation, deferred
compensation and retirement plan services for municipal governments and
corporations, structured settlement contracts and other special purpose annuity
contracts, and investment management contracts. The Company was rated the number
one writer of variable annuities for 1997 with an 11% market share according to
the Variable Annuity Research and Data Service, and sold approximately $869 of
mutual funds in its first full year offering the product, resulting in total
mutual fund assets of $972 at December 31, 1997.
Revenues increased $298, or 31%, to $1.3 billion in 1997 from $1.0 billion in
1996. This increase was principally the result of a $230 increase in premiums
and other considerations, reflecting a substantial increase in aggregate fees
earned due to the segment's growing block of separate account assets. The
average separate account assets of this segment increased to $50.7 billion in
1997, from $37.2 billion in 1996 primarily due to sales of individual variable
annuities of approximately $9.7 billion in 1997, as well as significant market
appreciation. Also, Group Annuity sales were $820 in 1997, an increase of $186,
or 29%, over 1996. In addition, net investment income grew $68, or 16%, to $502
in 1997 primarily due to growth in average general account assets which
increased to $8.1 billion in 1997 from $7.2 billion in 1996 largely as a result
of growth in the general account portion of the individual variable annuity
products.
The growth in this segment in 1997 also resulted in an increase in total
benefits, claims and expenses of $208, or 28%, to $957 in 1997 from $749 in
1996. Benefits, claims and claim adjustment expenses grew $29, or 7%, in 1997
primarily related to increased interest credited on Group Annuity general
account liabilities. Amortization of DPAC related to the Individual Annuity
operation grew $82, or 52%, in 1997 as prior and current year sales remained
strong. Also, other business expenses increased $103, in 1997, as a result of
the growth in this segment.
A 33% growth in average account value in 1997, coupled with a reduction in
individual annuity operating expenses as a percentage of total individual
annuity account value to 25 basis points in 1997 from 28 basis points in 1996,
contributed to the increase in net income of $57, or 39%, to $202 from $145 in
1996.
Similar factors generated an increase in 1996, as compared with 1995, in
revenues of $253, or 35%, average general account assets of $1.0 billion, or
16%, average separate account assets of $11.1 billion, or 42%, total benefits,
claims and expenses of $197, or 36%, net income of $32, or 28%, and a reduction
in individual annuity operating expenses as a percentage of total individual
annuity account value to 28 basis points in 1996 from 31 basis points in 1995.
Management believes it has developed and implemented strategies to maintain and
enhance its position as a market leader in the financial services industry as
individuals increasingly save and plan for retirement.
15
<PAGE> 17
INDIVIDUAL LIFE INSURANCE
OPERATING SUMMARY
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums and other considerations $339 $313 $266
Net investment income 171 159 142
Net realized capital gains -- -- --
- -------------------------------------------------------------------------------------------
TOTAL REVENUES 510 472 408
------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 251 266 217
Amortization of deferred policy acquisition costs 87 63 72
Dividends to policyholders 1 1 --
Other expenses 84 74 61
- -------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 423 404 350
------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 87 68 58
Income tax expense 31 24 21
- -------------------------------------------------------------------------------------------
NET INCOME $ 56 $ 44 $ 37
------------------------------------------------------------------------------------
</TABLE>
The Individual Life Insurance segment, which focuses on the high end estate and
business planning markets, sells a variety of life insurance products, including
variable life, universal life, interest-sensitive whole life, and term life
insurance policies. The Company is among the top five writers of individual life
insurance based on average face value per policy. In addition, the Company is
among the top five writers of individual variable life for the nine months ended
September 30, 1997, based on the Tillinghast Value Variable Life Survey.
Revenues in 1997 increased $38, or 8%, to $510 from $472 in 1996. In the first
quarter of 1996, a block of business was assumed from Investors Equity Life
Insurance Company ("IEL") which increased 1996 revenues by $9. Excluding this
transaction, 1997 revenues increased $47, or 10%, as compared to 1996,
reflecting the impact of applying cost of insurance charges and variable life
fees to a larger block of business. Account values increased $555, or 17%, to
$3.8 billion in 1997 from $3.2 billion in 1996. Sales were $140 in 1997, an
increase of 8% over 1996. Variable life product sales constituted 70%, or $98,
of total 1997 sales and grew $23, or 31%, over 1996 levels.
Total benefits, claims and expenses increased $19, or 5%, to $423 in 1997 from
$404 in 1996. Total benefits, claims and expenses, excluding IEL, increased $28,
or 7%, in 1997. This increase was primarily driven by an increase in
amortization of DPAC of $24 in 1997 related to the growth in new variable life
business.
The growth in this segment's account values, particularly variable life, along
with favorable mortality experience, contributed to an increase in net income of
$12, or 27%, in 1997.
Revenues in 1996 increased $64, or 16%, to $472 from $408 in 1995. This increase
was primarily due to a $47 increase in premiums and other considerations,
reflecting an increase in cost of insurance charges and variable life fees
applied to a larger block of business as account values increased $678 to $3.2
billion in 1996 from $2.6 billion in 1995. Total benefits, claims and expenses
increased $54, or 15%, to $404 in 1996 from $350 in 1995. This increase reflects
the growth in the block of individual life insurance business and is partially
offset by favorable mortality results and the full year impact of expense
leverage due to the consolidation of the division's two individual life
operations in 1995. The combination of account value growth, operational
efficiencies, and favorable mortality experience resulted in an increase in net
income of $7, or 19%, to $44 in 1996 from $37 in 1995.
Management believes that the Company's strong market position will provide
opportunities for growth in this segment as individuals increasingly prepare
their estates for an efficient transfer of wealth between generations.
16
<PAGE> 18
EMPLOYEE BENEFITS
OPERATING SUMMARY
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums and other considerations $ 2,051 $ 2,215 $ 2,048
Net investment income 593 618 467
Net realized capital gains - - -
- -----------------------------------------------------------------------------------------
TOTAL REVENUES 2,644 2,833 2,515
----------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 1,705 1,684 1,373
Amortization of deferred policy acquisition costs 8 4 4
Dividends to policyholders 240 634 675
Other expenses 553 396 362
- -----------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 2,506 2,718 2,414
----------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 138 115 101
Income tax expense 53 37 34
- -----------------------------------------------------------------------------------------
NET INCOME $ 85 $ 78 $ 67
----------------------------------------------------------------------------------
</TABLE>
The Employee Benefits segment consists of two areas of operation: Group
Insurance and Specialty Insurance. Through Group Insurance, the Company offers
products such as group life insurance, group short-term and long-term disability
and accidental death and dismemberment. According to the latest results
published by the Life Insurance Marketing and Research Association ("LIMRA"),
the Company is the second largest provider of group disability insurance for the
nine months ended September 30, 1997. Specialty Insurance primarily consists of
the Company's COLI business and its international operations, primarily in South
America.
Revenues decreased $189 to $2.6 billion in 1997, which was primarily
attributable to the COLI business for which associated revenues decreased $380,
or 28%, to $980 from $1.4 billion in 1996. The decrease in COLI revenues is
primarily a result of the elimination of sales of leveraged COLI due to the HIPA
Act of 1996, which phases out the deductibility of interest on policy loans
under leveraged COLI by the end of 1998. Excluding COLI, this segment's revenues
increased $191, or 13%, to $1.7 billion, in 1997, as compared to $1.5 billion,
in 1996. This increase was driven by Group Insurance which had growth in
premiums and other considerations of $209, or 16%, in 1997 as compared to 1996.
The increased Group Insurance premiums were primarily attributable to group
disability business, where premiums increased $115, or 21%, in 1997 and group
life business, where premiums increased $72, or 17%, in 1997 as compared to
1996. Group Insurance sales increased $68, or 17%, to $480 in 1997 as compared
to $412 in 1996. Included in the 1997 results are group disability and group
life premiums of $88 and $16, respectively, as a result of the acquisition of a
block of business from the United States branch of Confederation Life Insurance
Company. The 1996 results include $78 of group disability premiums and $23 of
group life premiums related to the acquisition of a block of business from North
American Life Assurance Company of Toronto.
Benefits, claims and expenses decreased $212 to $2.5 billion in 1997, which
generally reflected a decrease in dividends to policyholders of $394, or 62%,
primarily due to the elimination of sales of leveraged COLI as discussed above.
Benefits, claims and expenses, excluding COLI, increased $172, or 12%, to $1.6
billion, in 1997 from $1.4 billion in 1996. The increase in benefits, claims,
and claim adjustment expenses is directly related to an increase in benefits of
$161, or 14%, due to growth in the Company's group life and group disability
business.
As a result of the factors mentioned above, and the impact of favorable
mortality and morbidity results, Group Insurance net income grew $13, or 29%, to
$58 in 1997. Within Specialty Insurance, net income related to COLI increased $1
in 1997 to $27. In addition, the results of Specialty Insurance were impacted by
a $6 operating loss arising from the Company's international operations. This
loss was primarily attributable to the Company's operations in Argentina. In
November 1997, the Company replaced the Argentine management team with a new
management team and purchased the remaining 40% interest in ITT Hartford
Sudamericana Holding, S.A. from the local shareholders. The Argentine loss was
primarily due to higher than anticipated costs and expenditures.
Revenues increased $318, or 13%, to $2.8 billion in 1996 from $2.5 billion in
1995. This increase was largely the result of (i) a $167 increase in premiums
and other considerations, reflecting a $226 increase in group insurance premiums
from strong group disability sales and renewals, partially offset by a decline
in leveraged COLI premiums as a result of the HIPA Act of 1996 and (ii) a $151
increase in net investment income, primarily due to an increase in COLI account
value related to strong sales in 1995. Total benefits, claims and expenses
increased $304, or 13%, to $2.7 billion in 1996 from $2.4 billion in 1995. This
increase generally reflected an increased block of group disability business and
an increase in the Company's COLI account value, partially offset by a $41
decrease in dividends to policyholders primarily due to the elimination of sales
of leveraged COLI as a result of the enactment of the HIPA
17
<PAGE> 19
Act of 1996. The premium growth in Group Insurance, along with favorable
mortality and morbidity experience, resulted in an increase in net income in
this segment of $11, or 16%, to $78 in 1996 from $67 in 1995.
As employers continue to offer benefit plans in order to attract and retain
valued employees, management expects that the need for group life and group
disability insurance will continue to expand and believes the Company is well
positioned to take advantage of this growth potential.
GUARANTEED INVESTMENT CONTRACTS
OPERATING SUMMARY
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums and other considerations $ 2 $ 2 $ 1
Net investment income 237 251 377
Net realized capital losses -- (219) --
- --------------------------------------------------------------------------------------------------
TOTAL REVENUES 239 34 378
-------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 232 332 453
Amortization of deferred policy acquisition costs -- 1 12
Dividends to policyholders -- -- --
Other expenses 7 47 16
- --------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 239 380 481
-------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT) -- (346) (103)
Income tax expense (benefit) -- (121) (36)
- ---------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ -- $(225) $ (67)
-------------------------------------------------------------------------------------------
</TABLE>
The GIC segment consists of guaranteed rate contract ("GRC") business that is
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 contracts 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 instead to focus its distribution efforts on other products sold
through other segments and selling general account GRC primarily as an
accommodation to customers. From 1992 to 1994, the GIC segment sold over $5
billion of GRC. In contrast, the GIC segment sold only $47 and $108 of general
account GRC in 1997 and 1996, respectively. Consistent with management's
expectations, the segment had no net income in 1997 and expects no material
income or loss from the GIC segment in the future.
Closed Book GRC results in 1996 and 1995 were negatively affected by lower
investment rates and earnings in the related investment portfolio (primarily
consisting of collateralized mortgage obligations and mortgage backed
securities) due to prepayments experienced in excess of assumed and historical
levels. Closed Book GRC was also affected by the interest rate rise in 1994 when
the duration of its assets lengthened relative to that of the liabilities.
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 hedge transactions
in late September 1996 which substantially eliminated further fluctuation in
fair value of the investments due to interest rate changes. As of December 31,
1997, Closed Book GRC had general account assets and liabilities of $2.2
billion. The scheduled maturities are $1.0 billion, or 45%, in 1998, $0.7
billion, or 32%, in 1999 and $0.5 billion, or 23%, thereafter.
During 1996, Closed Book GRC incurred a $51, after-tax, loss from operations as
a result of negative interest spread, as compared with an after-tax loss from
operations of $68 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, after-tax, was determined
to have occurred and was recorded in September 1996. An additional other than
temporary impairment loss of $6, after-tax, occurred in the fourth quarter of
1996 bringing the total 1996 impairment to $88. Also, during the third quarter
of 1996, Closed Book GRC had asset sales resulting in proceeds of approximately
$500 and a realized loss of $55, after-tax. The asset sales were undertaken as a
result of liquidity needs and favorable market conditions for certain
securities. Other charges of $32, after-tax, were also incurred in the third
quarter of 1996.
18
<PAGE> 20
RESERVES
In accordance with applicable insurance regulations under which Hartford Life
operates, life insurance subsidiaries of the Company establish and carry as
liabilities actuarially determined reserves which are calculated to meet
Hartford Life's future obligations. Reserves for life insurance and disability
contracts are based on actuarially recognized methods using prescribed morbidity
and mortality tables in general use in the United States, which are modified to
reflect Hartford Life's actual experience when appropriate. These reserves are
computed at amounts that, with additions from premiums to be received and with
interest on such reserves compounded annually at certain assumed rates, are
expected to be sufficient to meet the Company's policy obligations at their
maturities or in the event of an insured's death. Reserves include unearned
premiums, premium deposits, claims reported but not yet paid, claims incurred
but not reported and claims in the process of settlement. Reserves for assumed
reinsurance are computed on bases essentially comparable to direct insurance
reserves.
INVESTMENTS
GENERAL
The Company's investments are managed by its investment strategy group which
consists of a risk management unit and a portfolio management unit and reports
directly to senior management of the Company. The risk management unit is
responsible for monitoring and managing the Company's asset/liability profile
and establishing investment objectives and guidelines. The portfolio management
unit is responsible for determining, within specified risk tolerances and
investment guidelines, the general asset allocation, duration, convexity and
other characteristics of the Company's general account and guaranteed separate
account investment portfolios. The Hartford Investment Management Company, a
wholly owned subsidiary of The Hartford, executes the investment plan of the
investment strategy group including the identification and purchase of
securities that fulfill the objectives of the strategy group.
The primary investment objective of the Company's general account and guaranteed
separate accounts is to maximize after-tax returns consistent with acceptable
risk parameters (including the management of the interest rate sensitivity of
invested assets relative to that of policyholder obligations). The Company does
not have any financial instruments entered into for trading purposes. The
Company is exposed to two primary sources of investment risk: credit risk,
relating to the uncertainty associated with an obligor's continued ability to
make timely payment of principal and interest, and interest rate risk, relating
to the market price and/or cash flow variability associated with changes in
market yield curves. See the Capital Markets Risk Management section of the MD&A
for further discussion of the Company's approach to managing these investment
risks.
The Company's separate accounts reflect two categories of risk assumption:
non-guaranteed separate accounts totaling $58.7 billion as of December 31, 1997,
wherein the policyholder assumes substantially all the investment risk and
reward, and guaranteed separate accounts totaling $10.7 billion as of December
31, 1997, wherein Hartford Life contractually guarantees either a minimum return
or account value to the policyholder. Non-guaranteed separate account products
include variable annuities, variable life and COLI. Guaranteed separate account
products primarily consist of fixed MVA individual annuities and modified
guaranteed life insurance, and generally include market value adjustment
features to mitigate the disintermediation risk in the event of surrenders.
The Company's general account consists of a diversified portfolio of
investments. Although all the assets of the general account support all the
Company's liabilities, the Company's investment strategy group has developed
separate investment portfolios for specific classes of product liabilities
within the general account. The strategy group works closely with the business
lines to develop specific investment guidelines, including duration targets,
asset allocation and convexity constraints, asset/liability mismatch tolerances
and return objectives, for each product line in order to achieve each product
line's individual risk and return objectives.
Invested assets in the Company's general account totaled $21 billion at December
31, 1997 and were comprised of $16.8 billion of fixed maturities, $3.8 billion
of policy loans, and other investments of $363. Policy loans, which had a
weighted-average interest rate of 11.2%, as of December 31, 1997, are secured by
the cash value of the underlying life insurance policies. These loans do not
mature in a conventional sense, but expire in conjunction with the related
policy liabilities.
19
<PAGE> 21
The following table sets forth by type the fixed maturity securities held in the
Company's general account as of December 31, 1997 and 1996.
FIXED MATURITIES BY TYPE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------
FAIR FAIR
TYPE VALUE PERCENT VALUE PERCENT
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Corporate $ 7,970 47.3% $ 7,587 48.3%
ABS 3,199 19.0% 2,693 17.1%
Commercial MBS 1,606 9.5% 1,098 7.0%
Short-term 1,395 8.3% 765 4.9%
CMO 978 5.8% 2,150 13.7%
MBS - agency 514 3.1% 402 2.6%
Gov't/Gov't agencies - For. 502 3.0% 395 2.5%
Municipal - taxable 267 1.6% 266 1.7%
Gov't/Gov't agencies - U.S. 241 1.4% 355 2.2%
Municipal - tax-exempt 171 1.0% -- --
Redeemable preferred stock 5 -- -- --
- -------------------------------------------------------------------------
TOTAL FIXED MATURITIES $16,848 100.0% $15,711 100.0%
- -------------------------------------------------------------------------
</TABLE>
During 1997, the Company continued to concentrate on reducing exposure to CMO's
and reallocated the funds into public and private corporate bonds, commercial
mortgage backed securities and other non-residential asset backed securities. In
general, commercial MBS and asset backed securities, although subject to
prepayment risk, are significantly less sensitive to changes in interest rates
as compared to CMO's and MBS.
As of December 31, 1997 and 1996, approximately 22.6% and 10.3%, respectively,
of the Company's fixed maturity portfolio was invested in private placement
securities (including Rule 144A offerings). Private placement securities are
generally less liquid than public securities; however, covenants for private
placements are 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. For further discussion of the
Company's investment credit policies, see the Capital Markets Risk Management
section of the MD&A under "Credit Risk".
INVESTMENT RESULTS
The table below summarizes Hartford Life's results for the past three years.
<TABLE>
<CAPTION>
(Before taxes) 1997 1996 1995
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Net investment income $1,536 $1,534 $1,451
Yield on average invested assets (1) 7.6% 7.7% 7.4%
Net realized capital losses $ - $(219) $(4)
- ----------------------------------------------------------------------
</TABLE>
(1) Represents net investment income (excluding net realized capital losses)
divided by average invested assets at cost (fixed maturities at amortized cost).
For the year ended December 31, 1997, before-tax net investment income totaled
$1.5 billion, unchanged from 1996. Before-tax yields on average invested assets
decreased to 7.6% in 1997 from 7.7% in 1996. The decrease in before-tax yields
was primarily attributable to declining market interest rates and a reduction in
policy loan yields.
For the year ended December 31, 1996, before-tax net investment income increased
$83 to $1.5 billion. The increase in net investment income was primarily due to
an increase in policy loans, new business cash flow invested in fixed maturities
and asset mix changes offset by asset sales and maturities in Closed Book GRC.
Yields on average invested assets increased to 7.7% in 1996 from 7.4% in 1995.
The increase in the before-tax yield was primarily due to the increase in policy
loan yields offset by a reduction in yields on fixed maturities as a result of
sales and maturities of higher yielding assets reinvested at lower average
yields.
There were no net realized capital gains or losses for the year ended December
31, 1997, as compared to net realized losses of $219 in 1996 and $4 in 1995. The
1996 capital losses were primarily attributable to the writedown and sale of
certain securities within Closed Book GRC.
20
<PAGE> 22
CAPITAL MARKETS RISK MANAGEMENT
As described below, credit risk and market risk are the primary sources of
investment risk to the Company. The following discussion identifies the
Company's policies and procedures for managing these risks and monitoring the
results of the Company's risk management activities.
CREDIT RISK
Hartford Life has established investment credit policies that focus on the
credit quality of obligors and counterparties, limit credit concentrations,
encourage diversification and require frequent creditworthiness reviews.
Investment activity, including setting of policy and defining acceptable risk
levels, is subject to regular review and approval by senior management and
frequent review by Hartford Life's Finance Committee.
The Company invests primarily in investment grade securities and has established
exposure limits, diversification standards and review procedures for all credit
risks whether borrower, issuer or counterparty. The creditworthiness of specific
obligors is determined by an internal credit evaluation supplemented by
consideration of external determinants of creditworthiness, typically ratings
assigned by nationally recognized ratings agencies. Obligor, geographic, asset
sector and industry concentrations are subject to established limits and
monitored at regular intervals.
The following table identifies fixed maturity securities for the Company's
operations by credit quality. The ratings referenced in the tables are based on
the ratings of nationally recognized rating organizations or, if not rated,
assigned based on the Company's internal analysis of such securities.
As of December 31, 1997, more than 99% of the fixed maturity portfolio,
including guaranteed separate accounts, was invested in investment-grade
securities.
FIXED MATURITIES BY CREDIT QUALITY
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------
FAIR VALUE PERCENT FAIR VALUE PERCENT
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Gov't/Gov't agencies $ 2,907 10.7% $ 2,003 7.8%
AAA 3,974 14.6% 5,752 22.2%
AA 2,967 10.9% 3,693 14.3%
A 9,351 34.3% 8,935 34.5%
BBB 5,966 21.9% 4,467 17.3%
BB & below 205 0.7% 155 0.6%
Short-term 1,869 6.9% 863 3.3%
- -------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 27,239 100.0% $ 25,868 100.0%
- -------------------------------------------------------------------------------
</TABLE>
The Company also maintains credit policies regarding the financial stability and
credit standing of its major derivatives' counterparties and typically requires
credit enhancement provisions to further reduce its credit risk. Credit risk for
derivatives contracts is limited to the amounts calculated to be due to the
Company on such contracts based on current market conditions and potential
payment obligations between the Company and its counterparties. Credit exposures
are quantified weekly and netted, and collateral is pledged to or held by the
Company to the extent the current value of derivatives exceed exposure policy
thresholds.
MARKET RISK
Hartford Life's exposure to market risk relates to the market price and/or cash
flow variability associated with changes in market interest rates. The following
discussion focuses on the Company's exposure to interest rate risk,
asset/liability management strategies utilized to manage this risk, and
characteristics of the Company's insurance liabilities and their sensitivity to
movements in interest rates.
INTEREST RATE RISK
Changes in interest rates can potentially impact the Company' profitability.
Under certain circumstances of interest rate volatility, the Company could be
exposed to disintermediation risk and reduction in net interest rate spread or
profit margins. For the Company's non-guaranteed separate accounts, exposure is
not significant since the policyholder assumes substantially all of the
investment risk.
The Company's general account and guaranteed separate account investment
portfolios primarily consist of investment-grade, fixed maturity securities,
including corporate bonds, asset backed securities, mortgage backed securities
and collateralized mortgage obligations. The fair value of these and the
Company's other invested assets fluctuates depending on the interest rate
environment
21
<PAGE> 23
and other general economic conditions. During periods of declining interest
rates, paydowns on mortgage backed securities and collateralized mortgage
obligations increase as the underlying mortgages are prepaid. 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 declines,
which also exposes the Company to the possibility of asset/liability cash flow
mismatch. For a discussion of the Company's risk management techniques to manage
this market risk, see the "Asset/Liability Management Strategies used to Manage
Market Risk" section below.
As described above, the Company holds a significant fixed maturity portfolio
which includes both fixed and variable rate features. The following table
reflects the principal amounts of the fixed and variable rate fixed maturity
portfolio at December 31, 1997, along with the respective weighted average
coupons by estimated maturity year. Expected maturities differ from contractual
maturities due to call or prepayment provisions. The weighted average coupon on
variable rate securities is based upon spot rates as of December 31, 1997, and
is primarily based upon the London Interbank Offered Rate ("LIBOR"). Callable
bonds and notes are distributed to either call dates or maturity depending on
which date produces the most conservative yield. Asset backed securities,
collateralized mortgage obligations and mortgage backed securities are
distributed to maturity year based on estimates of the rate of future
prepayments of principal over the remaining life of the securities. These
estimates are developed using prepayment speeds provided in broker consensus
data. Such estimates are derived from prepayment speeds previously experienced
at the interest rate levels projected for the underlying collateral. Actual
prepayment experience may vary from these estimates. Financial instruments with
certain leverage features have been included in each of the fixed maturity
categories. These instruments have not been separately displayed because they
were immaterial to the Company's investment portfolio.
22
<PAGE> 24
<TABLE>
<CAPTION>
1997
1998 1999 2000 2001 2002 Thereafter TOTAL Fair Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BONDS AND NOTES - CALLABLE
Fixed Rate
Par value $ 37 $ 50 $ 28 $ 13 $ 12 $ 566 $ 706 $ 668
Weighted average coupon 10.5% 7.5% 7.7% 7.6% 7.7% 5.4% 6.0%
Variable Rate
Par value $ 66 $ 33 $ 28 $ 44 $ 15 $ 981 $ 1,167 $ 1,106
Weighted average coupon 6.4% 6.9% 7.1% 6.0% 6.4% 6.5% 6.5%
BONDS AND NOTES - OTHER
Fixed Rate
Par value $3,013 $1,400 $1,285 $1,215 $1,033 $7,053 $14,999 $14,815
Weighted average coupon 3.2% 6.8% 7.1% 7.4% 7.7% 6.1% 5.9%
Variable Rate
Par value $ 140 $ 47 $ 138 $ -- $ 84 $ 900 $ 1,309 $ 1,352
Weighted average coupon 5.1% 1.3% 6.4% -- 5.7% 5.4% 5.3%
ASSET BACKED SECURITIES
Fixed Rate
Par value $ 211 $ 251 $ 447 $ 566 $ 240 $ 573 $ 2,288 $ 2,325
Weighted average coupon 6.9% 6.6% 6.7% 7.0% 6.8% 7.3% 7.0%
Variable Rate
Par value $ 40 $ 183 $ 237 $ 304 $ 358 $ 837 $ 1,959 $ 1,959
Weighted average coupon 6.2% 6.2% 6.2% 6.7% 6.2% 6.4% 6.4%
COLLATERALIZED MORTGAGE OBLIGATIONS
Fixed Rate
Par value $ 29 $ 171 $ 572 $ 308 $ 78 $ 581 $ 1,739 $ 1,695
Weighted average coupon 6.5% 6.0% 6.1% 5.6% 5.6% 6.0% 5.9%
Variable Rate
Par value $ 28 $ 12 $ 27 $ 14 $ 6 $ 359 $ 446 $ 424
Weighted average coupon 6.8% 6.6% 4.2% 6.7% 3.4% 7.7% 7.3%
COMMERCIAL MORTGAGE BACKED SECURITIES
Fixed Rate
Par value $ 4 $ 45 $ 184 $ 112 $ 134 $ 969 $ 1,448 $ 1,441
Weighted average coupon 8.6% 7.4% 6.9% 7.7% 7.0% 7.4% 7.3%
Variable Rate
Par value $ 20 $ 83 $ 90 $ 70 $ 165 $ 382 $ 810 $ 821
Weighted average coupon 6.1% 7.5% 6.9% 6.6% 6.5% 7.3% 7.0%
MORTGAGE BACKED SECURITIES
Fixed Rate
Par value $ 4 $ 25 $ 3 $ 41 $ 2 $ 501 $ 576 $ 590
Weighted average coupon 7.3% 7.0% 7.4% 6.2% 8.1% 7.4% 7.3%
Variable Rate
Par value $ -- $ -- $ -- $ -- $ -- $ 24 $ 24 $ 24
Weighted average coupon -- -- -- -- -- 6.5% 6.5%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE> 25
The table below provides information on debt obligations and reflects principal
cashflows and related weighted average interest rate by maturity year.
<TABLE>
<CAPTION>
1997
1998 1999 2000 2001 2002 Thereafter TOTAL FAIR VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SHORT-TERM DEBT
Fixed Rate
Amount $ 50 $ -- $ -- $ -- $ -- $ -- $ 50 $ 50
Weighted average interest rate 5.8% -- -- -- -- -- 5.8% 5.8%
LONG-TERM DEBT
Fixed Rate
Amount $ -- $ -- $ -- $ -- $ -- $ 650 $ 650 $ 674
Weighted average effective interest rate -- -- -- -- -- 7.4% 7.4% 6.9%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
ASSET/LIABILITY MANAGEMENT STRATEGIES USED TO MANAGE MARKET RISK
The Company employs several risk management tools to quantify and manage market
risk arising from its investments and interest sensitive liabilities. For
certain portfolios, management monitors the changes in present value between
assets and liabilities resulting from various interest rate scenarios using
integrated asset/liability measurement systems and a proprietary system that
simulates the impacts of parallel and non-parallel yield curve shifts. Based on
this current and prospective information, management implements risk reducing
techniques to improve the match between assets and liabilities.
Derivatives play an important role in facilitating the management of interest
rate risk, creating opportunities to efficiently fund obligations, hedge against
risks that affect the value of certain liabilities and adjust broad investment
risk characteristics as a result of any significant changes in market risks. The
Company uses a variety of derivatives, including swaps, caps, floors, forwards
and exchange-traded financial futures and options, in order to hedge exposure
primarily to interest rate risk on anticipated investment purchases or existing
assets and liabilities. The Company does not make a market or trade derivatives
for the express purpose of earning trading profits. The Company's derivative
program is monitored by an internal compliance unit and is reviewed by senior
management and Hartford Life's Finance Committee. The notional amounts of
derivative contracts, which represent the basis upon which pay or receive
amounts are calculated and are not reflective of credit risk, totaled $10.9
billion at December 31, 1997 ($6.6 billion related to insurance investments and
$4.3 related to life insurance liabilities).
The strategies described below are used to manage the aforementioned risks.
Anticipatory Hedging -- For certain liabilities, the Company commits to the
price of the product prior to receipt of the associated premium or deposit.
Anticipatory hedges are routinely executed to offset the impact of changes in
asset prices arising from interest rate changes pending the receipt of premium
or deposit and the subsequent purchase of an asset. These hedges involve taking
a long position in interest rate futures or entering into an interest rate swap
with duration characteristics equivalent to the associated liabilities or
anticipated investments. The notional amount of anticipatory hedges as of
December 31, 1997 was $255.
Liability Hedging -- Several products obligate the Company to credit a return to
the contract holder which is indexed to a market rate. 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 operation'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 as of December 31, 1997 was $4.3 billion.
Asset Hedging -- To meet the various policyholder obligations and to provide
cost effective prudent investment risk diversification, the Company may combine
two or more financial instruments to achieve the investment characteristics of a
fixed maturity security or that match an associated liability. The use of
derivative instruments in this regard effectively transfers unwanted investment
risks or attributes to others. The selection of the appropriate derivative
instruments depends on the investment risk, the liquidity and efficiency of the
market, and the asset and liability characteristics. The notional amount of
asset hedges as of December 31, 1997 was $3.2 billion.
24
<PAGE> 26
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 any difference to desired levels.
Portfolio hedges reduce the mismatch between assets and liabilities and offset
the potential impact to cash flows caused by changes in interest rates. The
notional amount of portfolio hedges as of December 31, 1997 was $3.1 billion.
The following tables provide information on derivative instruments used in
accordance with the aforementioned hedging strategies. For interest rate swaps,
caps, floors and options, the tables present notional amounts with weighted
average pay and received rates for swaps and weighted average strike rates for
caps, floors and options by maturity year. For interest rate futures, the tables
present contract amount and weighted average settlement price by expected
maturity year.
<TABLE>
<CAPTION>
1997
INTEREST RATE SWAPS 1998 1999 2000 2001 2002 Thereafter TOTAL Fair Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Pay Fixed/Receive Variable
Notional value $ 120 $ 151 $ 69 $ 198 $ 39 $ 297 $ 874 (19)
Weighted average pay rate 5.9% 6.4% 6.5% 6.7% 6.7% 6.5% 6.5%
Weighted average receive rate 7.1% 6.2% 5.9% 6.1% 5.9% 5.8% 6.1%
Pay Variable/Receive Fixed
Notional value $ 749 $ 995 $ 428 $ 351 $ 449 $ 1,240 $ 4,212 172
Weighted average pay rate 5.9% 5.9% 5.9% 6.0% 5.9% 5.9% 5.9%
Weighted average receive rate 6.4% 6.5% 6.8% 7.0% 6.7% 7.5% 6.9%
Pay Variable /Receive Different Variable
Notional value $ 83 $ 161 $ 275 $ 50 $ 291 $ 721 $ 1,581 (3)
Weighted average pay rate 6.0% 5.9% 5.9% 5.9% 7.7% 6.5% 6.4%
Weighted average receive rate 6.0% 6.8% 6.1% 9.6% 6.1% 7.0% 6.7%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1997
1998 1999 2000 2001 2002 Thereafter TOTAL Fair Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST RATE CAPS - LIBOR BASED
Purchased
Notional value $ -- $ -- $ -- $ 5 $ -- $ 38 $ 43 $3
Weighted average strike rate (4.0 - 5.9%) -- -- -- 5.9% -- 5.2% 5.2%
Notional value $ 50 $ -- $ -- $ -- $ -- $ 35 $ 85 $1
Weighted average strike rate (6.0 - 7.9%) 7.0% -- -- -- -- 6.6% 6.8%
Notional value $ 37 $ -- $ -- $ -- $ 13 $ 210 $ 260 $2
Weighted average strike rate (8.0 - 9.9%) 8.6% -- -- -- 9.0% 8.4% 8.5%
Notional value $ -- $ 16 $ 10 $ -- $ 26 $ -- $ 52 $--
Weighted average strike rate (10.0 - 11.9%) -- 11.8% 11.5% -- 10.1% -- 10.9%
Issued
Notional value $ 50 $ -- $ -- $ -- $ -- $ 13 $ 63 $--
Weighted average strike rate (6.0 - 7.9%) 7.0% -- -- -- -- 7.2% 7.0%
Notional value $ -- $ -- $ -- $ 4 $ -- $ 13 $ 17 $--
Weighted average strike rate (8.0 - 9.9%) -- -- -- 8.9% -- 8.3% 8.5%
INTEREST RATE CAPS - CMT BASED
Purchased
Notional value $ 200 $ -- $ 343 $ -- $ -- $ 18 $ 561 $--
Weighted average strike rate (6 - 7.9%) 7.5% -- 7.8% -- -- 7.0% 7.6%
Notional value $ -- $ -- $ 95 $ 100 $ 100 $ -- $ 295 $--
Weighted average strike rate (8 - 9.9%) -- -- 8.0% 8.0% 9.5% -- 8.5%
Issued
Notional value $ -- $ -- $ 343 $ -- $ -- $ 18 $ 361 $--
Weighted average strike rate (6 - 7.9%) -- -- 7.8% -- -- 7.5% 7.8%
Notional value $ -- $ -- $ -- $ 100 $ 100 $ -- $ 200 $--
Weighted average strike rate (8 - 9.9%) -- -- -- 8.0% 9.5% -- 8.8%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE> 27
<TABLE>
<CAPTION>
1997
1998 1999 2000 2001 2002 Thereafter TOTAL Fair Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST RATE FLOORS - LIBOR BASED
Purchased
Notional value $ -- $ 100 $ -- $ -- $ -- $ -- $ 100 $--
Weighted average strike rate (4.0 - 5.9%) -- 4.2% -- -- -- -- 4.2%
Notional value $ -- $ -- $ -- $ -- $ -- $ 65 $ 65 $ 5
Weighted average strike rate (6.0 - 7.9%) -- -- -- -- -- 7.0% 7.0%
Issued
Notional value $ -- $ -- $ 10 $ 10 $ 39 $ 204 $ 263 $(4)
Weighted average strike rate (4.0 - 5.9%) -- -- 5.1% 4.9% 5.3% 5.3% 5.3%
Notional value $ -- $ -- $ -- $ -- $ -- $ 27 $ 27 $(3)
Weighted average strike rate (6.0 - 7.9%) -- -- -- -- -- 7.8% 7.8%
INTEREST RATE FLOORS - CMT BASED
Purchased
Notional value $ 300 $ -- $ 100 $ -- $ -- $ 150 $ 550 $ 4
Weighted average strike rate (4.0 - 5.9%) 5.8% -- 5.8% -- -- 5.5% 5.7%
Notional value $ 81 $ 40 $ 10 $ 500 $ -- $ -- $ 631 $ 9
Weighted average strike rate (6.0 - 7.9%) 6.3% 6.5% 6.0% 6.0% -- -- 6.1%
Issued
Notional value $ -- $ -- $ -- $ 540 $ -- $ -- $ 540 $(2)
Weighted average strike rate (4.0 - 5.9%) -- -- -- 5.0% -- -- 5.0%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1997
INTEREST RATE FUTURES 1998 1999 2000 2001 2002 Thereafter TOTAL Fair Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long
Contract amount / Notional $ 19 $ -- $ -- $ -- $ -- $ -- $ 19 N/A
Weighted average settlement price $ 121 $ -- $ -- $ -- $ -- $ -- $ 121 N/A
Short
Contract amount / Notional $ 22 $ 3 $ 25 $ -- $ -- $ -- $ 50 N/A
Weighted average settlement price $ 94 $ 94 $ 94 $ -- $ -- $ -- $ 94 N/A
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
N/A - Not Applicable
26
<PAGE> 28
LIFE INSURANCE LIABILITY CHARACTERISTICS
Insurance liabilities, other than non-guaranteed separate accounts, which were
backed by $42.3 billion in total assets (including investments of $31.6
billion), totaled $26.5 billion (net of ceded reinsurance and policy loans) at
December 31, 1997. These insurance liabilities consisted of future policy
benefits of $4.9 billion, other policyholder funds of $21.1 billion, guaranteed
separate accounts of $10.1 billion and reinsurance recoverables of $(5.8)
billion and policy loans of $(3.8) billion. Matching of the duration of the
investments with respective policyholder obligations is an explicit objective of
the Company's management strategy. The Company's insurance policy liabilities,
along with estimated duration periods based on the Company's internal actuarial
assumptions, can be summarized based on investment needs in the five categories
described below at December 31, 1997.
<TABLE>
<CAPTION>
($ in billions)
- -------------------------------------------------------------------------------------------------------------------------------
DESCRIPTION (1) 1998 1999 2000 2001 2002 Thereafter TOTAL
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed rate asset accumulation vehicles $ 2.9 $ 1.8 $ 1.9 $ 1.2 $ 0.6 $ 4.3 $ 12.7
Weighted average credited rate 6.6% 7.1% 6.9% 6.9% 7.1% 6.6% 6.8%
Indexed asset accumulation vehicles $ 0.1 $ 0.1 $ -- $ -- $ -- $ -- $ 0.2
Weighted average credited rate 5.7% 6.3% -- -- -- -- 5.9%
Interest credited asset accumulation vehicles $ 4.2 $ 0.6 $ 0.4 $ 0.4 $ 0.5 $ 4.7 $ 10.8
Weighted average credited rate 5.7% 6.0% 6.0% 6.0% 6.1% 5.9% 5.8%
Long-term pay out liabilities $ 0.4 $ 0.3 $ 0.2 $ 0.1 $ 0.1 $ 1.2 $ 2.3
Short-term pay out liabilities $ 0.5 $ -- $ -- $ -- $ -- $ -- $ 0.5
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) As of December 31, 1997, the fair value of the Company's investment
contracts including guaranteed separate accounts was $21.9 billion.
Fixed Rate Asset Accumulation Vehicles -- Products in this category require the
Company to pay a fixed rate for a certain period of time. The cash flows are not
interest sensitive because the products are written with a market value
adjustment feature and the liabilities have protection against the early
withdrawal of funds through surrender charges. Product examples include fixed
rate annuities with a market value adjustment and fixed rate guaranteed
investment contracts. Contract duration is dependent on the policyholder's
choice of guarantee period.
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 that changes in the index may
adversely affect profitability. Product examples include indexed-guaranteed
investment contracts with an estimated duration of up to two years.
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. Product examples include universal life
contracts and the general account portion of the Company's variable annuity
products. Liability duration is short to intermediate term.
Long-term Pay Out Liabilities -- Products in this category are long-term in
nature and may contain significant actuarial (including mortality and morbidity)
pricing and cash flow risks. The cash flows associated with these policy
liabilities are not interest rate 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 that the actual
timing of the cash flows will differ from those anticipated resulting in an
investment return lower than that 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 6 to 10 years but, at times, exceeds 30 years.
Short-term Pay Out 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 and the variability in the timing of the expected cash flows.
Liquidity is of greater concern than for the long-term pay out liabilities.
Products include individual and group term life insurance contracts and
short-term disability contracts.
27
<PAGE> 29
SENSITIVITY TO CHANGES IN INTEREST RATES
For liabilities whose cash flows are not substantially affected by changes in
interest rates ("fixed liabilities") and where investment experience is
substantially absorbed by the Company, the sensitivity of the net economic value
(discounted present value of asset cash flows less the discounted present value
of liability cash flows) of those portfolios to 100 basis point shifts in
interest rates is shown in the table below. These fixed liabilities represent
approximately 60% of the Company's general and guaranteed separate account
liabilities. The remaining liabilities generally allow the Company significant
flexibility to adjust credited rates to reflect actual investment experience and
thereby pass through a substantial portion of actual investment experience to
the policyholder. The fixed liability portfolios are managed and monitored
relative to defined objectives and are analyzed regularly by management for
internal risk management purposes using scenario simulation techniques, and
evaluated annually consistent with regulatory requirements.
CHANGE IN NET ECONOMIC
VALUE DECEMBER 31, 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
Basis Point Shift -100 +100
- ---------------------------------------------------------------------------------
<S> <C> <C>
Dollar amount $5 $(10)
Percent of liability value 0.03% (0.06%)
- ---------------------------------------------------------------------------------
</TABLE>
CAPITAL RESOURCES AND LIQUIDITY
Capital resources and liquidity represent the overall financial strength of
Hartford Life and its ability to generate strong cash flows from each of the
business segments and borrow funds at competitive rates to meet operating and
growth needs. The Company maintained cash and short-term investments totaling
$1.5 billion, $837 and $1.2 billion as of December 31, 1997, 1996 and 1995,
respectively. The capital structure of Hartford Life consists of debt and
equity, and is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Short-term debt $ 50 $ -- $ --
Long-term debt 650 -- --
Allocated Advances from parent -- 893 732
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL DEBT $ 700 $ 893 $ 732
-----------------------------------------------------------------------------------------------------------------------------
Equity excluding net unrealized capital gains (losses) on securities, net of tax $ 1,907 $ 1,245 $ 1,221
Net unrealized capital gains (losses) on securities, net of tax 237 29 (44)
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 2,144 $ 1,274 $ 1,177
-----------------------------------------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION EXCLUDING NET UNREALIZED CAPITAL GAINS (LOSSES) ON
SECURITIES, NET OF TAX $ 2,607 $ 2,138 $ 1,953
-----------------------------------------------------------------------------------------------------------------------------
Debt to equity excluding net unrealized capital gains (losses) on
securities, net of tax 37% 72% 60%
Debt to capitalization excluding net unrealized capital gains (losses) on securities,
net of tax 27% 42% 37%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
CAPITALIZATION
The Company's total capitalization, excluding net unrealized capital gains
(losses) on securities, net of tax, increased $469, or 22%, to $2.6 billion in
1997 and $185, or 9%, to $2.1 billion in 1996. In 1997, the increase was
primarily the result of net income of $306 and net proceeds from the IPO of
$687, which were partially offset by a net reduction in debt of $193 and
dividends of $341. As a result of the IPO and debt restructuring described
below, both the debt to equity and debt to capitalization ratios decreased to
37% and 27% as of December 31, 1997, respectively, from 72% and 42% as of
December 31, 1996, respectively. The Company's commercial paper and senior debt
are rated by independent rating agencies and the Company continues to maintain
debt to capital ratios consistent with these ratings.
INITIAL PUBLIC OFFERING
On February 10, 1997, the Company filed a registration statement, as amended,
with the Securities and Exchange Commission relating to an IPO of the Company's
Class A Common Stock. Pursuant to the IPO on May 22, 1997, the Company sold to
the public 26 million shares at $28.25 per share and received net proceeds of
$687. Of the proceeds, $527 was used to retire debt related to the Company's
outstanding promissory notes and line of credit with the remaining $160
contributed to the Company's insurance subsidiaries to support growth in its
core businesses.
28
<PAGE> 30
DEBT
On February 7, 1997, the Company declared a dividend of $1.2 billion payable to
its direct parent, Hartford Accident and Indemnity Company ("HA&I"). As a
result, the Company borrowed $1.1 billion on February 18, 1997, pursuant to a
$1.3 billion line of credit, with interest payable at the two-month Eurodollar
rate plus 15 basis points, which, together with a promissory note in the amount
of $100, was paid as a dividend to HA&I on February 20, 1997. Of the $1.2
billion 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"). In
addition, on April 4, 1997 the Company declared and paid a dividend of $25 to
its parent in the form of a promissory note. Subsequently, $12 of this note was
forgiven in the form of a capital contribution from HA&I.
On February 14, 1997, the Company filed a shelf registration statement for the
issuance and sale of up to $1.0 billion in the aggregate of senior debt
securities, subordinated debt securities and preferred stock. On June 12, 1997,
the Company issued $650 of unsecured redeemable long-term debt in the form of
notes and debentures. Of this amount, $200 was in the form of 6.90% notes due
June 15, 2004, $200 of 7.10% notes due June 15, 2007, and $250 of 7.65%
debentures due June 15, 2027. Interest on each of the notes and debentures is
payable semi-annually on June 15 and December 15, of each year, commencing
December 15, 1997. The Company also issued $50 of short-term debt in the form of
commercial paper. Of the proceeds from these issuances, $670 was used to retire
the remaining balance on the $1.3 billion line of credit with the remainder
being used for working capital and other general corporate purposes.
Subsequently, the Company reduced the capacity of the line of credit from $1.3
billion to $250, which will be primarily used to support the commercial paper
program.
DIVIDENDS
In 1997, a total of $25 in dividends was paid to holders of Class A and Class B
Common Stock. See "Debt" discussion above for 1997 dividend payments made prior
to the IPO.
In 1998, Hartford Life expects to continue paying quarterly dividends on its
common stock of $0.09 per share. Dividend decisions will be based on, and
affected by, a number of factors, including the operating results and financial
requirements of Hartford Life on a stand-alone basis and the impact of the
regulatory restrictions discussed in the Liquidity Requirements section below.
The Company received dividends from its regulated life insurance subsidiaries of
$68 in 1997.
TREASURY STOCK
During 1997, to make shares available to employees pursuant to stock-based
benefit plans, the Company repurchased 100,000 shares of its common stock in the
open market at a total cost of $4. Shares repurchased in the open market are
carried at cost and reflected as a reduction to stockholders' equity. Treasury
shares subsequently reissued are reduced from treasury stock on a weighted
average cost basis. The Company currently intends to purchase shares of its
common stock to make shares available for its various employee stock-based
benefit plans.
RATINGS
The following table summarizes Hartford Life's significant U.S. member
companies' financial ratings from the major independent rating organizations as
of February 10, 1998:
<TABLE>
<CAPTION>
A.M. DUFF & STANDARD &
BEST PHELPS MOODY'S POOR'S
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INSURANCE RATINGS:
Hartford Life A+ AA+ Aa3 AA
Hartford Life & Accident A+ AA+ Aa3 AA
Hartford Life & Annuity A+ AA+ Aa3 AA
- -------------------------------------------------------------------------------------
OTHER RATINGS:
Hartford Life, Inc.:
Senior debt - A+ A2 A
Commercial paper - D-1 P-1 A-1
- -------------------------------------------------------------------------------------
</TABLE>
29
<PAGE> 31
Ratings are an important factor in establishing the competitive position of an
insurance company such as Hartford Life. There can be no assurance that the
Company's ratings will continue for any given period of time, or that they will
not be changed. In the event that the Company's ratings are downgraded, the
level of sales or the persistency of the Company's block of in-force business
may be adversely impacted.
LIQUIDITY REQUIREMENTS
The liquidity requirements of Hartford Life have been and will continue to be
met by funds from operations as well as the issuance of commercial paper, debt
securities and bank borrowings. The principal sources of funds are premiums and
investment income as well as maturities and sales of invested assets. Hartford
Life is a holding company which receives operating cash flow in the form of
dividends from its subsidiaries, enabling it to service debt.
Dividends to Hartford Life, Inc. from its subsidiaries are restricted. The
payment of dividends by Connecticut-domiciled insurers is limited under the
insurance holding company laws of Connecticut. Hartford Life and Accident
("HLA"), a direct subsidiary of the Company, adheres to these laws which require
notice to and approval by the state insurance commissioner for the declaration
or payment of any dividend, which 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 income (or net gain from operations, if such company is a life insurance
company) for the twelve-month period ending on the thirty-first day of December
last preceding, in each case determined under statutory insurance accounting
policies. In addition, if any dividend of a Connecticut-domiciled insurer
exceeds the insurer's earned surplus, it requires the prior approval of the
Connecticut Insurance Commissioner. The total amount of statutory dividends
which may be paid by the insurance subsidiaries of the Company without prior
approval in 1997 is estimated to be $167.
The insurance holding company laws of the other jurisdictions in which Hartford
Life's insurance subsidiaries are incorporated (or deemed commercially
domiciled) generally contain similar (although in certain instances somewhat
more restrictive) limitations on the payment of dividends.
The primary uses of funds are to pay claims, policy benefits, operating expenses
and commissions, and to purchase new investments. In addition, Hartford Life
carries a significant short-term investment position and accordingly does not
anticipate selling intermediate and long-term fixed maturity investments to meet
any liquidity needs. For a discussion of the Company's investment objectives and
strategies, see the "Investments" section of the MD&A.
RISK-BASED CAPITAL
The National Association of Insurance Commissioners ("NAIC") adopted regulations
establishing minimum capitalization requirements based on Risk-Based Capital
("RBC") formulas for life insurance companies (effective December 31, 1993). The
requirements consist of formulas which identify companies that are
undercapitalized and require specific regulatory actions. The RBC formula for
life insurance companies establishes capital requirements relating to insurance,
business, asset and interest rate risks. The RBC ratios for each of the major
life insurance subsidiaries are in excess of 200% as of December 31, 1997.
CASH FLOW
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Cash provided by operating
activities $ 1,147 $ 338 $ 266
Cash (used for) provided by
investing activities $ (650) $ 58 $(662)
Cash (used for) provided by
financing activities $ (480) $(394) $ 431
- ----------------------------------------------------------------------------
Increase in cash $ 17 $ 2 $ 35
Impact of foreign exchange $ (1) $ -- $ 1
Cash - beginning of year $ 72 $ 70 $ 34
- ----------------------------------------------------------------------------
Cash - end of year $ 88 $ 72 $ 70
- ----------------------------------------------------------------------------
</TABLE>
During 1997, cash provided by operating activities increased from the prior year
due primarily to growth in the Individual Life Insurance segment and the Group
Insurance operation of the Employee Benefits segment. The change in cash used
for investing activities primarily reflects the investment of cash from
operating activities. The change in cash used for financing activities was
30
<PAGE> 32
primarily due to declines in investment-type contracts and changes in debt and
dividends paid to the Company's parent, which were partially offset by proceeds
from the IPO.
During 1996, cash provided by operating activities increased from the prior year
due primarily to continued growth in business operations. The changes in cash
provided by or used for both investing and financing activities were primarily
due to increases in investment-type contract maturities, partially offset by
changes in allocated advances from the Company's parent. Operating cash flows in
each of the past three years have been more than adequate to meet liquidity
requirements.
REGULATORY INITIATIVES AND CONTINGENCIES
LEGISLATIVE INITIATIVES
Although the Federal government does not directly regulate the insurance
business, Federal initiatives often have an impact on the insurance industry in
a variety of ways. Current and proposed Federal measures which may significantly
affect the life insurance business include tax law changes affecting the tax
treatment of life insurance products and its impact on the relative desirability
of various personal investment vehicles, medical testing for insurability, and
proposed legislation to prohibit the use of gender in determining insurance and
pension rates and benefits. In particular, President Clinton's 1998 Federal
Budget Proposal currently contains certain recommendations for modifying tax
rules related to the treatment of variable annuities and COLI by
contractholders, which if enacted as described, could have a material adverse
impact on the Company's sales of these products. It is too early to determine
whether these tax proposals will ultimately be enacted by Congress and the
potential impact, if any, to the Company's financial condition or results of
operations.
INSOLVENCY FUND
In all states, insurers licensed to transact certain classes of insurance are
required to become members of an insolvency fund. In most states, in the event
of the insolvency of an insurer writing any such class of insurance in the
state, all members of the fund are assessed to pay certain claims of the
insolvent insurer. A particular state's fund assesses its members based on their
respective written premiums in the state for the classes of insurance in which
the insolvent insurer is engaged. Assessments are generally limited for any year
to 1% or 2% of premiums written per year depending on the state. Such
assessments paid by Hartford Life approximated $15, $12 and $13 in 1997, 1996
and 1995, respectively.
NAIC PROPOSALS
The NAIC has been developing several model laws and regulations, including a
Model Investment Law and amendments to the Model Holding Company System
Regulatory Act (the "Holding Act Amendments"). The Model Investment Law defines
the investments which are permissible for life insurers to hold, and the Holding
Act Amendments address the types of activities in which subsidiaries and
affiliates may engage. The NAIC adopted these models in 1997 and 1996, but the
laws have not been enacted for insurance companies domiciled in the State of
Connecticut, such as Hartford Life. Even if enacted in Connecticut or other
states in which Hartford Life's subsidiaries are domiciled, it is expected that
these laws will neither significantly change Hartford Life's investment
strategies nor have any material adverse effect on Hartford Life's liquidity or
financial position.
The NAIC is expected to adopt its codification of Statutory Accounting
Principles ("SAP") in early 1998 with a proposed effective date of January 1,
1999. The American Institute of Certified Public Accountants ("AICPA") has not
yet determined whether SAP will qualify as an Other Comprehensive Basis of
Accounting ("OCBOA"). If SAP is granted OCBOA status and is adopted by Hartford
Life's domiciliary states, the Company will make the necessary changes required
for implementation. These changes are not anticipated to have a material impact
on the statutory financial statements of the Company.
YEAR 2000
The Year 2000 issue relates to the ability or inability of computer systems to
properly process information and data containing or related to dates beginning
with the year 2000 and beyond. The Year 2000 issue exists because many computer
systems that are in use today were developed years ago when a year was
identified using a two-digit field rather than a four-digit field. As
information and data containing or related to the century date are introduced to
computer hardware, software and other systems, date sensitive systems may
recognize the year 2000 as 1900, or not at all, which may result in computer
systems processing information incorrectly. This, in turn, may significantly and
adversely affect the integrity and reliability of information databases and may
result in a wide variety of adverse consequences to a company. In addition, Year
2000 problems that occur with third parties with which a company does business,
such as suppliers, computer vendors and others, may also adversely affect any
given company.
As an insurance and financial services company, Hartford Life has thousands of
individual and business customers that have insurance policies, annuities,
mutual funds and other financial products from Hartford Life. Nearly all of
these policies and products
31
<PAGE> 33
contain date sensitive data, such as policy expiration dates, birth dates,
premium payment dates, and the like. In addition, Hartford Life has business
relationships with numerous third parties that affect virtually all aspects of
Hartford Life's business, including, without limitation, suppliers, computer
hardware and software vendors, insurance agents and brokers, securities
broker-dealers and other distributors of financial products.
Beginning in 1990, Hartford Life began working on making its computer systems
Year 2000 ready, either by installing new programs or by replacing systems. In
January 1998, Hartford Life commenced a company-wide program to further
identify, assess and remediate the impact of Year 2000 problems in all of
Hartford Life's business segments. Hartford Life currently anticipates that this
internal program will be substantially completed by the end of 1998, and testing
of computer systems will continue through 1999. The costs of addressing the Year
2000 issue that have been incurred by Hartford Life through the year ended
December 31, 1997 have not been material to Hartford Life's financial condition
or results of operations. Hartford Life will continue to incur costs related to
its Year 2000 efforts and is in the process of attempting to determine the
approximate total costs to be incurred in the future, which are not currently
anticipated to be material to the Company's results of operations or financial
condition.
In addition, as part of its Year 2000 program, Hartford Life is identifying
third parties with which it has significant business relations in order to
attempt to assess the potential impact on Hartford Life of their Year 2000
issues and remediation plans. Hartford Life currently anticipates that it will
substantially complete this evaluation by the end of 1998, and will conduct
systems testing with certain third parties through 1999. Hartford Life does not
have control over these third parties and, as a result, Hartford Life cannot
currently determine to what extent future operating results may be adversely
affected by the failure of these third parties to successfully address their
Year 2000 issues.
EFFECT OF INFLATION
The rate of inflation as measured by the change in the average consumer price
index has not had a material effect on the revenues or operating results of
Hartford Life during the three most recent fiscal years.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to the Capital Markets Risk Management section of the
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements and Schedules elsewhere herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF HARTFORD LIFE
Certain of the information called for by Item 10 is set forth in the definitive
proxy statement for the 1998 annual meeting of shareholders (the "Proxy
Statement") filed or to be filed by Hartford Life with the Securities and
Exchange Commission within 120 days after the end of the last fiscal year
covered by this Form 10-K under the caption "Item 1. Election of Directors" and
"The Board of Directors and Its Committees" and is incorporated herein by
reference. Additional information required by Item 10 regarding Hartford Life's
executive officers is set forth in Item 1 of this Form 10-K under the caption
"Executive Officers of Hartford Life" and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 is set forth in the Proxy Statement under
the captions "Compensation of Executive Officers", "The Board of Directors
and its Committees - Directors' Compensation", and "Compensation Committee
Interlocks and Insider Participation" and is incorporated herein by
reference.
32
<PAGE> 34
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by Item 12 is set forth in the Proxy Statement under
the caption "Stock Ownership of Directors, Executive Officers and Certain
Shareholders" and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Item 13 is set forth in Proxy Statement under
the caption "Certain Relationships with The Hartford" and is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this report:
1. CONSOLIDATED FINANCIAL STATEMENTS. See Index to Consolidated Financial
Statements and Schedules elsewhere herein.
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES. See Index to Consolidated
Financial Statement and Schedules elsewhere herein.
3. EXHIBITS. See Exhibit Index elsewhere herein.
(b) Reports on Form 8-K - None.
(c) See Item 14(a)(3).
(d) See Item 14(a)(2).
33
<PAGE> 35
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
Page(s)
<S> <C>
Report of Management F-1
Report of Independent Public Accountants F-2
Consolidated Statements of Income for the three years ended December 31, 1997 F-3
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-4
Consolidated Statements of Stockholders' Equity for the three years ended December 31, 1997 F-5
Consolidated Statements of Cash Flows for the three years ended December 31, 1997 F-6
Notes to Consolidated Financial Statements F-7-25
Summary of Investments - Other Than Investments in Affiliates S-1
Condensed Financial Information of Hartford Life, Inc. S-2-3
Supplementary Insurance Information S-4
Reinsurance S-5
Valuation and Qualifying Accounts S-6
</TABLE>
REPORT OF MANAGEMENT
The management of Hartford Life, Inc. ("Hartford Life") is responsible for the
preparation and integrity of information contained in the accompanying
consolidated financial statements and other sections of the Annual Report. The
financial statements are prepared in accordance with generally accepted
accounting principles, and, where necessary, include amounts that are based on
management's informed judgments and estimates. Management believes these
statements present fairly Hartford Life's financial position and results of
operations, and, that any other information contained in the Annual Report is
consistent with the financial statements.
Management has made available Hartford Life's financial records and related data
to Arthur Andersen LLP, independent public accountants, in order for them to
perform an audit of Hartford Life's consolidated financial statements. Their
report appears on page F-2.
An essential element in meeting management's financial responsibilities is
Hartford Life's system of internal controls. These controls, which include
accounting controls and the internal auditing program, are designed to provide
reasonable assurance that assets are safeguarded, and transactions are properly
authorized, executed and recorded. The controls, which are documented and
communicated to employees in the form of written codes of conduct and policies
and procedures, provide for careful selection of personnel and for appropriate
division of responsibility. Management continually monitors for compliance,
while Hartford Life's internal auditors independently assess the effectiveness
of the controls and make recommendations for improvement. Also, Arthur Andersen
LLP took into consideration Hartford Life's system of internal controls in
determining the nature, timing and extent of its audit tests.
Another important element is management's recognition of its responsibility for
fostering a strong, ethical climate, thereby ensuring that Hartford Life's
affairs are transacted according to the highest standards of personal and
professional conduct. Hartford Life has a long-standing reputation of integrity
in business conduct and utilizes communication and education to create and
fortify a strong compliance culture.
The Audit Committee of the Board of Directors of Hartford Life (the
"Committee"), composed of non-employee directors, meets periodically with the
external and internal auditors to evaluate the effectiveness of work performed
by them in discharging their respective responsibilities and to assure their
independence and free access to the Committee.
F-1
<PAGE> 36
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO HARTFORD LIFE, INC.:
We have audited the accompanying Consolidated Balance Sheets of Hartford Life,
Inc. ("Hartford Life") (a Delaware corporation) and subsidiaries as of December
31, 1997 and 1996, and the related Consolidated Statements of Income,
Stockholders' Equity and Cash Flows for each of the three years in the period
ended December 31, 1997. These consolidated financial statements and the
schedules referred to below are the responsibility of Hartford Life's
management. Our responsibility is to express an opinion on these financial
statements and schedules 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 financial position of Hartford Life and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in the Index to
Consolidated Financial Statements and Schedules are presented for the purpose of
complying with the Securities and Exchange Commission's rules and are not part
of the basic financial statements. These schedules have been subjected to the
auditing procedures applied in the audits of the basic financial statements and,
in our opinion, fairly state in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Hartford, Connecticut
January 27, 1998
F-2
<PAGE> 37
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the years ended December 31,
(In millions, except for per share data) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Premiums and other considerations $3,163 $ 3,069 $ 2,643
Net investment income 1,536 1,534 1,451
Net realized capital gains (losses) -- (219) (4)
- ----------------------------------------------------------------------------------------------------------
TOTAL REVENUES 4,699 4,384 4,090
-----------------------------------------------------------------------------------------------------
BENEFITS, CLAIMS AND EXPENSES
Benefits, claims and claim adjustment expenses 2,671 2,727 2,395
Amortization of deferred policy acquisition costs 345 241 205
Dividends to policyholders 241 635 675
Interest expense 58 55 35
Other expenses 904 695 554
- ----------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 4,219 4,353 3,864
-----------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 480 31 226
Income tax expense 174 7 76
- ----------------------------------------------------------------------------------------------------------
NET INCOME $ 306 $ 24 $ 150
-----------------------------------------------------------------------------------------------------
PRO FORMA BASIC EARNINGS PER SHARE (1) $ 2.28 $ 0.19 $ --
PRO FORMA DILUTED EARNINGS PER SHARE (1) $ 2.28 $ 0.19 $ --
- ----------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding (1) 134 125 --
Weighted average common shares outstanding
and dilutive potential common shares (1) 134 125 --
- ----------------------------------------------------------------------------------------------------------
Cash dividends declared per share subsequent
to the Initial Public Offering (2) $ 0.18 $ -- $ --
</TABLE>
(1) See Note 9 of Notes to Consolidated Financial Statements for further
explanation.
(2) Cash dividends declared exclude amounts paid to the Company's parent prior
to the Initial Public Offering (May 22, 1997).
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE> 38
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of December 31,
--------------------------
(In millions, except for share data) 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments
Fixed maturities, available for sale, at fair value
(amortized cost of $16,475 and $15,659) $ 16,848 $15,711
Equity securities, at fair value 181 119
Policy loans, at outstanding balance 3,759 3,839
Other investments, at cost 182 161
- ----------------------------------------------------------------------------------------------
Total investments 20,970 19,830
Cash 88 72
Premiums receivable and agents' balances 147 170
Reinsurance recoverables 5,765 5,839
Deferred policy acquisition costs 3,361 2,800
Deferred income tax 397 543
Other assets 890 909
Separate account assets 69,362 49,770
- ----------------------------------------------------------------------------------------------
TOTAL ASSETS $ 100,980 $79,933
------------------------------------------------------------------------------------------
LIABILITIES
Future policy benefits $ 4,939 $ 3,986
Other policyholder funds 21,139 22,253
Short-term debt 50 --
Long-term debt 650 --
Allocated advances from parent -- 893
Other liabilities 2,696 1,757
Separate account liabilities 69,362 49,770
- ----------------------------------------------------------------------------------------------
TOTAL LIABILITIES 98,836 78,659
STOCKHOLDERS' EQUITY
Preferred stock - authorized 50,000,000 shares; no shares issued
and outstanding, par value $0.01 -- --
Common stock - authorized 0 and 1,000 shares; issued and
outstanding 0 and 100 shares, par value $0.01 -- --
Class A common stock - authorized 600,000,000 shares; issued and
outstanding 26,026,153 and 0 shares, par value $0.01 -- --
Class B common stock - authorized 600,000,000 shares;
issued and outstanding 114,000,000 and 0 shares,
par value $0.01 1 --
Capital surplus 1,283 585
Treasury stock, at cost - 35,684 and 0 shares (1) --
Net unrealized capital gains on securities, net of tax 237 29
Retained earnings 624 660
- ----------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 2,144 1,274
------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 100,980 $79,933
--------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE> 39
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CLASS A CLASS B
PREFERRED COMMON COMMON COMMON CAPITAL
(In millions) STOCK STOCK STOCK STOCK SURPLUS
--------- --------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 $ -- $ -- $ -- $ -- $ 405
Net income -- -- -- -- --
Dividends -- -- -- -- --
Capital contribution -- -- -- -- 180
Change in net unrealized
capital gains (losses) on
securities, net of tax -- -- -- -- --
Translation adjustments -- -- -- -- --
--------- --------- --------- --------- -------
BALANCE, DECEMBER 31, 1995 -- -- -- -- 585
Net income -- -- -- -- --
Change in net unrealized
capital gains (losses) on
securities, net of tax -- -- -- -- --
--------- --------- --------- --------- -------
BALANCE, DECEMBER 31, 1996 -- -- -- -- 585
Net income -- -- -- -- --
Dividends -- -- -- -- --
Conversion to Class B
common stock -- -- -- 1 (1)
Issuance of Class A
common stock -- -- -- -- 687
Capital contribution -- -- -- -- 12
Net treasury stock activity -- -- -- -- --
Change in net unrealized
capital gains (losses) on
securities, net of tax -- -- -- -- --
Translation adjustments -- -- -- -- --
--------- --------- --------- --------- -------
BALANCE, DECEMBER 31, 1997 $ -- $ -- $ -- $ 1 $ 1,283
========= ========= ========= ========= =======
</TABLE>
<TABLE>
<CAPTION>
NET
UNREALIZED
CAPITAL
GAINS (LOSSES)
ON TOTAL
TREASURY SECURITIES, RETAINED STOCKHOLDERS'
STOCK NET OF TAX EARNINGS EQUITY
-------- -------------- --------- -------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 $-- $(730) $ 711 $ 386
Net income -- -- 150 150
Dividends -- -- (226) (226)
Capital contribution -- -- -- 180
Change in net unrealized
capital gains (losses) on
securities, net of tax -- 686 -- 686
Translation adjustments -- -- 1 1
--- ----- ----- -------
BALANCE, DECEMBER 31, 1995 -- (44) 636 1,177
Net income -- -- 24 24
Change in net unrealized
capital gains (losses) on
securities, net of tax -- 73 -- 73
--- ----- ----- -------
BALANCE, DECEMBER 31, 1996 -- 29 660 1,274
Net income -- -- 306 306
Dividends -- -- (341) (341)
Conversion to Class B
common stock -- -- -- --
Issuance of Class A
common stock -- -- -- 687
Capital contribution -- -- -- 12
Net treasury stock activity (1) -- -- (1)
Change in net unrealized
capital gains (losses) on
securities, net of tax -- 208 -- 208
Translation adjustments -- -- (1) (1)
--- ----- ----- -------
BALANCE, DECEMBER 31, 1997 $(1) $ 237 $ 624 $ 2,144
=== ===== ===== =======
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE> 40
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended December 31,
----------------------------------------
(IN MILLIONS) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 306 $ 24 $ 150
ADJUSTMENTS TO RECONCILE NET INCOME TO CASH PROVIDED
BY OPERATING ACTIVITIES
Depreciation and amortization 23 12 17
Net realized capital losses -- 219 4
Decrease (increase) in premiums receivable and
agents' balances 23 (13) (27)
Increase in other liabilities 258 433 171
Increase (decrease) in receivables, payables and
accruals 77 2 (266)
Increase (decrease) in accrued taxes 143 (90) 35
Decrease (increase) in deferred income taxes 37 (137) (104)
Increase in deferred policy acquisition costs (561) (580) (390)
Increase in liabilities for future policy benefits 956 472 654
(Increase) decrease in reinsurance recoverables and
other assets (115) (4) 22
- ----------------------------------------------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES 1,147 338 266
- ----------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of fixed maturity investments (7,943) (7,045) (6,950)
Sales of fixed maturity investments 5,220 4,018 5,494
Maturities and principal paydowns of fixed maturity
investments 2,513 2,890 1,847
Purchases of other investments (159) (391) (928)
Sales of other investments 140 284 64
Net (purchases) sales of short-term investments (421) 302 (189)
- ----------------------------------------------------------------------------------------------------------
CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES (650) 58 (662)
- ----------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase in short-term debt 50 -- --
Increase in long-term debt 650 -- --
(Decrease) increase in allocated advances from parent (893) 115 --
Dividends paid (329) (19) --
Net (disbursements for) receipts from investment
and universal life-type contracts (charged
against) credited to policyholder accounts (644) (490) 431
Net proceeds from the sale of common stock 687 -- --
Acquisition of treasury stock (1) -- --
- ----------------------------------------------------------------------------------------------------------
CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES (480) (394) 431
- ----------------------------------------------------------------------------------------------------------
Increase in cash 17 2 35
Impact of foreign exchange (1) -- 1
- ----------------------------------------------------------------------------------------------------------
Cash - beginning of year 72 70 34
- ----------------------------------------------------------------------------------------------------------
CASH - END OF YEAR $ 88 $ 72 $ 70
- ----------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
NET CASH PAID DURING THE YEAR FOR:
Income taxes $ 45 $ 166 $ 173
Interest $ 55 $ 55 $ 35
NONCASH FINANCING ACTIVITIES:
Capital contribution $ 12 $ -- $ 180
Increase in allocated advances from parent for other assets $ -- $ 46 $ --
Dividends $ -- $ -- $ 207
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE> 41
HARTFORD LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN MILLIONS EXCEPT PER SHARE DATA UNLESS OTHERWISE STATED)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Hartford Life, Inc. (a Delaware corporation) ("Hartford Life" or 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 ("HLA"). On February 10, 1997, Hartford Life filed a
registration statement, as amended, with the Securities and Exchange Commission
relating to an initial public offering ("IPO" or "the Offering") of the
Company's Class A Common Stock. Pursuant to the IPO on May 22, 1997, Hartford
Life became a publicly traded company selling 26 million shares at $28.25 per
share and receiving net proceeds of $687. The Company is a direct subsidiary of
Hartford Accident and Indemnity Company ("HA&I") and is ultimately a subsidiary
of Hartford Fire Insurance Company ("Hartford Fire"). Hartford Fire is an
indirect wholly owned subsidiary of The Hartford Financial Services 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 which
provides, primarily in the United States: (a) investment 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
(a) BASIS OF PRESENTATION
The accompanying consolidated financial statements present the financial
position, results of operations and cash flows of Hartford Life, Inc. and HLA
and subsidiaries on the basis of historical cost, in a manner similar to pooling
of interests accounting. HLA directly owns all outstanding shares 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 Hartford Life as if it were a separate entity for all periods
presented. All material intercompany transactions and balances between Hartford
Life, its subsidiaries and affiliates have been eliminated. The consolidated
financial statements are prepared on the basis of generally accepted accounting
principles which differ materially from the statutory accounting practices
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. The most significant estimates
include those used in determining deferred policy acquisition costs and the
liability for future policy benefits and other policyholder funds. Although some
variability is inherent in these estimates, management believes the amounts
provided are adequate.
Certain reclassifications have been made to prior year financial information to
conform to the current year presentation.
(b) CHANGES IN ACCOUNTING PRINCIPLES
In December 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") No. 97-3 "Accounting by Insurance
and Other Enterprises for Insurance Related Assessments". This SOP provides
guidance on accounting by insurance and other enterprises for assessments
related to insurance activities. Specifically, the SOP provides guidance on when
a guaranty fund or other assessment should be recognized, how to measure the
liability, and what information should be disclosed. This SOP will be effective
for fiscal years beginning after December 15, 1998. Adoption of SOP 97-3 is not
expected to have a material impact on the Company's financial condition or
results of operations.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share". This statement established new standards for computing and presenting
earnings per share
F-7
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
("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 Accounting Principles Board Opinion No. 15, "Earnings
per Share", and makes them comparable to international EPS standards. It
replaces the presentation of primary EPS with the 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. For additional information, see Note 9.
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 EITF 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 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 June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities" which is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996. 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, 1996, Hartford Life adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of". This statement establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles, and goodwill related to
those assets to be held and used and for long-lived assets and certain
identifiable intangibles to be disposed of. Adoption of SFAS No. 121 did not
have a material effect on the Company's financial condition or results of
operations.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation", which was effective in 1996. As permitted by SFAS No. 123,
Hartford Life measures compensation costs of employee stock option plans using
the intrinsic value method prescribed by Accounting Principles Board Opinion No.
25 and has made disclosures of pro forma net income and pro forma earnings per
share as if the fair value method prescribed by SFAS No. 123 had been applied.
For additional information, see Note 11.
The Company's cash flows were not impacted by these changes in accounting
principles.
(c) REVENUE RECOGNITION
Revenues for universal life-type $ 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 and
disability policies are recognized as revenues when they are due from
policyholders.
(d) 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.
(e) 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 over the expected maturity of the securities, 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-8
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(f) INVESTMENTS
Hartford Life's investments in fixed maturities include bonds and commercial
paper which are considered "available for sale" and accordingly are carried at
fair value with the after-tax difference from cost reflected as a component of
Stockholders' Equity designated "Net unrealized capital gains (losses) on
securities, net of tax". Equity securities, which include common and
non-redeemable preferred stocks, are carried at fair values with the after-tax
difference from cost reflected in Stockholders' Equity. Policy loans are carried
at outstanding balance which approximates fair value. Net realized capital gains
and losses, after deducting pension policyholders' share, are reported as a
component of revenue and are determined on a specific identification basis.
The Company's accounting policy for impairment 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 securities for
appropriate valuation on an on-going basis.
During 1996, it was determined that certain individual securities within the
investment portfolio supporting the Company's block of guaranteed rate contract
business written prior to 1995 could not recover to amortized cost prior to
sale. Therefore, an other than temporary impairment loss of $88, after taxes,
was recorded.
(g) DERIVATIVE INSTRUMENTS
Hartford Life uses a variety of derivative 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 planned
investment purchases or existing assets and liabilities. Hartford Life does not
hold or issue derivative instruments for trading purposes. Hartford Life's
accounting for derivative 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", AICPA SOP 86-2, "Accounting for
Options" and various EITF pronouncements. Written options are used, in all cases
in conjunction with other assets and derivatives, as part of the Company's asset
and liability management strategy. Derivative instruments are carried at values
consistent with the asset or liability being hedged. Derivative instruments used
to hedge fixed maturities or equity securities are carried at fair value with
the after-tax difference from cost reflected in Stockholders' Equity. Derivative
instruments used to hedge other invested assets or liabilities are carried at
cost.
Derivative instruments must be designated at inception as a hedge and measured
for effectiveness both at inception and on an on-going basis. Hartford Life's
minimum correlation threshold for hedge designation is 80%. If correlation,
which is assessed monthly and measured based on a rolling three month average,
falls below 80%, hedge accounting will be terminated. Derivative instruments
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. Consistent with industry
practice, synthetic instruments are accounted for like the financial instrument
it is intended to replicate. Derivative instruments which fail to meet risk
management criteria, subsequent to acquisition, 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 investment of future receipt of product cash flows are deferred and, at the
time of the ultimate investment 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 contract futures are closed, except for futures used in duration
hedging which are deferred and basis adjusted on a quarterly basis. The basis
adjustments are amortized into net investment income over the remaining asset
life.
Open forward commitment contracts are marked to market through Stockholders'
Equity. Such contracts are accounted for at settlement by recording the purchase
of the specified securities at the previously committed price. Gains or losses
resulting from the termination of 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.
F-9
<PAGE> 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The cost of options entered into as part of a risk management strategy are basis
adjusted to the underlying asset or liability and amortized over the remaining
life of the option. Gains or losses on expiration or termination are adjusted
into the basis of the underlying asset or liability and amortized over the
remaining asset life.
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 investment 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 net investment income. Interest rate swaps purchased in
anticipation of an asset purchase ("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 capital gain or loss.
Premiums paid on purchased floor or cap agreements and the premium received on
issued cap or floor 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. Changes in the spot rate of instruments designated
as hedges of the net investment in a foreign subsidiary are reflected in the
cumulative translation adjustments component of Stockholders' Equity. Cash flows
from futures, options, and swaps, accounted for as hedges, are included with the
cash flows of the item being hedged.
(h) SEPARATE ACCOUNTS
The Company maintains separate account assets and liabilities 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 policyholders.
Separate accounts reflect two categories of risk assumption: non-guaranteed
separate accounts, wherein the policyholder assumes the investment risk, and
guaranteed separate account assets, wherein the Company contractually guarantees
either a minimum return or account value to the policyholder.
(i) DEFERRED POLICY ACQUISITION COSTS
Policy acquisition costs, which include 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 charges, 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 adjusted by a cumulative charge or credit to income.
The Company's other expenses include the following:
<TABLE>
<CAPTION>
1997 1996 1995
------- ----- -----
<S> <C> <C> <C>
Commissions $ 1,073 $ 949 $ 705
Deferred acquisition costs (881) (836) (633)
Other 712 582 482
------- ----- -----
Total other expenses $ 904 $ 695 $ 554
======= ===== =====
</TABLE>
F-10
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(j) 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, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
CLAIM RESERVES, JANUARY 1 $ 1,496 $ 1,254
- ----------------------------------------------------------------------------
Less: Reinsurance recoverable, January 1 53 35
------- -------
Incurred expenses related to:
Current year 890 799
Prior year (51) (66)
------- -------
Total incurred 839 733
------- -------
Paid expenses related to:
Current year 274 236
Prior year 333 273
------- -------
Total paid 607 509
------- -------
Add: Reinsurance recoverable, December 31 71 53
------- -------
CLAIM RESERVES, DECEMBER 31 $ 1,746 $ 1,496
============================================================================
</TABLE>
(k) FOREIGN CURRENCY TRANSLATION
Foreign currency translation gains and losses are reflected in Stockholders'
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.
(l) 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
33%, 25%, and 23% in 1997, 1996, and 1995, respectively, of total insurance in
force.
3. INITIAL PUBLIC OFFERING
On February 10, 1997, Hartford Life filed a registration statement, as amended,
with the Securities and Exchange Commission, relating to the IPO of the
Company's Class A Common Stock. Pursuant to the Offering on May 22, 1997,
Hartford Life sold to the public 26 million shares at $28.25 per share and
received proceeds, net of offering expenses, of $687. Of the proceeds, $527 was
used to retire promissory notes outstanding and the line of credit discussed in
Note 7 and the remaining $160 was contributed to the Company's insurance
subsidiaries to be used for growth in the Company's core businesses.
The 26 million shares sold in the Offering represent approximately 18.6% of the
equity ownership in Hartford Life and approximately 4.4% of the combined voting
power of Hartford Life's Class A and Class B Common Stock. The Hartford owns all
of the 114 million outstanding shares of Class B Common Stock of Hartford Life,
representing approximately 81.4% of the equity ownership in the Company and
approximately 95.6% of the combined voting power of Hartford Life's Class A and
Class B Common Stock. Holders of Class A Common Stock generally have identical
rights to the holders of Class B Common Stock except that the 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
HLI's stockholders.
On April 3, 1997, the Company reclassified the authorized shares of common
stock, par value $0.01 per share, of the Company into Class B Common Stock, par
value $0.01 per share ( the "Class B Common Stock" ), and authorized the Class A
Common Stock, par value $0.01 per share ( the "Class A Common Stock" ) and the
preferred stock, par value $0.01 per share ( the "Preferred Stock" ).
F-11
<PAGE> 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INITIAL PUBLIC OFFERING (CONTINUED)
Holders of Class A 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 (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 (a) 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 (b) 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.
4. INVESTMENTS AND DERIVATIVE INSTRUMENTS
<TABLE>
<CAPTION>
For the years ended December 31,
-------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(a) COMPONENTS OF NET INVESTMENT INCOME
Interest income from fixed maturities $ 1,094 $ 1,040 $ 1,112
Interest income from policy loans 425 477 342
Income from other investments 35 32 9
- -----------------------------------------------------------------------------------------------------------------------------
Gross investment income 1,554 1,549 1,463
Less: Investment expenses 18 15 12
- -----------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME $ 1,536 $ 1,534 $ 1,451
=============================================================================================================================
(b) COMPONENTS OF NET REALIZED CAPITAL GAINS (LOSSES)
Fixed maturities $ (11) $ (214) $ 30
Equity securities 12 2 (6)
Real estate and other (1) (4) (26)
Less: Decrease in liability to policyholders for realized capital gains -- (3) (2)
- -----------------------------------------------------------------------------------------------------------------------------
NET REALIZED CAPITAL GAINS (LOSSES) $ -- $ (219) $ (4)
=============================================================================================================================
(c) NET UNREALIZED CAPITAL GAINS (LOSSES) ON EQUITY SECURITIES
Gross unrealized capital gains $ 22 $ 7 $ 4
Gross unrealized capital losses -- (1) (2)
- -----------------------------------------------------------------------------------------------------------------------------
Net unrealized capital gains 22 6 2
Deferred income tax expense 8 2 --
- -----------------------------------------------------------------------------------------------------------------------------
Net unrealized capital gains, net of tax 14 4 2
Balance - beginning of year 4 2 (5)
- -----------------------------------------------------------------------------------------------------------------------------
NET CHANGE IN UNREALIZED CAPITAL GAINS (LOSSES) ON EQUITY SECURITIES $ 10 $ 2 $ 7
=============================================================================================================================
(d) NET UNREALIZED CAPITAL GAINS (LOSSES) ON FIXED MATURITIES
Gross unrealized capital gains $ 461 $ 425 $ 581
Gross unrealized capital losses (88) (373) (598)
Unrealized capital (gains) losses credited to policyholders (30) (13) (53)
- -----------------------------------------------------------------------------------------------------------------------------
Net unrealized capital gains (losses) 343 39 (70)
Deferred income tax expense (benefit) 120 14 (24)
- -----------------------------------------------------------------------------------------------------------------------------
Net unrealized capital gains (losses), net of tax 223 25 (46)
Balance - beginning of year 25 (46) (725)
- -----------------------------------------------------------------------------------------------------------------------------
NET CHANGE IN UNREALIZED CAPITAL GAINS (LOSSES) ON FIXED MATURITIES $ 198 $ 71 $ 679
=============================================================================================================================
</TABLE>
F-12
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS AND DERIVATIVE INSTRUMENTS (CONTINUED)
(e) FIXED MATURITY INVESTMENTS
<TABLE>
<CAPTION>
As of December 31, 1997
--------------------------------------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Cost Gains Losses Fair Value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U. S. gov't and gov't agencies and authorities
(guaranteed and sponsored) $ 239 $ 3 $ (1) $ 241
U. S. gov't and gov't agencies and authorities
(guaranteed and sponsored) - asset-backed 1,366 70 (36) 1,400
States, municipalities and political subdivisions 429 10 (1) 438
International governments 472 33 (3) 502
Public utilities 989 30 (3) 1,016
All other corporate including international 6,058 252 (29) 6,281
All other corporate - asset-backed 4,855 53 (10) 4,898
Short-term investments 1,394 - - 1,394
Certificates of deposit 668 10 (5) 673
Redeemable preferred stock 5 - - 5
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 16,475 $ 461 $ (88) $ 16,848
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1996
-----------------------------------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Cost Gains Losses Fair Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U. S. gov't and gov't agencies and authorities
(guaranteed and sponsored) $ 194 $ 13 $ (4) $ 203
U. S. gov't and gov't 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 estimated fair value of fixed maturity investments at
December 31, 1997 by estimated maturity year are shown below. Expected
maturities differ from contractual maturities due to call or prepayment
provisions. Asset-backed securities, including MBS and CMO's, are distributed to
maturity year based on the Company's estimates of the rate of future prepayments
of principal over the remaining lives of the securities. These estimates are
developed using prepayment speeds provided in broker consensus data. Such
estimates are derived from prepayment speeds experienced at the interest rate
levels projected for the applicable underlying collateral and can be expected to
vary from actual experience.
<TABLE>
<CAPTION>
Amortized
MATURITY Cost Fair Value
- -----------------------------------------------------------------------------
<S> <C> <C>
One year or less $ 2,997 $ 3,043
Over one year through five years 6,433 6,522
Over five years through ten years 3,928 3,994
Over ten years 3,117 3,289
- -----------------------------------------------------------------------------
TOTAL $ 16,475 $ 16,848
- -----------------------------------------------------------------------------
</TABLE>
F-13
<PAGE> 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS AND DERIVATIVE INSTRUMENTS (CONTINUED)
(e) FIXED MATURITY INVESTMENTS (CONTINUED)
Sales of fixed maturities, excluding short-term fixed maturities, for the years
ended December 31, 1997, 1996 and 1995 resulted in proceeds of $5.2 billion,
$4.0 billion and $5.5 billion, gross realized capital gains of $175, $102 and
$111, gross realized capital losses (including writedowns) of $186, $316 and
$81, respectively. Sales of equity security investments for the years ended
December 31, 1997, 1996 and 1995 resulted in proceeds of $132, $74 and $42,
gross realized capital gains of $12, $2 and $0 and gross realized capital losses
of $0, $0 and $6, respectively.
(f) CONCENTRATION OF CREDIT RISK
The Company has invested in the securities of a single issuer, Merrill Lynch
Mortgage Investors, in an amount greater than 10% of stockholders' equity. The
amortized cost related to this investment was $230, the fair value was $231 and
the associated ratings varied from AAA to BBB. Excluding this investment and
investments in U.S. government and agencies, the Company has no other
significant concentration of credit risk in fixed maturities.
(g) DERIVATIVE INSTRUMENTS
Hartford Life utilizes a variety of derivative instruments, including swaps,
caps, floors, forwards and exchange traded futures and options, in accordance
with Company policy and in order to achieve one of three Company approved
objectives: to hedge risk arising from interest rate, price or currency exchange
rate volatility; to manage liquidity; or, to control transactions costs. The
Company utilizes derivative instruments to manage market risk through four
principal risk management strategies: hedging anticipated transactions, hedging
liability instruments, hedging invested assets and hedging portfolios of assets
and/or liabilities. Hartford Life does not trade in these instruments for the
express purpose of earning trading profits.
The Company maintains a derivatives counterparty exposure policy which
establishes market-based credit limits, favors long-term financial stability and
creditworthiness, and typically requires credit enhancement/credit risk reducing
agreements. Credit risk is measured as the amount owed to Hartford Life based on
current market conditions and potential payment obligations between the Company
and its counterparties. Credit exposures are quantified weekly and netted, and
collateral is pledged to or held by the Company to the extent the current value
of derivatives exceed exposure policy thresholds.
The Company's derivative program is monitored by an internal compliance unit and
is reviewed by senior management and Hartford Life's Finance Committee. Notional
amounts, which represent the basis upon which pay or receive amounts are
calculated and are not reflective of credit risk, pertaining to derivative
financial instruments (excluding the Company's guaranteed separate account
derivative investments), totaled $7.7 billion and $10.9 billion ($5.6 billion
and $8.2 billion related to the Company's investments, $2.1 billion and $2.6
billion on the Company's liabilities) at December 31, 1997 and 1996,
respectively.
F-14
<PAGE> 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS AND DERIVATIVE INSTRUMENTS (CONTINUED)
The table below provides a summary of derivative instruments held by Hartford
Life at December 31, 1997 and 1996, segregated by major investment and liability
category:
<TABLE>
<CAPTION>
1997 AMOUNT HEDGED (NOTIONAL AMOUNTS)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Purchased Interest Foreign Total
Carrying Issued Caps Caps, Floors Futures Rate Currency Notional
ASSETS HEDGED Value & Floors and Options (2) Swaps Swaps (3) Amount
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Asset backed securities (excluding inverse
floaters and anticipatory) $ 6,222 $ 500 $ 1,419 $ 28 $ 343 $ - $ 2,290
Inverse floaters (1) 75 47 80 - 25 - 152
Anticipatory (4) - - - 19 236 - 255
Other bonds and notes 9,156 497 596 22 1,721 94 2,930
Short-term investments 1,395 - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES 16,848 1,044 2,095 69 2,325 94 5,627
Equity securities, policy loans and other
investments 4,122 - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $ 20,970 $ 1,044 $ 2,095 $ 69 $ 2,325 $ 94 $ 5,627
LONG TERM DEBT - - - - - - -
OTHER POLICY CLAIMS - 10 150 - 1,889 - 2,049
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL DERIVATIVES - NOTIONAL VALUE $ 1,054 $ 2,245 $ 69 $ 4,214 $ 94 $ 7,676
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL DERIVATIVES - FAIR VALUE $ (8) $ 23 $ - $ 37 $ (6) $ 46
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1996 AMOUNT HEDGED (NOTIONAL AMOUNTS)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Purchased Interest Foreign Total
Carrying Issued Caps Caps, Floors Futures Rate Currency Notional
ASSETS HEDGED Value & Floors and Options (2) Swaps Swaps (3) Amount
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Asset backed securities (excluding inverse
floaters and anticipatory) $ 5,939 $ 500 $ 2,454 $ - $ 941 $ - $ 3,895
Inverse floaters (1) 404 98 856 - 346 - 1,300
Anticipatory (4) - - - 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
LONG TERM DEBT - - - - - - -
OTHER POLICY CLAIMS - 10 150 - 2,468 - 2,628
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL DERIVATIVES - NOTIONAL VALUE $ 1,064 $ 4,207 $ 337 $ 5,144 $ 125 $ 10,877
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL DERIVATIVES - FAIR VALUE $ (10) $ 38 $ - $ - $ (9) $ 19
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Inverse floaters are variations of collateralized mortgage obligations
("CMO's") for which the coupon rates move inversely with an index rate
such as the London Interbank Offered Rate ("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, caps and
floors.
(2) As of December 31, 1997 and 1996, more than 59% and 71% , respectively, of
the notional futures contracts expire within one year.
(3) As of December 31, 1997 and 1996, more than 16% and 42%, respectively, of
foreign currency swaps expire within one year; the balance matures over
the succeeding 9 years.
(4) Deferred gains and losses on anticipatory transactions are included in the
carrying value of fixed maturities 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, 1997, the Company had
$2.7 of net deferred gains, which the Company expects to basis adjust in
1998. At December 31, 1996, the Company had $5.7 in net deferred gains for
futures, interest rate swaps and purchased options of which $5.9 was basis
adjusted in 1997.
F-15
<PAGE> 50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS AND DERIVATIVE INSTRUMENTS (CONTINUED)
The following is a reconciliation of notional amounts by derivative type and
strategy as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
December 31, Maturities/ December 31,
1996 Notional Terminations 1997 Notional
Amount Additions (1) Amount
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BY DERIVATIVE TYPE
Caps $ 1,862 $ 33 $ 630 $ 1,265
Floors 3,399 32 1,532 1,899
Swaps/ Forwards 5,269 1,639 2,600 4,308
Futures 337 319 587 69
Options 10 125 - 135
- ----------------------------------------------------------------------------------------
TOTAL $ 10,877 $ 2,148 $ 5,349 $ 7,676
- ----------------------------------------------------------------------------------------
BY STRATEGY
Liability $ 2,628 $ 251 $ 830 $ 2,049
Anticipatory 392 428 565 255
Asset 2,380 1,164 1,090 2,454
Portfolio 5,477 305 2,864 2,918
- ----------------------------------------------------------------------------------------
TOTAL $ 10,877 $ 2,148 $ 5,349 $ 7,676
- ----------------------------------------------------------------------------------------
</TABLE>
(1) During 1997, the Company had no significant gains or losses on
terminations of hedge positions using derivative financial instruments.
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 "Disclosure about Fair Value
of Financial Instruments" requires disclosure of fair value information of
financial instruments. For certain financial instruments where quoted market
prices are not available, other independent valuation techniques and assumptions
are used. Because considerable judgment is used, these estimates are not
necessarily indicative of amounts that could be realized in a current market
exchange. SFAS No. 107 excludes certain financial instruments from disclosure,
including insurance contracts.
For cash, short-term investments, accounts receivable, policy loans, mortgage
loans and other liabilities, carrying amounts on the Consolidated Balance Sheets
approximate fair value.
Fair value for fixed maturities and marketable equity securities are based upon
quoted market prices. Fair value for securities that are not publicly traded are
analytically determined. These amounts are disclosed in Note 4 of Notes to
Consolidated Financial Statements.
The fair value of derivative financial instruments, including swaps, caps,
floors, futures, options and forward commitments, is determined using a pricing
model which is validated through quarterly comparison to dealer quoted prices.
Amounts are disclosed in Note 4 of Notes to Consolidated Financial Statements.
Fair value for partnerships and trusts are based on external market valuations
from partnership and trust management.
Other policy claims and benefits payable fair value information is determined by
estimating future cash flows, discounted at the current market rate.
Fair value for long-term debt is based on external valuation using discounted
future cash flows at current market interest rates.
F-16
<PAGE> 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying amount and fair values of Hartford Life's financial instruments at
December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------ ----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Fixed maturities $16,848 $16,848 $15,711 $15,711
Equity securities 181 181 119 119
Policy loans 3,759 3,759 3,839 3,839
Mortgage loans -- -- 2 2
Investments in partnerships and trusts 59 74 66 68
Other 123 158 93 119
LIABILITIES
Other policy benefits $11,769 $11,755 $11,707 $11,469
Short-term debt 50 50 -- --
Long-term debt 650 674 -- --
Allocated Advances -- -- 893 893
- ------------------------------------------------------------------------------------------------------------
</TABLE>
6. SEPARATE ACCOUNTS
Hartford Life maintained separate account assets and liabilities totaling $69.4
billion and $49.8 billion at December 31, 1997 and 1996, respectively, which are
reported at fair value. Separate account assets are segregated from other
investments and net investment income and net realized capital gains and losses
accrue directly to the policyholder. Separate accounts reflect two categories of
risk assumption: non-guaranteed separate accounts totaling $58.7 billion and
$39.4 billion at December 31, 1997 and 1996, respectively, wherein the
policyholder assumes the investment risk, and guaranteed separate accounts
totaling $10.7 and $10.4 billion at December 31, 1997 and 1996, respectively,
wherein Hartford Life contractually guarantees either a minimum return or
account value to the policyholder. Included in the non-guaranteed category were
policy loans totaling $1.9 billion and $2.0 billion at December 31, 1997 and
1996, respectively. Net investment income (including net realized capital 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 were $699, $538 and $387 in 1997, 1996 and
1995, respectively. The guaranteed separate accounts include fixed market value
adjusted individual annuity and modified guaranteed life insurance. The average
credited interest rate on these contracts was 6.52% at December 31, 1997. The
assets that support these liabilities were comprised of $10.4 billion in fixed
maturities as of December 31, 1997. The portfolios are segregated from other
investments and are managed to minimize liquidity and interest rate risk. In
order to minimize the risk of disintermediation associated with early
withdrawals, fixed MVA 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 which totaled $119 in
carrying value and $3.2 billion in notional amounts as of December 31, 1997.
<TABLE>
<CAPTION>
7. DEBT 1997 1996
------------------------------------------------------------------
Weighted Average Weighted Average
Amount Interest Rate Amount Interest Rate
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHORT-TERM DEBT
Commercial paper $ 50 5.8% $ - -
Allocated advances from Parent - - 893 7.1%
- -----------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM DEBT $ 50 5.8% $ 893 7.1%
- -----------------------------------------------------------------------------------------------------------
LONG-TERM DEBT
Notes, due 2004 $ 200 7.0% $ - -
Notes, due 2007 200 7.2% - -
Notes, due 2027 250 7.8% - -
- -----------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT $ 650 7.4% $ - -
- -----------------------------------------------------------------------------------------------------------
</TABLE>
F-17
<PAGE> 52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEBT (CONTINUED)
On February 7, 1997, the Company declared a dividend of $1,184 payable to HA&I.
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, which, together with a promissory note in the amount of
$100, was paid as a dividend to HA&I 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"). Such
Allocated Advances were not treated as liabilities or indebtedness for tax and
statutory accounting purposes. Cash received in respect to Allocated Advances
was used to support the growth of the life insurance subsidiaries and was
treated as surplus for statutory accounting purposes. In addition, on April 4,
1997, the Company declared and paid a dividend of $25 to its parent in the form
of a promissory note. Subsequently, $12 of this note was forgiven and treated as
a capital contribution from HA&I.
On February 14, 1997, the Company filed a shelf registration statement for the
issuance and sale of up to $1.0 billion in the aggregate of senior debt
securities, subordinated debt securities and preferred stock. On June 12, 1997,
the Company issued $650 of unsecured redeemable long-term debt in the form of
notes and debentures. Of this amount, $200 was in the form of 6.90% notes due
June 15, 2004, $200 of 7.10% notes due June 15, 2007, and $250 of 7.65%
debentures due June 15, 2027. Interest on each of the notes and debentures is
payable semi-annually on June 15 and December 15, of each year, commencing
December 15, 1997. The Company also issued $50 of short-term debt in the form of
commercial paper. Of the proceeds from these issuances, $670 was used to retire
the remaining balance on the $1,300 line of credit with the remainder being used
to fund business growth. Subsequently, the Company reduced the capacity of the
line of credit from $1,300 to $250, which will be primarily used to support the
commercial paper program.
8. 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 filing 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 affiliated group of which The Hartford is the
common parent. To the extent allowed by law, it is the 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 36%, 23% and 34% in
1997, 1996 and 1995, respectively.
Income tax expense is as follows:
<TABLE>
<CAPTION>
For the years ended December 31,
------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Current $ 169 $ 134 $ 213
Deferred 5 (127) (137)
- ----------------------------------------------------------------------
INCOME TAX EXPENSE $ 174 $ 7 $ 76
- ----------------------------------------------------------------------
</TABLE>
A reconciliation of the tax provision at the U.S. Federal statutory rate to the
provision (benefit) for income taxes is as follows:
<TABLE>
<CAPTION>
For the years ended December 31,
-------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax provision at the U.S. Federal $ 168 $ 11 $ 79
statutory rate
Tax-exempt income - (2) (3)
Foreign tax credit - - (4)
Other 6 (2) 4
- -------------------------------------------------------------------------------------------
TOTAL $ 174 $ 7 $ 76
- -------------------------------------------------------------------------------------------
</TABLE>
F-18
<PAGE> 53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAX (CONTINUED)
Deferred tax assets (liabilities) include the following at December 31:
<TABLE>
<CAPTION>
1997 1996
-------------------------
<S> <C> <C>
Tax return deferred acquisition costs $ 651 $ 524
Financial statement deferred acquisition
costs and reserves (364) (260)
Employee benefits 13 15
Net unrealized capital gains on securities (128) (16)
Investments and other 225 280
- --------------------------------------------------------------------------
TOTAL $ 397 $ 543
- --------------------------------------------------------------------------
</TABLE>
Income taxes paid to The Hartford were $45, $166 and $173 in 1997, 1996 and
1995, respectively. Hartford Life had a current tax payment of $52 due to The
Hartford at December 31, 1997 and a tax refund due from The Hartford of $59 at
December 31, 1996.
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 these situations, 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,
1997 was $37.
9. PRO FORMA EARNINGS PER SHARE
The Company adopted SFAS No. 128, "Earnings per Share", effective December 15,
1997. Basic earnings per share are computed based upon the weighted average
number of shares outstanding during the year. Diluted earnings per share include
the dilutive effect of outstanding options, using the treasury stock method, and
also contingently issuable shares. Under the treasury stock method, it is
assumed that options are exercised and the proceeds are used to purchase common
stock at the average market price for the period. The difference between the
number of shares assumed issued and number of shares purchased represents the
dilutive shares. Contingently issuable shares are included upon satisfaction of
certain conditions related to contingency.
Pro forma earnings per share amounts, on a basic and diluted basis, have been
calculated based upon the weighted average common shares deemed to be
outstanding during the respective periods. For periods prior to the closing of
the Company's IPO (May 22, 1997), outstanding shares are based upon 114 million
shares of Class B Common Stock owned by The Hartford plus an assumed issuance of
11 million shares of Class A Common Stock (the number of shares that, based upon
the IPO price and the 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). For the period subsequent to the closing of the IPO, outstanding
shares are based upon 114 million shares of Class B Common Stock owned by The
Hartford plus approximately 26 million shares of Class A Common Stock owned by
the public. Pro forma earnings per share for periods prior to 1996 are not
presented as it would not be meaningful.
Pro forma effect has also been given for all periods presented for the
conversion of 1,000 shares of common stock, par value $0.01 per share, into 114
million shares of Class B Common Stock, par value $0.01 per share, which
occurred on April 3, 1997.
F-19
<PAGE> 54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. PRO FORMA EARNINGS PER SHARE (CONTINUED)
<TABLE>
<CAPTION>
For the years ended December 31, 1997
---------------------------------------------------
Income Shares Per Share Amount
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PRO FORMA BASIC EARNINGS PER SHARE
Amounts available to common shareholders $ 306 134.0 $ 2.28
--------------------
Impact of options and contingently issuable shares - 0.1
---------------------------
PRO FORMA DILUTED EARNINGS PER SHARE
Amounts available to common shareholders plus assumed conversions $ 306 134.1 $ 2.28
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
For the years ended December 31, 1996
---------------------------------------------------
Income Shares Per Share Amount
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PRO FORMA BASIC EARNINGS PER SHARE
Amounts available to common shareholders $ 24 125.0 $ 0.19
---------------------
Impact of options and contingently issuable shares - -
--------------------------
PRO FORMA DILUTED EARNINGS PER SHARE
Amounts available to common shareholders plus assumed conversions $ 24 125.0 $ 0.19
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
If earnings per share was calculated based upon 140 million weighted average
shares outstanding for all periods presented (representing the weighted average
shares outstanding at the time of the IPO, May 22, 1997) earnings per share
would have been $2.18 and $0.17 for the periods ended December 31, 1997 and
1996, respectively.
10. POSTRETIREMENT BENEFIT AND SAVINGS PLANS
(a) PENSION PLANS
Hartford Life's employees are included in The Hartford'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 U.S. 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 $10, $7 and $6 in 1997, 1996 and 1995,
respectively.
The Company also provides, through The Hartford, 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 1997, 1996 and 1995,
respectively.
The assumed rate in the per capita cost of health care (the health care trend
rate) was 8.5% for 1997, 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
covered employees.
(b) INVESTMENT AND SAVINGS PLAN
Substantially all employees of the Company are eligible to participate in The
Hartford's Investment and Savings Plan. Under this plan, designated
contributions, which may be invested in Class A Common Stock of Hartford Life or
certain other investments, are matched, up to 3% of compensation, by the
Company. The cost to Hartford Life for the above-mentioned plans was
approximately $5 in 1997.
F-20
<PAGE> 55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCK COMPENSATION PLANS
During the second quarter of 1997, the Company adopted the 1997 HLI Incentive
Stock Plan (the "Plan"). Under the Plan, options granted may be either
non-qualified options or incentive stock options qualifying under Section 422A
of the Internal Revenue Code. The aggregate number of shares of Class A Common
Stock which may be awarded in any one year shall be subject to an annual limit.
The maximum number of shares of Class A Common Stock which may be granted under
the Plan in each year shall be 1.5% of the total issued and outstanding shares
of HLI Class A Common Stock and treasury stock as reported in the Annual Report
on Form 10-K of the Company for the preceding year plus unused portions of such
limit from prior years. In addition, no more than 5,000,000 shares of Class A
Common Stock shall be cumulatively available for awards of incentive stock
options under the Plan, and no more than 20% of the total number of shares on a
cumulative basis shall be available for restricted stock and performance shares.
All options granted have an exercise price equal to the market price of the
Company's stock on the date of grant and an option's maximum term is ten years.
Certain nonperformance based options become exercisable upon the attainment of
specified market price appreciation of the Company's common shares or at seven
years after the date of grant, while the remaining nonperformance based options
become exercisable over a three year period commencing with the date of grant.
Also included in the Plan are long-term performance awards which become payable
upon the attainment of specific performance goals achieved over a three year
period.
During the second quarter of 1997, the Company established the HLI Employee
Stock Purchase Plan ("ESPP"). Under this plan, eligible employees of HLI may
purchase Class A Common Stock of the Company at a 15% discount from the lower of
the market price at the beginning or end of the quarterly offering period. The
Company may sell up to 2,700,000 shares of stock to eligible employees. The
Company sold 54,316 shares under the ESPP in 1997.
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretation in accounting for its stockbased compensation plans. Accordingly,
in the measurement of compensation expense the Company utilizes the excess of
market price over exercise price, on the first date that both the number of
shares and award price are known. For the year ended December 31, 1997,
compensation expense related to the Company's two stock based compensation plans
was immaterial. Had compensation cost for the Company's incentive stock plan and
ESPP been determined based on the fair value at the grant dates for awards under
those plans consistent with the method SFAS No. 123, the Company's net income
and earnings per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1997
- -------------------------------------------
<S> <C>
Net income:
As reported $306
Pro forma 304
- -------------------------------------------
Pro forma basic earnings per share:
As reported $2.28
Pro forma 2.27
- -------------------------------------------
Pro forma diluted earnings per share:
As reported $2.28
Pro forma 2.27
- -------------------------------------------
</TABLE>
Note: The pro forma disclosures are not representative of the effects on net
income and earnings per share in future years
F-21
<PAGE> 56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCK COMPENSATION PLANS (CONTINUED)
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes options-pricing model with the following weighted-average
assumptions used for grants in 1997: dividend yield of 1.0%, expected price
variability of 29%, risk-free interest rates of 6.4%, and an expected life of
five years.
A summary of the status of the Company's option plan as of December 31, 1997 and
changes through the period ended December 31, 1997 are presented below:
INCENTIVE STOCK PLAN
(shares in thousands)
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at beginning of year - -
Granted 450,377 $31.52
Exercised - -
Cancelled (27,865) 31.31
-------
Outstanding at end of year 422,512 $31.54
- ------------------------------------------------------------------------------------------------
Exercisable at end of year 136,532 $31.14
Weighted average fair value of options granted $10.93
- ------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about stock options outstanding
(shares in thousands) at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding
---------------------------------------------------------------------------------
Range of Number Outstanding at Weighted Average Remaining Weighted Average
Exercise Prices December 31, 1997 Contractual Life Exercise Price
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$30.06 - $39.13 422,512 9.4 $31.54
- --------------------------------------------------------------------------------------------------------
</TABLE>
12. REINSURANCE
Hartford Life cedes insurance to other insurers in order to limit its maximum
loss. Such transfer does not relieve Hartford Life of its primary liability.
Hartford Life also assumes insurance from other insurers. Failure of reinsurers
to honor their obligations could result in losses to Hartford Life. Hartford
Life evaluates the financial condition of its reinsurers and monitors
concentration of credit risk.
Net premiums and other considerations were comprised of the following:
<TABLE>
<CAPTION>
For the years ended December 31,
-------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross premiums $ 3,352 $ 3,077 $ 2,348
Assumed 165 405 608
Ceded (354) (413) (313)
- --------------------------------------------------------------------------------------------------
NET PREMIUMS AND OTHER CONSIDERATIONS $ 3,163 $ 3,069 $ 2,643
- --------------------------------------------------------------------------------------------------
</TABLE>
Life reinsurance recoveries, which reduce death and other benefits, approximated
$205, $239 and $162 for the years ended December 31, 1997, 1996 and 1995,
respectively.
As of December 31, 1997, the Company had reinsurance recoverables of $5.0
billion from Mutual Benefit Life Assurance Corporation ("Mutual Benefit"),
supported by assets in a security trust of $5.0 billion (including policy loans
and accrued interest of $4.5 billion). 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.
Hartford Life has no other significant reinsurance-related concentrations of
credit risk.
F-22
<PAGE> 57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. RELATED PARTY TRANSACTIONS
Transactions of the Company with HA&I and its affiliates relate principally to
tax settlements, reinsurance, insurance coverage, rental and service fees,
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 The Hartford. 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 $53, $45, and $51 in 1997, 1996 and 1995,
respectively. Management believes that the methods used are reasonable. Included
in other liabilities is $80 and $61 due The Hartford as of December 31, 1997 and
1996, respectively.
14. STATUTORY RESULTS
<TABLE>
<CAPTION>
For the years ended December 31,
-------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory net income $ 223 $ 171 $ 113
- -----------------------------------------------------------------------------
Statutory surplus $ 1,672 $ 1,320 $ 1,224
- -----------------------------------------------------------------------------
</TABLE>
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
1998, is estimated to be $167.
The domestic insurance subsidiaries of Hartford Life prepare their statutory
financial statements in accordance with accounting practices prescribed by the
State of Connecticut and the State of New Jersey Insurance Departments.
Prescribed statutory accounting practices include publications of the National
Association of Insurance Commissioners, as well as state laws, regulations, and
general administrative rules.
15. COMMITMENTS AND CONTINGENT LIABILITIES
(a) LITIGATION
Hartford Life is involved in pending and threatened litigation in the normal
course of its business in which claims for monetary and punitive damages have
been asserted. Although there can be no assurances, management, at the present
time, does not anticipate that the ultimate liability arising from such pending
or threatened litigation will have a material effect on the financial condition
or operating results of the Company.
(b) GUARANTY FUNDS
Under insurance guaranty fund laws 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 $15,
$12 and $13 in 1997, 1996 and 1995, respectively, of which $5, $6, and $7 were
estimated to be creditable against premium taxes.
F-23
<PAGE> 58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
(c) LEASES
The rent paid to Hartford Fire for space occupied by the Company was $13 in
1997, and $11 in 1996 and 1995. Future minimum rental commitments are as
follows:
<TABLE>
<S> <C>
1998 $14
1999 14
2000 22
2001 22
2002 22
Thereafter 154
- --------------------------------------------
TOTAL $248
- --------------------------------------------
</TABLE>
Rental expense is recognized on a level basis over the term of the sublease,
which expires on December 31, 2009, and amounted to approximately $16 in 1997
and $14 in 1996 and 1995.
16. 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 core businesses into three
segments: Annuity, Individual Life Insurance, and Employee Benefits. The Company
also maintains a Guaranteed Investment Contracts segment, which is primarily
comprised of guaranteed rate contract business written prior to 1995 and 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,
interest-sensitive whole life, and term life policies. The Employee Benefits
segment sells group insurance products, including group life, group short- and
long-term disability 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 (a) unallocated income and expense, (b) the Company's group medical
business, which it exited in 1993, and (c) 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.
F-24
<PAGE> 59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED )
16. BUSINESS SEGMENT INFORMATION (CONTINUED)
The following table outlines revenues, operating income and assets by business
segment:
<TABLE>
<CAPTION>
For the years ended December 31,
------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Annuity $ 1,271 $ 973 $ 720
Individual Life Insurance 510 472 408
Employee Benefits 2,644 2,833 2,515
Guaranteed Investment Contracts 239 34 378
Corporate Operation 35 72 69
- ----------------------------------------------------------------------------------------------
TOTAL REVENUES $ 4,699 $ 4,384 $ 4,090
- ----------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE
(BENEFIT)
Annuity $ 314 $ 224 $ 168
Individual Life Insurance 87 68 58
Employee Benefits 138 115 101
Guaranteed Investment Contracts - (346) (103)
Corporate Operation (59) (30) 2
- ----------------------------------------------------------------------------------------------
TOTAL INCOME BEFORE INCOME TAX EXPENSE $ 480 $ 31 $ 226
- ----------------------------------------------------------------------------------------------
ASSETS
Annuity $ 69,452 $ 52,967 $ 39,673
Individual Life Insurance 5,151 3,968 3,173
Employee Benefits 20,186 16,297 15,137
Guaranteed Investment Contracts 3,347 4,533 6,069
Corporate Operation 2,844 2,168 1,910
- ----------------------------------------------------------------------------------------------
TOTAL ASSETS $ 100,980 $ 79,933 $ 65,962
- ----------------------------------------------------------------------------------------------
</TABLE>
17. QUARTERLY RESULTS FOR 1997 AND 1996 (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
------------------------------------------------------------------------------
1997 1996 1997 1996 1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $1,055 $1,303 $1,042 $987 $1,058 $ 817 $1,544 $1,277
Benefits, claims and claim
adjustment expenses $ 659 $ 651 $ 612 $690 $ 596 $ 711 $ 804 $ 675
Net income $ 63 $ 39 $ 73 $ 43 $ 83 $(114) $ 87 $ 56
Pro forma basic earnings per share $ 0.51 $ 0.31 $ 0.56 $0.34 $ 0.59 (0.91) $ 0.62 $ 0.45
Pro forma diluted earnings per share $ 0.51 $ 0.31 $ 0.56 $0.34 $ 0.59 $(0.91) $ 0.62 $ 0.45
Weighted average common shares outstanding 125 125 131 125 140 125 140 125
Weighted average common shares outstanding and
dilutive potential common shares 125 125 131 125 140 125 140 125
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-25
<PAGE> 60
HARTFORD LIFE, INC. AND SUBSIDIARIES
SCHEDULE I
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN AFFILIATES
<TABLE>
<CAPTION>
(In millions) As of December 31, 1997
------------------------------------------------------------------
Amount at which
shown on Balance
Type of Investment Cost Fair Value Sheet
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FIXED MATURITIES
Bonds and Notes
U. S. gov't and gov't agencies and authorities
(guaranteed and sponsored) $ 239 $ 241 $ 241
U. S. gov't and gov't agencies and authorities
(guaranteed and sponsored) - asset-backed 1,366 1,400 1,400
States, municipalities and political subdivisions 429 438 438
International governments 472 502 502
Public utilities 989 1,016 1,016
All other corporate including international 6,058 6,281 6,281
All other corporate - asset-backed 4,855 4,898 4,898
Short-term investments 1,394 1,394 1,394
Certificates of deposit 668 673 673
Redeemable preferred stock 5 5 5
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES 16,475 16,848 16,848
- -----------------------------------------------------------------------------------------------------------------------------------
EQUITY SECURITIES
Common Stocks
Public utilities - - -
Banks, trusts and insurance companies - - -
Industrial and miscellaneous 167 181 181
Nonredeemable preferred stocks - - -
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL EQUITY SECURITIES 167 181 181
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES AND EQUITY SECURITIES 16,642 17,029 17,029
- -----------------------------------------------------------------------------------------------------------------------------------
REAL ESTATE - - -
OTHER INVESTMENTS
Mortgage loans on real estate - - -
Policy loans 3,759 3,759 3,759
Investments in partnerships and trusts 59 74 59
Futures, options and miscellaneous 123 158 123
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER INVESTMENTS 3,941 3,991 3,941
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $ 20,583 $ 21,020 $ 20,970
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
S-1
<PAGE> 61
HARTFORD LIFE, INC. AND SUBSIDIARIES
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF HARTFORD LIFE, INC.
(REGISTRANT)
<TABLE>
<CAPTION>
(In millions) As of December 31,
--------------------------
CONDENSED BALANCE SHEETS 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Other assets $ 14 $ 46
Investment in affiliates 2,832 2,121
- -----------------------------------------------------------------------------------------
TOTAL ASSETS 2,846 2,167
- -----------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debt 50 -
Long-term debt 650 -
Allocated Advances from parent - 893
Other liabilities 2 -
- -----------------------------------------------------------------------------------------
TOTAL LIABILITIES 702 893
TOTAL STOCKHOLDERS' EQUITY 2,144 1,274
- -----------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,846 $ 2,167
- -----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
(In millions)
CONDENSED STATEMENTS OF INCOME For the years ended December 31,
----------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Earnings of subsidiaries $ 538 $ 86 $ 261
Interest expense 58 55 35
- -----------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 480 31 226
Income tax expense 174 7 76
- -----------------------------------------------------------------------------------------
NET INCOME $ 306 $ 24 $ 150
- -----------------------------------------------------------------------------------------
</TABLE>
S-2
<PAGE> 62
HARTFORD LIFE, INC. AND SUBSIDIARIES
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF HARTFORD LIFE, INC. (CONTINUED)
(REGISTRANT)
<TABLE>
<CAPTION>
(In millions)
CONDENSED STATEMENTS OF CASH FLOWS For the years ended December 31,
--------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 306 $ 24 $ 150
Undistributed earnings (279) (5) (150)
Change in other assets and liabilities (11) - -
- --------------------------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES 16 19 -
- --------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital contribution to subsidiary (180) (115) -
- --------------------------------------------------------------------------------------
CASH USED FOR INVESTING ACTIVITIES (180) (115) -
- --------------------------------------------------------------------------------------
FINANCING ACTIVITIES
(Decrease) increase in Allocated Advances (893) 115 -
Increase in short-term debt 50 - -
Increase in long-term debt 650 - -
Dividends paid (329) (19) -
Net proceeds from the sale of Class A common
stock 687 - -
Acquisition of treasury stock (1) - -
- --------------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES 164 96 -
- --------------------------------------------------------------------------------------
Net change in cash - - -
Cash - beginning of year - - -
- --------------------------------------------------------------------------------------
CASH - END OF YEAR $ - $ - $ -
- --------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
NET CASH ACTIVITY DURING THE YEAR FOR:
Interest expense paid $ 55 $ 55 $ 35
Tax refund received $ 17 $ - $ -
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING
ACTIVITIES:
Capital contribution $ 12 $ - $ 180
Dividends paid $ - $ - $ 207
Increase in Allocated Advances for fixed
assets $ - $ 46 $ -
Capital contribution to subsidiaries $ 46 $ - $ -
</TABLE>
S-3
<PAGE> 63
HARTFORD LIFE, INC. AND SUBSIDIARIES
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
(In millions)
Future Policy
Benefits,
Unpaid Claims Other
Deferred and Claim Policy
Policy Claims Claims and Premiums Net
Acquisition Adjustment Benefits and Other Investment
Segment Costs Expenses Payable Considerations Income
- ----------------------------------------------------------------------------------------------------------------------------
1997
<S> <C> <C> <C> <C> <C>
Annuity $ 2,479 $ 2,028 $ 6,839 $ 769 $ 502
Individual Life Insurance 861 566 2,180 339 171
Employee Benefits 21 2,317 9,338 2,051 593
Guaranteed Investment Contracts - - 2,782 2 237
Corporate Operation - 28 - 2 33
- ----------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS $ 3,361 $ 4,939 $ 21,139 $ 3,163 $ 1,536
- ----------------------------------------------------------------------------------------------------------------------------
1996
Annuity $ 2,033 $ 1,507 $ 6,101 $ 539 $ 434
Individual Life Insurance 748 514 2,133 313 159
Employee Benefits 18 1,937 9,895 2,215 618
Guaranteed Investment Contracts 1 - 4,124 2 251
Corporate Operation - 28 - - 72
- ----------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS $ 2,800 $ 3,986 $ 22,253 $ 3,069 $ 1,534
- ----------------------------------------------------------------------------------------------------------------------------
1995
Annuity $ 1,559 $ 1,314 $ 5,705 $ 323 $ 397
Individual Life Insurance 630 569 1,940 266 142
Employee Benefits 29 1,643 9,399 2,048 467
Guaranteed Investment Contracts 1 - 5,720 1 377
Corporate Operation - 28 - 5 68
- ----------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS $ 2,220 $ 3,554 $ 22,764 $ 2,643 $ 1,451
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
(In millions)
Benefits, Amortization
Claims and of Deferred
Net Realized Claim Policy
Capital Adjustment Acquisition Dividends to Other
Segment Gains(Losses) Expenses Costs Policyholders Expenses*
- -----------------------------------------------------------------------------------------------------------------------------------
1997
<S> <C> <C> <C> <C> <C>
Annuity $ - $ 445 $ 250 $ - $ 262
Individual Life Insurance - 251 87 1 84
Employee Benefits - 1,705 8 240 553
Guaranteed Investment Contracts - 232 - - 7
Corporate Operation - 38 - - 56
- -----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS $ - $ 2,671 $ 345 $ 241 $ 962
- -----------------------------------------------------------------------------------------------------------------------------------
1996
Annuity $ - $ 416 $ 174 $ - $ 159
Individual Life Insurance - 266 63 1 74
Employee Benefits - 1,684 4 634 396
Guaranteed Investment Contracts (219) 332 1 - 47
Corporate Operation - 29 (1) - 74
- -----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS $ (219) $ 2,727 $ 241 $ 635 $ 750
- -----------------------------------------------------------------------------------------------------------------------------------
1995
Annuity $ - $ 317 $ 117 $ - $ 118
Individual Life Insurance - 217 72 - 61
Employee Benefits - 1,373 4 675 362
Guaranteed Investment Contracts - 453 12 - 16
Corporate Operation (4) 35 - - 32
- -----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS $ (4) $ 2,395 $ 205 $ 675 $ 589
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Includes interest expense.
S-4
<PAGE> 64
HARTFORD LIFE, INC. AND SUBSIDIARIES
SCHEDULE IV
REINSURANCE
<TABLE>
<CAPTION>
Ceded to Assumed Percentage of
Gross Other From Other Net Amount
(In millions) Amount Companies Companies Amount Assumed to Net
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1997
LIFE INSURANCE IN FORCE $ 396,736 $ 172,928 $ 42,729 $ 266,537 16.0%
- ---------------------------------------------------------------------------------------------------------------------------------
INSURANCE REVENUES
Life insurance and annuities 2,340 273 58 2,125 2.7%
Accident and health insurance 1,012 81 107 1,038 10.3%
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INSURANCE REVENUES $ 3,352 $ 354 $ 165 $ 3,163 5.2%
- ---------------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1996
Life insurance in force $ 300,783 $ 89,388 $ 46,040 $ 257,435 17.9%
- ---------------------------------------------------------------------------------------------------------------------------------
INSURANCE REVENUES
Life insurance and annuities 2,338 326 183 2,195 8.3%
Accident and health insurance 739 87 222 874 25.4%
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INSURANCE REVENUES $ 3,077 $ 413 $ 405 $ 3,069 13.2%
- ---------------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1995
Life insurance in force $ 328,130 $ 109,829 $ 18,805 $ 237,106 7.9%
- ---------------------------------------------------------------------------------------------------------------------------------
INSURANCE REVENUES
Life insurance and annuities 1,653 247 471 1,877 25.1%
Accident and health insurance 695 66 137 766 17.9%
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INSURANCE REVENUES $ 2,348 $ 313 $ 608 $ 2,643 23.0%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
S-5
<PAGE> 65
HARTFORD LIFE, INC. AND SUBSIDIARIES
SCHEDULE V
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Charged to
Balance Costs and Translation Write-offs/ Balance
January 1, Expenses Adjustment Payments/Other December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997
Accumulated depreciation of plant, property and
equipment $ 101 $ 17 $ - $ (6) $ 112
1996
Accumulated depreciation of plant, property
and equipment $ 8 $ - $ - $ 93 $ 101
1995
Accumulated depreciation of plant, property
and equipment $ 8 $ - $ - $ - $ 8
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
S-6
<PAGE> 66
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
HARTFORD LIFE, INC.
By: Gregory A. Boyko
----------------------------------------
Gregory A. Boyko
Senior Vice President,
Chief Financial Officer and Treasurer
Date: March 27, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Ramani Ayer Chairman and Director March 27, 1998
- ---------------------------
Ramani Ayer
/s/ Lowndes A. Smith Chief Executive Officer, March 27, 1998
- --------------------------- President and Director
Lowndes A. Smith
/s/ Gregory A. Boyko Senior Vice President,
- --------------------------- Chief Financial Officer and
Gregory A. Boyko Treasurer
/s/ Gail Deegan Director March 27, 1998
- ---------------------------
Gail Deegan
/s/ Donald R. Frahm Director March 27, 1998
- ---------------------------
Donald R. Frahm
/s/ Paul G. Kirk, Jr. Director March 27, 1998
- ---------------------------
Paul G. Kirk, Jr.
/s/ Robert E. Patricelli Director March 27, 1998
- ---------------------------
Robert E. Patricelli
/s/ H. Patrick Swygert Director March 27, 1998
- ---------------------------
H. Patrick Swygert
/s/ Deroy C. Thomas Director March 27, 1998
- ---------------------------
Deroy C. Thomas
/s/ Gordon I. Ulmer Director March 27, 1998
- ---------------------------
Gordon I. Ulmer
/s/ David K. Zwiener Director March 27, 1998
- ---------------------------
David K. Zwiener
</TABLE>
II-1
<PAGE> 67
HARTFORD LIFE, INC. AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
EXHIBITS INDEX
<TABLE>
<CAPTION>
EXHIBIT #
- ---------
<S> <C>
3.01 Amended and Restated Certificate of Incorporation of Hartford Life,
Inc. (the "Company") was filed as Exhibit 3.1 to the Company's
Registration Statement on Form S-1 dated February 10, 1997
(Registration No. 333-21459) and is incorporated herein by
reference.
3.02 Amended By-Laws of the Company, amended effective December 18,
1997, are filed herewith.
4.01 Amended and Restated Certificate of Incorporation and By-Laws of
the Company (included as Exhibits 3.01 and 3.02, respectively).
4.02 Senior Indenture, dated as of May 19, 1997, between the Company and
Citibank, N.A., as trustee, with respect to the Company's 6.90%
Notes due June 15, 2004, 7.10% Notes due June 15, 2007, and 7.65%
Debentures due June 15, 2027, was filed as Exhibit 4.3 to the
Company's Registration Statement on Form S-3 (Amendment No. 2)
dated May 23, 1997, and is incorporated herein by reference.
10.1 Master Intercompany Agreement among the Company, The Hartford
Financial Services Group, Inc. (formerly known as ITT Hartford
Group, Inc.) ("The Hartford") and with respect to Articles VI and
XII, Hartford Fire Insurance Company, was filed as Exhibit 10.1 to
the Company's Form 10-Q filed for the quarterly period ended June
30, 1997 and is incorporated herein by reference.
10.2 Tax Sharing Agreement among The Hartford and its subsidiaries,
including the Company, was filed as Exhibit 10.2 to the Company's
Form 10-Q filed for the quarterly period ended June 30, 1997 and is
incorporated herein by reference.
10.3 Management Agreement among Hartford Life Insurance Company and The
Hartford Investment Management Company, was filed as Exhibit 10.3
to the Company's Form 10-Q filed for the quarterly period ended
June 30, 1997 and is incorporated herein by reference.
10.4 Management Agreement among certain subsidiaries of the Company and
Hartford Investment Services, Inc., was filed as Exhibit 10.4 to
the Company's Form 10-Q filed for the quarterly period ended June
30, 1997 and is incorporated herein by reference.
10.5 Sublease Agreement between Hartford Fire Insurance Company and the
Company, was filed as Exhibit 10.5 to the Company's Form 10-Q filed
for the quarterly period ended June 30, 1997 and is incorporated
herein by reference.
10.6 Promissory Note dated February 20, 1997, executed by the Company
for the benefit of Hartford Accident and Indemnity Company, was
filed as Exhibit 10.9 to the Company's Registration Statement on
Form S-1 (Amendment No. 2) dated April 24, 1997 (Registration No.
333-21459) and is incorporated herein by reference.
10.7 1997 Hartford Life, Inc. Incentive Stock Plan, as amended, is filed
herewith.
10.8 1997 Hartford Life, Inc. Deferred Restricted Stock Unit Plan, was
filed as Exhibit 10.8 to the Company's Form 10-Q filed for the
quarterly period ended June 30, 1997 and is incorporated herein by
reference.
10.9 1997 Hartford Life, Inc. Restricted Stock Plan for Non-Employee
Directors, was filed as Exhibit 10.9 to the Company's Form 10-Q
filed for the quarterly period ended June 30, 1997 and is
incorporated herein by reference.
</TABLE>
II-2
<PAGE> 68
<TABLE>
<S> <C>
10.10 Promissory Note dated April 4, 1997, executed by the Company for
the benefit of Hartford Accident and Indemnity Company, was filed
as Exhibit 10.16 to the Company's Registration Statement on Form
S-1 (Amendment No. 2) dated April 24, 1997 (Registration No.
333-21459) and is incorporated herein by reference.
10.11 Employment Agreement dated July 1, 1997 between the Company and The
Hartford and Lowndes A. Smith was filed as exhibit 10.02 to the
Hartford's Form 10-Q filed for the quarter ended September 30,
1997, and is incorporated herein by reference.
10.12 Form of Employment Protection Agreement between the Company and
three executive officers of the Company is filed herewith.
12 Computation of Ratio of Earnings to Fixed Charges is filed
herewith.
21 Subsidiaried of the Company is filed herewith.
23 Consent of Arthur Andersen LLP to the incorporation by reference
into the Company's Registration Statements on Form S-8 and Form S-3
of the Report of Arthur Andersen LLP contained in this Form 10-K
regarding the audited financial statements is filed herewith.
27 Financial Data Schedule is filed herewith.
</TABLE>
II-3
<PAGE> 1
Exhibit 3.02
Final
AMENDED AND RESTATED
BY-LAWS
of
HARTFORD LIFE, INC.,
adopted by the
Board of Directors
on
December 18, 1997
[THE HARTFORD LOGO]
THE HARTFORD
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I
Stockholders
SECTION 1.1. Place of Stockholders'
Meetings 1
SECTION 1.2. Day and Time of Annual
Meetings of Stockholders 1
SECTION 1.3. Purposes of Annual Meetings 1
SECTION 1.4. Special Meetings of
Stockholders 3
SECTION 1.5. Notice of Meetings of
Stockholders 3
SECTION 1.6. Quorum of Stockholders 3
SECTION 1.7. Chairman of the Board
and Secretary of Meeting 5
SECTION 1.8 Voting by Stockholders 5
SECTION 1.9. Proxies 5
SECTION 1.10. Inspectors 6
SECTION 1.11. List of Stockholders 6
SECTION 1.12. Confidential Voting 7
ARTICLE II
Directors
SECTION 2.1. Powers of Directors 7
SECTION 2.2. Method of Election,
Terms of Office of Directors 8
SECTION 2.3. Resignations and Vacancies
on Board 9
SECTION 2.4. Meetings of the Board 9
SECTION 2.5. Quorum and Action 10
SECTION 2.6. Presiding Officer and
Secretary of Meeting 11
SECTION 2.7. Action by Consent without
Meeting 11
SECTION 2.8. Standing Committees 11
SECTION 2.9. Other Committees 12
SECTION 2.10. Compensation of Directors 12
</TABLE>
<PAGE> 3
ARTICLE III
Officers
<TABLE>
<CAPTION>
<S> <C> <C>
SECTION 3.1. Officers, Titles,
Elections, Terms 13
SECTION 3.2. General Powers of Officers 14
SECTION 3.3. Powers and Duties of the
Chairman of the Board 14
SECTION 3.4. Powers and Duties of the
Chief Executive Officer
and President 15
SECTION 3.5. Powers and Duties of
Executive Vice Presidents,
Senior Vice Presidents
and Vice Presidents 15
SECTION 3.6. Powers and Duties of the
Chief Financial Officer 15
SECTION 3.7. Powers and Duties of the
General Counsel 15
SECTION 3.8. Powers and Duties of the
Controller and Assistant
Controllers 16
SECTION 3.9. Powers and Duties of the
Treasurer and Assistant
Treasurers 16
SECTION 3.10. Powers and Duties of the
Secretary and Assistant
Secretaries 17
ARTICLE IV
Indemnification
SECTION 4.1 Indemnification 18
SECTION 4.2. Insurance, Contracts and
Funding 19
SECTION 4.3. Indemnification; Not
Exclusive Right 19
SECTION 4.4. Advancement of Expenses 19
SECTION 4.5. Indemnification Procedures;
Presumptions and Effect of
Certain Proceedings;Remedies 20
SECTION 4.6. Indemnification of Employees
and Agents 25
SECTION 4.7. Severability 26
</TABLE>
<PAGE> 4
ARTICLE V
Capital Stock
<TABLE>
<CAPTION>
<S> <C> <C>
SECTION 5.1. Stock Certificates 26
SECTION 5.2. Record Ownership 27
SECTION 5.3. Transfer of Record
Ownership 27
SECTION 5.4. Lost, Stolen or
Destroyed Certificates 28
SECTION 5.5. Transfer Agent; Registrar;
Rules Respecting Certificates 28
SECTION 5.6. Fixing Record Date for
Determination of Stockholders
of Record 28
ARTICLE VI
Securities held by the Corporation
SECTION 6.1. Voting 29
SECTION 6.2. General Authorization to
Transfer Securities Held
by the Corporation 29
ARTICLE VII
Depositaries and Signatories
SECTION 7.1. Depositaries 30
SECTION 7.2. Signatories 30
ARTICLE VIII
Seal 31
ARTICLE IX
Fiscal Year 31
ARTICLE X
Waiver of or Dispensing
with Notice 31
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
ARTICLE XI
<S> <C> <C>
Amendment of By-Laws 32
ARTICLE XII
Offices and Agent 32
</TABLE>
<PAGE> 6
1
BY-LAWS
OF
HARTFORD LIFE, INC.
(A DELAWARE CORPORATION, THE "CORPORATION")
1. STOCKHOLDERS.
1.1 Place of Stockholders' Meetings. All meetings of the stockholders
of the Corporation shall be held at such place or places, within or outside the
State of Delaware, as may be fixed by the Corporation's Board of Directors (the
"Board", and each member thereof a "Director") from time to time or as shall be
specified in the respective notices thereof.
1.2 Day and Time of Annual Meetings of Stockholders. An annual meeting
of stockholders shall be held at such place (within or outside the State of
Delaware), date and hour as shall be determined by the Board and designated in
the notice thereof. Any previously scheduled annual meeting of stockholders may
be postponed by action of the Board taken prior to the time previously scheduled
for such annual meeting of stockholders.
1.3 Purposes of Annual Meetings. (a) At each annual meeting, the
stockholders shall elect the successors of the class of Directors whose term
expires at such annual meeting for a term expiring at the third succeeding
annual meeting. At any such annual meeting any business properly brought before
the meeting may be transacted.
(b) To be properly brought before an annual meeting, business must be
(i) specified in the notice of the meeting (or any supplement thereto) given by
or at the
<PAGE> 7
2
direction of the Board, (ii) otherwise properly brought before the meeting by or
at the direction of the Board or (iii) otherwise properly brought before the
meeting by a stockholder. For business to be properly brought before an annual
meeting by a stockholder, the stockholder must have given written notice
thereof, either by personal delivery or by United States mail, postage prepaid,
to the Secretary of the Corporation (the "Secretary") at the principal executive
offices of the Corporation, not less than 70 days nor more than 90 days prior to
the anniversary date of the immediately preceding annual meeting; provided,
however, that in the event that the date of the annual meeting is more than 30
days earlier or more than 60 days later than such anniversary date, notice by
the stockholder must be so delivered or received not earlier than the 90th day
prior to such annual meeting and not later than the close of business on the
later of the 70th day prior to such annual meeting or the tenth day following
the day on which public announcement of the date of such meeting is first made.
Any such notice shall set forth as to each matter the stockholder proposes to
bring before the annual meeting (i) a brief description of the business desired
to be brought before the annual meeting and the reasons for conducting such
business at the annual meeting; (ii) the name and address, as they appear on the
Corporation's books, of the stockholder proposing such business; (iii) the class
and number of shares of the Corporation which are beneficially owned by the
stockholder; (iv) any material interest of the stockholder in such business; and
(v) if the stockholder intends to solicit proxies in support of such
stockholder's proposal, a representation to that effect. The foregoing notice
requirements shall be deemed satisfied by a stockholder if the stockholder has
notified the Corporation of his or her intention to present a proposal at an
annual meeting and such stockholder's proposal has been included in a proxy
statement that has been prepared by management of the Corporation to solicit
proxies for such annual meeting; provided, however, that if such stockholder
does not appear or send a qualified representative to present such proposal at
such annual meeting, the Corporation need not present such proposal for a vote
at such meeting, notwithstanding that proxies in respect of such vote may have
been received by the Corporation. No business shall be conducted at an annual
meeting of stockholders except in accordance with this Section 1.3(b), and the
presiding officer of any annual meeting of stockholders may refuse
<PAGE> 8
3
to permit any business to be brought before an annual meeting without compliance
with the foregoing procedures or if the stockholder solicits proxies in support
of such stockholder's proposal without such stockholder having made the
representation required by clause (v) of the preceding sentence.
1.4 Special Meetings of Stockholders. Except as otherwise expressly
required by the Restated Certificate of Incorporation of the Corporation (the
"Certificate") or by applicable law, special meetings of the stockholders or of
any class or series entitled to vote may be called for any purpose or purposes
by a majority vote of the entire Board, to be held at such place (within or
outside the State of Delaware), date and hour as shall be determined by the
Board and designated in the notice thereof. Only such business as is specified
in the notice of any special meeting of the stockholders shall come before such
meeting.
1.5 Notice of Meetings of Stockholders. Except as otherwise expressly
required or permitted by the Certificate or by applicable law, not less than ten
days nor more than 60 days before the date of every stockholders' meeting the
Secretary shall cause to be delivered to each stockholder of record entitled to
vote at such meeting written notice stating the place, date and hour of the
meeting and, in the case of a special meeting, the purpose or purposes for which
the meeting is called. Notice of any meeting of stockholders shall not be
required to be given to any stockholder who shall attend such meeting in person
or by proxy except for the purpose of objecting at the beginning of the meeting
to the transaction of any business because the meeting was not lawfully called
or commenced, or who shall waive notice thereof as provided in Article 10 of
these By-laws. Except as provided in Section 1.6(d), or as otherwise expressly
required by the Certificate or by applicable law, notice of any adjourned
meeting of stockholders need not be given if the time and place thereof are
announced at the meeting at which the adjournment is taken. Any notice, if
mailed, shall be deemed to be given when deposited in the United States mail,
postage prepaid, addressed to the stockholder at the address for notices to such
stockholder as it appears on the books of the Corporation.
1.6 Quorum of Stockholders. (a) Unless otherwise
<PAGE> 9
4
expressly required by the Certificate or by applicable law, at any meeting of
the stockholders, the presence in person or by proxy of stockholders entitled to
cast a majority of votes thereat shall constitute a quorum for the entire
meeting, notwithstanding the withdrawal of stockholders entitled to cast a
sufficient number of votes in person or by proxy to reduce the number of votes
represented at the meeting below a quorum; provided, however, that in the case
of any vote to be taken by a class or classes, the holders of a majority of the
votes entitled to be cast by the stockholders of a particular class or series,
present in person or by proxy, shall constitute a quorum of such class or
series. Shares of the Corporation's stock belonging to the Corporation or to
another corporation, if a majority of the shares entitled to vote in an election
of the directors of such other corporation is held by the Corporation, shall
neither be counted for the purpose of determining the presence of a quorum nor
entitled to vote at any meeting of the stockholders; provided, however, that the
foregoing shall not limit the right of the Corporation to vote stock, including
but not limited to it own stock, held by it in a fiduciary capacity.
(b) At any meeting of the stockholders at which a quorum shall be
present, a majority of those present in person or by proxy may adjourn the
meeting from time to time without notice other than announcement at the meeting.
In the absence of a quorum, the officer presiding thereat shall have power to
adjourn the meeting from time to time until a quorum shall be present. Notice of
any adjourned meeting other than announcement at the meeting shall not be
required to be given, except as provided in Section 1.6(d) below and except
where expressly required by applicable law.
(c) At any adjourned meeting at which a quorum shall be present, any
business may be transacted which might have been transacted at the meeting
originally called, but only those stockholders entitled to vote at the meeting
as originally noticed shall be entitled to vote at any adjournment or
adjournments thereof unless a new record date is fixed by the Board.
(d) If an adjournment is for more than 30 days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given in the manner specified in Section 1.5 to
<PAGE> 10
5
each stockholder of record entitled to vote at the meeting.
1.7 Chairman of the Board and Secretary of Meeting. The Chairman of the
Board or, in his or her absence, another officer of the Corporation designated
by the Chairman of the Board, shall preside at meetings of the stockholders. The
Secretary shall act as secretary of the meeting, or in the absence of the
Secretary, an Assistant Secretary of the Corporation shall so act, or if neither
is present, then the presiding officer may appoint a person to act as secretary
of the meeting.
1.8 Voting by Stockholders. (a) Except as otherwise expressly required
by the Certificate or by applicable law, at every meeting of the stockholders
each stockholder of record shall be entitled to the number of votes specified in
the Certificate or any certificate of designations providing for the creation of
any series of Preferred Stock, in person or by proxy, for each share of stock
standing in his or her name on the books of the Corporation on the date fixed
pursuant to the provisions of Section 5.6 of these By-laws as the record date
for the determination of the stockholders who shall be entitled to receive
notice of and to vote at such meeting.
(b) When a quorum is present at any meeting of the stockholders, all
questions shall be decided by the vote of a majority in voting power of the
stockholders present in person or by proxy and entitled to vote at such meeting,
unless a question is one upon which by express provision of law, the Certificate
or these By-laws, a different vote is required, in which case such express
provision shall govern and control the decision of such question.
(c) Except as required by applicable law, the vote at any meeting of
stockholders on any question need not be by ballot, unless so directed by the
presiding officer of the meeting. On a vote by ballot, each ballot shall be
signed by the stockholder voting, or by his or her attorney-in-fact, if
authorized by proxy, and shall state the number of shares voted.
1.9 Proxies. Any stockholder entitled to vote at any meeting of
stockholders may vote either in person or by his or her attorney-in-fact or
proxy.
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1.10 Inspectors. (a) The election of Directors and any other vote by
ballot at any meeting of the stockholders shall be supervised by one or more
inspectors. Such inspectors may be appointed by the Chairman of the Board before
or at the meeting. If the Chairman of the Board shall not have so appointed such
inspectors or if one or both inspectors so appointed shall refuse to serve or
shall not be present, such appointment shall be made by the officer presiding at
the meeting. Each inspector, before entering upon the discharge of his or her
duties, shall take and sign an oath faithfully to execute the duties of
inspector with strict impartiality and according to the best of his or her
ability.
(b) The inspectors shall (i) ascertain the number of shares of the
Corporation outstanding and the voting power of each; (ii) determine the shares
represented at any meeting of stockholders and the validity of the proxies and
ballots; (iii) count all proxies and ballots; (iv) determine and retain for a
reasonable period a record of the disposition of any challenges made to any
determination by the inspectors; and (v) certify their determination of the
number of shares represented at the meeting, and their count of all proxies and
ballots. The inspectors may appoint or retain other persons or entities to
assist the inspectors in the performance of the duties of the inspectors.
(c) If there are three or more inspectors, the act of a majority shall
govern. On request of the officer presiding at such meeting, the inspectors
shall make a report of any challenge, question or matter determined by them and
execute a certificate of any fact found by them. Any report or certificate made
by them shall be prima face evidence of the facts therein stated and of the vote
as certified by them, and such report or certificate shall be filed with the
minutes of such meeting.
1.11 List of Stockholders. (a) At least ten days before every meeting
of stockholders, the Chief Financial Officer shall cause to be prepared and made
a complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order and showing the address of each stockholder and the number of
shares registered in the name of each stockholder.
(b) During ordinary business hours for a period of
<PAGE> 12
7
at least ten days prior to the meeting, such list shall be open to examination
by any stockholder for any purpose germane to the meeting, either at a place
within the city where the meeting is to be held, which place shall be specified
in the notice of the meeting, or if not so specified, at the place where the
meeting is to be held.
(c) The list shall also be produced and kept at the time and place of
the meeting during the whole time of the meeting, and it may be inspected by any
stockholder who is present.
(d) The stock ledger shall be the only evidence as to who are the
stockholders entitled to examine the stock ledger, the list required by this
Section 1.11 or the books of the Corporation, or to vote in person or by proxy
at any meeting of stockholders.
1.12 Confidential Voting. (a) Proxies and ballots that identify the
votes of specific stockholders shall be kept in confidence by the tabulators and
the inspectors of election unless (i) there is an opposing solicitation with
respect to the election or removal of Directors; (ii) disclosure is required by
applicable law; (iii) a stockholder expressly requests or otherwise authorizes
disclosure; or (iv) the Corporation concludes in good faith that a bona fide
dispute exists as to the authenticity of one or more proxies, ballots or votes,
or as to the accuracy of any tabulation of such proxies, ballots or votes.
(b) The tabulators and inspectors of election and any authorized agents
or other persons engaged in the receipt, count and tabulation of proxies and
ballots shall be advised of this By-law and instructed to comply herewith.
(c) The inspectors of election shall certify, to the best of their
knowledge based on due inquiry, that proxies and ballots have been kept in
confidence as required by this Section 1.12.
2. DIRECTORS.
2.1 Powers of Directors. The business and affairs of the Corporation
shall be managed by or under the direction of the Board, which may exercise all
the powers of the Corporation except such as are by applicable law,
<PAGE> 13
8
the Certificate or these By-laws required to be exercised or performed by the
stockholders.
2.2 Method of Election, Terms of Office of Directors. The directors
shall be classified as specified in the Certificate. Directors need not be
stockholders of the Corporation or citizens of the United States of America.
Nominations of persons for election as Directors may be made by the
Board or by any stockholder who is a stockholder of record at the time of giving
of the notice of nomination provided for in this Section 2.2 and who is entitled
to vote for the election of Directors. Any stockholder of record entitled to
vote for the election of Directors at a meeting may nominate a person or persons
for election as Directors only if written notice of such stockholder's intent to
make such nomination is given in accordance with the procedures for bringing
business before the meeting set forth in Section 1.3(b) of these By-laws, either
by personal delivery or by United States mail, postage prepaid, to the Secretary
not later than (i) with respect to an election to be held at an annual meeting
of stockholders, not less than 70 nor more than 90 days prior to the anniversary
date of the immediately preceding annual meeting; provided, however, that in the
event that the date of the annual meeting is more than 30 days earlier or more
than 60 days later than such anniversary date, notice by the stockholder must be
so delivered or received not earlier than the 90th day prior to such annual
meeting and not later than the close of business on the later of the 70th day
prior to such annual meeting or the 10th day following the day on which public
announcement of the date of such meeting is first made and (ii) with respect to
an election to be held at a special meeting of stockholders for the election of
directors, not earlier than the 90th day prior to such special meeting and not
later than the close of business on the later of the 60th day prior to such
special meeting or the 10th day following the day on which public announcement
of the date of the special meeting is first made and of the nominees to be
elected at such meeting. Each such notice shall set forth: (a) the name and
address of the stockholder who intends to make the nomination and of the person
or persons to be nominated; (b) a representation that the stockholder is a
holder of record of stock of the Corporation entitled to vote at such meeting
and intends to appear in person or by proxy
<PAGE> 14
9
at the meeting to nominate the person or persons specified in the notice; (c) a
description of all arrangements or understandings between the stockholder and
each nominee and any other person or persons (naming such person or persons)
pursuant to which the nomination or nominations are to be made by the
stockholder; (d) such other information regarding each nominee proposed by such
stockholder as would have been required to be included in a proxy statement
filed pursuant to the proxy rules of the Securities and Exchange Commission had
each nominee been nominated, or intended to be nominated, by the Board; (e) the
consent of each nominee to serve as a Director if so elected; and (f) if the
stockholder intends to solicit proxies in support of such stockholder's
nominee(s), a representation to that effect. The presiding officer of any
meeting of stockholders to elect Directors and the Board may refuse to
acknowledge the nomination of any person not made in compliance with the
foregoing procedure or if the stockholder solicits proxies in support of such
stockholder's nominee(s) without such stockholder having made the representation
required by clause (f) of the preceding sentence.
At each meeting of the stockholders for the election of Directors at
which a quorum is present, the persons receiving the greatest number of votes,
up to the number of Directors to be elected, shall be the Directors.
2.3 Resignations and Vacancies on Board. Any Director may resign from
office at any time by delivering a written resignation to the Chairman of the
Board or the Secretary. The resignation will take effect at the time specified
therein, or, if no time is specified, at the time of its receipt by the
Corporation. The acceptance of a resignation shall not be necessary to make it
effective, unless expressly so provided in the resignation. Any vacancy on the
Board shall be filled as specified in the Certificate.
2.4 Meetings of the Board. (a) The Board may hold its meetings, both
regular and special, either within or outside the State of Delaware, at such
places as from time to time may be determined by the Board or as may be
designated in the respective notices or waivers of notice thereof.
(b) Regular meetings of the Board shall be held at
<PAGE> 15
10
such times and at such places as from time to time shall be determined by the
Board.
(c) The first meeting of each newly elected Board shall be held as soon
as practicable after the annual meeting of the stockholders and shall be for the
election of officers and the transaction of such other business as may come
before it.
(d) Special meetings of the Board shall be held whenever called by
direction of the Chairman of the Board or at the request of Directors
constituting one-third of the number of Directors then in office.
(e) Members of the Board or any Committee of the Board may participate
in a meeting of the Board or such Committee, as the case may be, by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and such participation
shall constitute presence in person at such meeting.
(f) The Secretary shall give notice to each Director of any meeting of
the Board by mailing the same at least two days before the meeting or by
delivering the same not later than the day before the meeting. Such notice need
not include a statement of the business to be transacted at, or the purpose of,
any such meeting. Any and all business may be transacted at any meeting of the
Board. No notice of any adjourned meeting need be given. No notice to or waiver
by any Director shall be required with respect to any meeting at which the
Director is present except when such Director attends the meeting for the
express purpose of objecting at the beginning of the meeting to the transaction
of any business because the meeting was not lawfully called or convened.
2.5 Quorum and Action. Except as otherwise expressly required by
applicable law, the Certificate or these By-laws, at any meeting of the Board,
the presence of at least one-third of the entire Board shall constitute a quorum
for the transaction of business; but if there shall be less than a quorum at any
meeting of the Board, a majority of those present may adjourn the meeting from
time to time. Unless otherwise provided by applicable law, the Certificate or
these By-laws, the vote of a majority of the Directors present at any meeting at
which a quorum is present shall be necessary for the approval and adoption of
any resolution or the
<PAGE> 16
11
approval of any act of the Board.
2.6 Presiding Officer and Secretary of Meeting. The Chairman of the
Board or, in the absence of the Chairman of the Board, a member of the Board
selected by the members present, shall preside at meetings of the Board. The
Secretary shall act as secretary of the meeting, but in the Secretary's absence
the presiding officer may appoint a secretary of the meeting.
2.7 Action by Consent without Meeting. Any action required or permitted
to be taken at any meeting of the Board or of any Committee thereof may be taken
without a meeting if all members of the Board or Committee, as the case may be,
consent thereto in writing and the writing or writings are filed with the
minutes of proceedings of the Board or Committee.
2.8 Standing Committees. By resolution adopted by the Board, the Board
shall elect, from among its members, individuals to serve on the Standing
Committees established by this Section 2.8. Each Standing Committee shall be
comprised of such number of Directors, not less than two, as shall be elected to
such Committee; provided that no officer or employee of the Corporation shall be
eligible to serve on the Audit or Compensation and Personnel Committees. Each
Committee shall keep a record of all its proceedings and report the same to the
Board. One-third of the members of a Committee, but not less than two, shall
constitute a quorum, and the act of a majority of the members of a Committee
present at any meeting at which a quorum is present shall be the act of the
Committee. Each Standing Committee shall meet at the call of its chairman or any
two of its members. The chairmen of the various Committees shall preside, when
present, at all meetings of such Committees, and shall have such powers and
perform such duties as the Board may from time to time prescribe. The Standing
Committees of the Board, and functions of each, are as follows:
(a) Compensation and Personnel Committee. The Compensation and
Personnel Committee shall exercise the power of oversight over the compensation
and benefits of the employees of the Corporation, and shall be charged with
evaluating management performance, and establishing executive compensation. This
Committee shall consist of a majority of independent directors and shall have
access to its own independent outside compensation counsel. For
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purposes of this Section 2.8(a), "independent director" shall mean a Director
who: (i) has not been employed by the Corporation or an affiliate thereof in an
executive capacity within the past five years; (ii) is not, and is not
affiliated with a company or firm that is, an advisor or consultant to the
Corporation; (iii) is not affiliated with a significant customer of the
Corporation; (iv) has no personal services contract(s) with the Corporation; (v)
is not affiliated with a tax-exempt entity that receives significant
contributions from the Corporation; and (vi) is not a familial relative of any
person described by clauses (i) through (v).
(b) Audit Committee. The Audit Committee shall recommend the selection
of the independent auditors for the Corporation, confirm the scope of audits to
be performed by such auditors, review audit results and internal accounting and
control procedures and policies, review the fees paid to the Corporation's
independent auditors, and review and recommend approval of the audited financial
statements of the Corporation and the annual reports to stockholders. The Audit
Committee shall also review expense accounts of senior executives.
(c) Nominating Committee. The Nominating Committee shall make
recommendations as to the organization, size and composition of the Board and
Committees thereof, propose nominees for election to the Board and the
Committees thereof, and consider the qualifications, compensation and retirement
of Directors.
2.9 Other Committees. By resolution passed by the Board, the Board may
also appoint from among its members such other Committees, standing or
otherwise, as it may from time to time deem desirable and may delegate to such
Committees such powers of the Board as it may consider appropriate, consistent
with applicable law, the Certificate and these By-laws.
2.10 Compensation of Directors. Unless otherwise restricted by the
Certificate or these By-laws, Directors shall receive for their services on the
Board or any Committee thereof such compensation and benefits, including,
without limitation, the granting of options or restricted stock, together with
expenses, if any, as the Board may from time to time determine. The Directors
may be paid a fixed sum for attendance at each meeting of the Board or Committee
thereof and/or a stated annual sum as
<PAGE> 18
13
a Director, together with expenses, if any, of attendance at each meeting of the
Board or Committee thereof. Nothing herein contained shall be construed to
preclude any Director from serving the Corporation in any other capacity and
receiving compensation therefor.
3. OFFICERS.
3.1 Officers, Titles, Elections, Terms. (a) The Board may from time to
time elect a Chairman of the Board, Chief Executive Officer and President, one
or more Executive Vice Presidents, one or more Senior Vice Presidents, one or
more Vice Presidents, a Chief Financial Officer, a Controller, a Treasurer, a
Secretary, a General Counsel, one or more Assistant Controllers, one or more
Assistant Treasurers, one or more Assistant Secretaries, and one or more
Associate or Assistant General Counsels, to serve at the pleasure of the Board
or otherwise as shall be specified by the Board at the time of such election and
until their successors are elected and qualified or until their earlier death,
retirement, resignation or removal from office in accordance with these By-laws
or any applicable law or pursuant to an order of a court.
(b) The Board may elect or appoint at any time such other officers or
agents with such duties as it may deem necessary or desirable. Such other
officers or agents shall serve at the pleasure of the Board or otherwise as
shall be specified by the Board at the time of such election or appointment and,
in the case of such other officers, until their successors are elected and
qualified or until their earlier death, retirement, resignation or removal from
office in accordance with these By-laws or any applicable law or pursuant to an
order of a court. Each such officer or agent shall have such authority and shall
perform such duties as may be provided herein or as the Board may prescribe. The
Board may from time to time authorize any officer or agent to appoint and remove
any other such officer or agent and to prescribe such person's authority and
duties.
(c) No person may be elected or appointed an officer who is not a
citizen of the United States of America if such election or appointment is
prohibited by applicable law or regulation.
(d) Any vacancy in any office may be filled for the
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unexpired portion of the term by the Board. Each officer elected or appointed
during the year shall hold office until the next annual meeting of the Board at
which officers are regularly elected or appointed and until his or her successor
is elected or appointed and qualified or until his or her earlier death,
retirement, resignation or removal from office in accordance with these By-laws
or any applicable law or pursuant to an order of a court.
(e) Any officer or agent elected or appointed by the Board may be
removed at any time by the affirmative vote of a majority of the entire Board.
(f) Any officer may resign from office at any time. Such resignation
shall be made in writing and given to the Chief Executive Officer and President
or the Secretary. Any such resignation shall take effect at the time specified
therein, or, if no time is specified, at the time of its receipt by the
Corporation. The acceptance of a resignation shall not be necessary to make it
effective, unless expressly so provided in the resignation.
3.2 General Powers of Officers. Except as may be otherwise provided by
applicable law or in Article 6 or Article 7 of these By-laws, the Chairman of
the Board, the Chief Executive Officer and President, any Executive Vice
President, any Senior Vice President, any Vice President, the Chief Financial
Officer, the General Counsel, the Controller, the Treasurer and the Secretary,
or any of them, may (i) execute and deliver in the name of the Corporation, in
the name of any division of the Corporation or in both names any agreement,
contract, instrument, power of attorney or other document pertaining to the
business or affairs of the Corporation or any division of the Corporation,
including, without limitation, agreements or contracts with any government or
governmental department, agency or instrumentality, and (ii) delegate to any
employee or agent the power to execute and deliver any such agreement, contract,
instrument, power of attorney or other document.
3.3 Powers and Duties of the Chairman of the Board. The Chairman of the
Board shall, if present, preside at meetings of the Board and, if present,
preside at meetings of the stockholders. The Chairman of the Board shall, when
requested, counsel with and advise the other officers of the Corporation and
shall perform such other
<PAGE> 20
15
duties as he or she may agree with the Chief Executive Officer and President or
as the Board may from time to time prescribe.
3.4 Powers and Duties of the Chief Executive Officer and President.
Except in such instances as the Board may confer powers in particular
transactions upon any other officer, and subject to the control and direction of
the Board, the Chief Executive Officer and President shall manage and direct the
business and affairs of the Corporation and shall communicate to the Board and
any Committee thereof reports, proposals and recommendations for their
respective consideration or action.
3.5 Powers and Duties of Executive Vice Presidents, Senior Vice
Presidents and Vice Presidents. Executive Vice Presidents, Senior Vice
Presidents and Vice Presidents shall have such powers and perform such duties as
the Board or the Chief Executive Officer and President may from time to time
prescribe or as may be prescribed in these By-laws.
3.6 Powers and Duties of the Chief Financial Officer. The Chief
Financial Officer shall have such powers and perform such duties as the Board or
the Chief Executive Officer and President may from time to time prescribe or as
may be prescribed in these By-laws. The Chief Financial Officer shall cause to
be prepared and maintained (i) at the office of the Corporation, a stock ledger
containing the names and addresses of all stockholders and the number of shares
held by each and (ii) the list of stockholders for each meeting of the
stockholders as required by Section 1.11 of these By-laws. The Chief Financial
Officer shall be responsible for the custody of all stock books and of all
unissued stock certificates.
3.7 Powers and Duties of the General Counsel. The General Counsel shall
be the chief legal officer of the Corporation reporting to the Chief Executive
Officer and President and shall be responsible for all the legal affairs of the
Corporation, including, without limitation, advising and representing the
Corporation on relevant corporate, employment, securities, tax, investment and
insurance laws, litigation, regulatory and governmental filings and proceedings,
and on such other legal matters which, in the judgment of the General
<PAGE> 21
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Counsel, affect the Corporation. In addition, the General Counsel shall perform
such other duties as the Board of Directors may prescribe.
3.8 Powers and Duties of the Controller and Assistant Controllers. (a)
The Controller shall be responsible for the maintenance of adequate accounting
records of all assets, liabilities, capital and transactions of the Corporation.
The Controller shall prepare and render such balance sheets, income statements,
budgets and other financial statements and reports as the Board or the Chief
Executive Officer and President may require, and shall perform such other duties
as may be prescribed or assigned pursuant to these By-laws and all other acts
incident to the position of Controller.
(b) Each Assistant Controller shall perform such duties as from time to
time may be assigned by the Controller or by the Board. In the event of the
absence, incapacity or inability to act of the Controller, then any Assistant
Controller may perform any of the duties and may exercise any of the powers of
the Controller.
3.9 Powers and Duties of the Treasurer and Assistant Treasurers. (a)
The Treasurer shall have the care and custody of all the funds and securities of
the Corporation except as may be otherwise ordered by the Board, and shall cause
such funds (i) to be invested or reinvested from time to time for the benefit of
the Corporation as may be designated by the Board, the Chairman of the Board,
the Chief Executive Officer and President, the Chief Financial Officer or the
Treasurer or (ii) to be deposited to the credit of the Corporation in such banks
or depositories as may be designated by the Board, the Chairman of the Board,
the Chief Executive Officer and President, the Chief Financial Officer or the
Treasurer, and shall cause such securities to be placed in safekeeping in such
manner as may be designated by the Board, the Chairman of the Board, the Chief
Executive Officer and President, the Chief Financial Officer or the Treasurer.
(b) The Treasurer, any Assistant Treasurer or such other person or
persons as may be designated for such purpose by the Board, the Chairman of the
Board, the Chief Executive Officer and President, the Chief Financial Officer or
the Treasurer may endorse in the
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name and on behalf of the Corporation all instruments for the payment of money,
bills of lading, warehouse receipts, insurance policies and other commercial
documents requiring such endorsement.
(c) The Treasurer, any Assistant Treasurer or such other person or
persons as may be designated for such purpose by the Board, the Chairman of the
Board, the Chief Executive Officer and President, the Chief Financial Officer or
the Treasurer (i) may sign all receipts and vouchers for payments made to the
Corporation, (ii) shall render a statement of the cash account of the
Corporation to the Board as often as it shall require the same and (iii) shall
enter regularly in books to be kept for that purpose full and accurate accounts
of all moneys received and paid on account of the Corporation and of all
securities received and delivered by the Corporation.
(d) The Treasurer shall perform such other duties as may be prescribed
or assigned pursuant to these By-laws and all other acts incident to the
position of Treasurer. Each Assistant Treasurer shall perform such duties as may
from time to time be assigned by the Treasurer or by the Board. In the event of
the absence, incapacity or inability to act of the Treasurer, then any Assistant
Treasurer may perform any of the duties and may exercise any of the powers of
the Treasurer.
3.10 Powers and Duties of the Secretary and Assistant Secretaries. (a)
The Secretary shall keep the minutes of all proceedings of the stockholders, the
Board and the Committees of the Board. The Secretary shall attend to the giving
and serving of all notices of the Corporation, in accordance with the provisions
of these By-laws and as required by applicable law. The Secretary shall be the
custodian of the seal of the Corporation. The Secretary shall affix or cause to
be affixed the seal of the Corporation to such contracts, instruments and other
documents requiring the seal of the Corporation, and when so affixed may attest
the same and shall perform such other duties as may be prescribed or assigned
pursuant to these By-laws and all other acts incident to the position of
Secretary.
(b) Each Assistant Secretary shall perform such duties as may from time
to time be assigned by the Secretary or by the Board. In the event of the
absence,
<PAGE> 23
18
incapacity or inability to act of the Secretary, then any Assistant Secretary
may perform any of the duties and may exercise any of the powers of the
Secretary.
4. INDEMNIFICATION.
4.1 Indemnification. (a) The Corporation, to the fullest extent
permitted by applicable law as then in effect, shall indemnify any person who
was or is a Director or officer of the Corporation and who was or is involved in
any manner (including, without limitation, as a party or a witness) or is
threatened to be made so involved in any threatened, pending or completed
investigation, claim, action, suit or proceeding, whether civil, criminal,
administrative or investigative (including, without limitation, any action, suit
or proceeding by or in the right of the Corporation to procure a judgment in its
favor) (each, a "Proceeding"), by reason of the fact that such person was or is
a Director, officer, employee or agent of the Corporation or was or is serving
at the request of the Corporation as a director, officer, employee, or agent of
another corporation, partnership, joint venture, trust or other enterprise
(including, without limitation, any employee benefit plan) (a "Covered Entity"),
against all expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement and actually and reasonably incurred by such person in
connection with such Proceeding. Any such former or present Director or officer
of the Corporation finally determined to be entitled to indemnification as
provided in this Article 4 is hereinafter called an "Indemnitee". Until such
final determination is made, such former or present Director or officer shall be
a "Potential Indemnitee" for purposes of this Article 4. Notwithstanding the
foregoing provisions of this Section 4.1(a), the Corporation shall not indemnify
an Indemnitee with respect to any Proceeding commenced by such Indemnitee unless
the commencement of such Proceeding by such Indemnitee has been approved by a
majority vote of the Disinterested Directors (as defined in Section 4.5(d));
provided, however, that such approval of a majority of the Disinterested
Directors shall not be required with respect to any Proceeding commenced by such
Indemnitee after a Change in Control (as defined in Section 4.5(d)) has
occurred.
(b) Neither the amendment or repeal of, nor the adoption of a provision
inconsistent with, any provision
<PAGE> 24
19
of this Article 4 (including, without limitation, this Section 4.1(b)) shall
adversely affect the rights of any Director or officer under this Article 4 (i)
with respect to any Proceeding commenced or threatened prior to such amendment,
repeal or adoption of an inconsistent provision or (ii) after the occurrence of
a Change in Control, with respect to any Proceeding arising out of any action or
omission occurring prior to such amendment, repeal or adoption of an
inconsistent provision, in either case without the written consent of such
Director or officer.
4.2 Insurance, Contracts and Funding. The Corporation may purchase and
maintain insurance to protect itself and any Director, officer, employee or
agent of the Corporation or of any Covered Entity against any expenses,
judgments, fines and amounts paid in settlement as specified in Section 4.1(a)
or Section 4.6 of this Article 4 or incurred by any such Director, officer,
employee or agent in connection with any Proceeding referred to in such
Sections, to the fullest extent permitted by applicable law as then in effect.
The Corporation may enter into contracts with any Director, officer, employee or
agent of the Corporation or of any Covered Entity in furtherance of the
provisions of this Article 4 and may create a trust fund, grant a security
interest or use other means (including, without limitation, a letter of credit)
to ensure the payment of such amounts as may be necessary to effect
indemnification as provided in this Article 4.
4.3 Indemnification; Not Exclusive Right. The right of indemnification
provided in this Article 4 shall not be exclusive of any other rights to which
an Indemnitee or Potential Indemnitee may otherwise be entitled, and the
provisions of this Article 4 shall inure to the benefit of the heirs and legal
representatives of any Indemnitee or Potential Indemnitee under this Article 4
and shall be applicable to Proceedings commenced or continuing after the
adoption of this Article 4, whether arising from acts or omissions occurring
before or after such adoption.
4.4 Advancement of Expenses. Each Potential Indemnitee shall be
entitled to receive advance payment of any expenses actually and reasonably
incurred by such Potential Indemnitee in connection with such Proceeding prior
to a determination of entitlement to
<PAGE> 25
20
indemnification pursuant to Section 4.5(a). Each Potential Indemnitee shall
submit a statement or statements to the Corporation requesting such advance or
advances from time to time, whether prior to or after final disposition of such
Proceeding, reasonably evidencing the expenses incurred by such Potential
Indemnitee and accompanied by an undertaking by or on behalf of such Potential
Indemnitee to repay the amounts advanced if ultimately it should be determined
that such Potential Indemnitee is not entitled to be indemnified against such
expenses pursuant to this Article 4. A determination of the reasonableness of
such expenses shall be made and such reasonable expenses shall be advanced
pursuant to procedures to be established from time to time by the Board or its
designee(s)(the "Advancement Procedures"). The amendment or repeal of, and the
adoption of a provision inconsistent with, any provision of the Advancement
Procedures shall be governed by Section 4.1(b) of this Article 4.
Notwithstanding the foregoing provisions of this Section 4.4, the Corporation
shall not advance expenses to a Potential Indemnitee with respect to any
Proceeding commenced by such Potential Indemnitee unless the commencement of
such Proceeding by such Potential Indemnitee has been approved by a majority
vote of the Disinterested Directors; provided, however, that such approval of a
majority of the Disinterested Directors shall not be required with respect to
any Proceeding commenced by such Potential Indemnitee after a Change in Control
has occurred.
4.5 Indemnification Procedures; Presumptions and Effect of Certain
Proceedings; Remedies. In furtherance, but not in limitation, of the foregoing
provisions of this Article 4, the following procedures, presumptions and
remedies shall apply with respect to the right to indemnification under this
Article 4:
(a) Procedures for Determination of Entitlement to Indemnification. (i)
To obtain indemnification under this Article 4, a Potential Indemnitee shall
submit to the Secretary a written request, including such documentation and
information as is reasonably available to the Indemnitee and reasonably
necessary to determine whether and to what extent the Potential Indemnitee is
entitled to indemnification (the "Supporting Documentation"). The determination
of the Potential Indemnitee's entitlement to indemnification shall be made not
later than 60 days after the later of (A) the receipt
<PAGE> 26
21
by the Corporation of the written request for indemnification together with the
Supporting Documentation and (B) the receipt by the Corporation of written
notice of final disposition of the Proceeding for which indemnification is
sought. The Secretary shall, promptly upon receipt of such a request for
indemnification, advise the Board in writing that the Potential Indemnitee has
requested indemnification.
(ii) The Potential Indemnitee's entitlement to indemnification under
this Article 4 shall be determined in one of the following ways: (A) by a
majority vote of the Disinterested Directors, whether or not they constitute a
quorum of the Board; (B) by a committee of the Disinterested Directors
designated by a majority vote of the Disinterested Directors, whether or not
they constitute a quorum of the Board; (C) by a written opinion of Independent
Counsel (as defined in Section 4.5(d)) if (x) a Change in Control shall have
occurred and the Potential Indemnitee so requests or (y) there are no
Disinterested Directors or a majority of such Disinterested Directors so
directs; (D) by the stockholders of the Corporation; or (E) as provided in
Section 4.5(b) of this Article 4.
(iii) In the event the determination of entitlement to indemnification
is to be made by Independent Counsel pursuant to Section 4.5(a)(ii), a majority
of the Disinterested Directors (or, if there are no Disinterested Directors, the
General Counsel of the Corporation or, if the General Counsel is or was a party
to the Proceeding in respect of which indemnification is sought, the highest
ranking officer of the Corporation who is not and was not a party to such
Proceeding) shall select the Independent Counsel, but only an Independent
Counsel to which the Potential Indemnitee does not reasonably object; provided,
however, that if a Change in Control shall have occurred, the Potential
Indemnitee shall select such Independent Counsel, but only an Independent
Counsel to which a majority of the Disinterested Directors does not reasonably
object.
(b) Presumptions and Effect of Certain Proceedings. Except as otherwise
expressly provided in this Article 4, if a Change in Control shall have
occurred, the Potential Indemnitee shall be presumed to be entitled to
indemnification under this Article 4 (with respect to actions or omissions
occurring prior to such Change in
<PAGE> 27
22
Control) upon submission of a request for indemnification together with the
Supporting Documentation in accordance with Section 4.5(a)(i) of this Article 4,
and thereafter the Corporation shall have the burden of proof to overcome that
presumption in reaching a contrary determination. In any event, if the person or
persons empowered under Section 4.5(a) of this Article 4 to determine
entitlement to indemnification shall not have been appointed or shall not have
made a determination within 60 days after the later of (x) the receipt by the
Corporation of the written request for indemnification together with the
Supporting Documentation and (y) the receipt by the Corporation of written
notice of final disposition of the Proceeding for which indemnification is
sought, the Potential Indemnitee shall be deemed to be, and shall be, entitled
to indemnification. The termination of any Proceeding, or of any claim, issue or
matter therein, by judgment, order, settlement or conviction, or upon a plea of
nolo contendere or its equivalent, shall not, of itself, adversely affect the
right of the Potential Indemnitee to indemnification or create a presumption
that the Potential Indemnitee did not act in good faith and in a manner which
the Potential Indemnitee reasonably believed to be in or not opposed to the best
interests of the Corporation or, with respect to any criminal Proceeding, that
the Potential Indemnitee had reasonable cause to believe that his or her conduct
was unlawful.
(c) Remedies. (i) In the event that a determination is made pursuant to
Section 4.5(a) of this Article 4 that the Potential Indemnitee is not entitled
to indemnification under this Article 4, (A) the Potential Indemnitee shall be
entitled to seek an adjudication of his or her entitlement to such
indemnification either, at the Potential Indemnitee's sole option, in (x) an
appropriate court of the State of Delaware or any other court of competent
jurisdiction or (y) an arbitration to be conducted by a single arbitrator
pursuant to the rules of the American Arbitration Association; (B) any such
judicial proceeding or arbitration shall be de novo and the Potential Indemnitee
shall not be prejudiced by reason of such adverse determination; and (C) if a
Change in Control shall have occurred, in any such judicial proceeding or
arbitration, the Corporation shall have the burden of proving that the Potential
Indemnitee is not entitled to indemnification under this Article 4 (with respect
to actions or omissions occurring prior to such
<PAGE> 28
23
Change in Control).
(ii) If a determination shall have been made or deemed to have been
made, pursuant to Section 4.5(a) or (b) of this Article 4, that the Potential
Indemnitee is entitled to indemnification, the Corporation shall be obligated to
pay the amounts constituting such indemnification within five days after such
determination has been made or deemed to have been made and shall be
conclusively bound by such determination unless (A) the Indemnitee
misrepresented or failed to disclose a material fact in making the request for
indemnification or in the Supporting Documentation or (B) such indemnification
is prohibited by law. In the event that payment of indemnification is not made
within five days after a determination of entitlement to indemnification has
been made or deemed to have been made pursuant to Section 4.5(a) or (b) of this
Article 4, the Indemnitee shall be entitled to seek judicial enforcement of the
Corporation's obligation to pay to the Indemnitee such indemnification.
Notwithstanding the foregoing, the Corporation may bring an action, in an
appropriate court in the State of Delaware or any other court of competent
jurisdiction, contesting the right of the Indemnitee to receive indemnification
hereunder due to the occurrence of an event described in clause (A) or (B) of
this subsection (each, a "Disqualifying Event"); provided, however, that in any
such action the Corporation shall have the burden of proving the occurrence of
such Disqualifying Event.
(iii) The Corporation shall be precluded from asserting in any judicial
proceeding or arbitration commenced pursuant to this Section 4.5(c) that the
procedures and presumptions of this Article 4 are not valid, binding and
enforceable and shall stipulate in any such court or before any such arbitrator
that the Corporation is bound by all the provisions of this Article 4.
(iv) In the event that the Indemnitee or Potential Indemnitee, pursuant
to this Section 4.5(c), seeks a judicial adjudication of or an award in
arbitration to enforce his or her rights under, or to recover damages for breach
of, this Article 4, such person shall be entitled to recover from the
Corporation, and shall be indemnified by the Corporation against, any expenses
actually and reasonably incurred by such person in
<PAGE> 29
24
connection with such judicial adjudication or arbitration if such person
prevails in such judicial adjudication or arbitration. If it shall be determined
in such judicial adjudication or arbitration that such person is entitled to
receive part but not all of the indemnification or advancement of expenses
sought, the expenses incurred by such person in connection with such judicial
adjudication or arbitration shall be prorated accordingly.
(d) Definitions. For purposes of this Article 4:
(i) "Change in Control" means a change in control of the Corporation of a
nature that would be required to be reported in response to Item 6(e) (or any
successor provision) of Schedule 14A of Regulation 14A (or any amendment or
successor provision thereto) promulgated under the Securities Exchange Act of
1934, as amended (the "Act"), whether or not the Corporation is then subject to
such reporting requirement; provided that, without limitation, such a change in
control shall be deemed to have occurred if (A) any "person" (as such term is
used in Sections 13(d) and 14(d) of the Act) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Act), directly or indirectly, of
securities of the Corporation representing 15% or more of the voting power of
all outstanding shares of stock of the Corporation entitled to vote generally in
an election of Directors without the prior approval of at least two-thirds of
the members of the Board in office immediately prior to such acquisition; (B)
the Corporation is a party to any merger or consolidation in which the
Corporation is not the continuing or surviving corporation or pursuant to which
shares of the Corporation's Common Stock would be converted into cash,
securities or other property, other than a merger of the Corporation in which
the holders of the Corporation's Common Stock immediately prior to the merger
have the same proportionate ownership of common stock of the surviving
corporation immediately after the merger; (C) there is a sale, lease, exchange
or other transfer (in one transaction or a series of related transactions) of
all, or substantially all, of the assets of the Corporation, or liquidation or
dissolution of the Corporation; (D) the Corporation is a party to a merger,
consolidation, sale of assets or other reorganization, or a proxy contest, as a
consequence of which members of the Board in office immediately prior to such
transaction or event constitute less than a majority of the Board
<PAGE> 30
25
thereafter; or (E) during any period of two consecutive years, individuals who
at the beginning of such period constituted the Board (including for this
purpose any new Director whose election or nomination for election by the
stockholders was approved by a vote of at least two-thirds of the Directors then
still in office who were Directors at the beginning of such period) cease for
any reason to constitute at least a majority of the Board.
(ii) "Disinterested Director" means a Director who is not and was not a
party to the Proceeding in respect of which indemnification is sought by the
Indemnitee or Potential Indemnitee.
(iii) "Independent Counsel" means a law firm or a member of a law firm
that neither presently is, nor in the past five years has been, retained to
represent: (a) the Corporation or the Indemnitee or Potential Indemnitee in any
matter material to either such party or (b) any other party to the Proceeding
giving rise to a claim for indemnification under this Article 4. Notwithstanding
the foregoing, the term "Independent Counsel" shall not include any person who,
under applicable standards of professional conduct then prevailing under the law
of the State of Delaware, would have a conflict of interest in representing
either the Corporation or the Indemnitee or Potential Indemnitee in an action to
determine the Indemnitee's or Potential Indemnitee's rights under this Article
4.
4.6 Indemnification of Employees and Agents. Notwithstanding any other
provision of this Article 4, the Corporation, to the fullest extent permitted by
applicable law as then in effect, may indemnify any person other than a Director
or officer of the Corporation who is or was an employee or agent of the
Corporation and who is or was involved in any manner (including, without
limitation, as a party or a witness) or is threatened to be made so involved in
any threatened, pending or completed Proceeding, by reason of the fact that such
person was or is an employee or agent of the Corporation or was or is serving at
the request of the Corporation as a director, officer, employee or agent of a
Covered Entity, against all expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by such
person in connection with such Proceeding. The Corporation may also advance
expenses
<PAGE> 31
26
incurred by such employee, fiduciary or agent in connection with any such
Proceeding, consistent with the provisions of applicable law as then in effect.
If made or advanced, such indemnification shall be made and such reasonable
expenses shall be advanced pursuant to procedures to be established from time to
time by the Board or its designee(s).
4.7 Severability. If any provision or provisions of this Article 4
shall be held to be invalid, illegal or unenforceable for any reason whatsoever:
(i) the validity, legality and enforceability of the remaining provisions of
this Article 4 (including, without limitation, all portions of any Section of
this Article 4 containing any such provision held to be invalid, illegal or
unenforceable, that are not themselves invalid, illegal or unenforceable) shall
not in any way be affected or impaired thereby; and (ii) to the fullest extent
possible, the provisions of this Article 4 (including, without limitation, all
portions of any Section of this Article 4 containing any such provision held to
be invalid, illegal or unenforceable, that are not themselves invalid, illegal
or unenforceable) shall be construed so as to give effect to the intent
manifested by the provision held invalid, illegal or unenforceable.
5. CAPITAL STOCK
5.1 Stock Certificates. (a) Every holder of stock in the Corporation
shall be entitled to have a certificate certifying the number of shares owned by
him or her in the Corporation and designating the class and series of stock to
which such shares belong, which certificate shall otherwise be in such form as
the Board shall prescribe and as provided in Section 5.1(d). Each such
certificate shall be signed by, or in the name of, the Corporation by the
Chairman of the Board, the Chief Executive Officer and President or any Vice
President, and by the Treasurer or any Assistant Treasurer or the Secretary or
any Assistant Secretary.
(b) If such certificate is countersigned by a transfer agent other than
the Corporation or its employee, or by a registrar other than the Corporation or
its employee, the signatures of the officers of the Corporation may be
facsimiles, and, if permitted by applicable law, any other signature on the
certificate
<PAGE> 32
27
may be a facsimile.
(c) In case any officer who has signed or whose facsimile signature has
been placed upon a certificate shall have ceased to be such officer before such
certificate is issued, it may be issued by the Corporation with the same effect
as if such person were such officer at the date of issue.
(d) Certificates of stock shall be issued in such form as shall be
approved by the Board and not inconsistent with the Certificate. They shall be
numbered and registered in the order in which they are issued. No certificate
shall be issued until fully paid.
(e) All certificates surrendered to the Corporation shall be canceled
(other than treasury shares) with the date of cancellation affixed thereon and
shall be retained by the Chief Financial Officer, together with the powers of
attorney to transfer and the assignments of the shares represented by such
certificates, for such period of time as such officer shall designate.
5.2 Record Ownership. A record of the name of the person, firm or
corporation and address of such holder of each certificate, the number of shares
represented thereby and the date of issue thereof shall be made on the
Corporation's books. The Corporation shall be entitled to treat the holder of
record of any share of stock as the holder in fact thereof, and accordingly
shall not be bound to recognize any equitable or other claim to or interest in
any share on the part of any person, whether or not it shall have express or
other notice thereof, except as required by applicable law.
5.3 Transfer of Record Ownership. Transfers of stock shall be made on
the books of the Corporation only by direction of the person named in the
certificate or such person's attorney, lawfully constituted in writing, and only
upon the surrender of the certificate therefor and a written assignment of the
shares evidenced thereby. Whenever any transfer of stock shall be made for
collateral security, and not absolutely, it shall be so expressed in the entry
of the transfer if, when the certificates are presented to the Corporation for
transfer, both the transferor and transferee request the Corporation to do so.
<PAGE> 33
28
5.4 Lost, Stolen or Destroyed Certificates. Certificates representing
shares of the stock of the Corporation shall be issued in place of any
certificate alleged to have been lost, stolen or destroyed in such manner and on
such terms and conditions as the Board from time to time may authorize in
accordance with applicable law.
5.5 Transfer Agent; Registrar; Rules Respecting Certificates. The
Corporation shall maintain one or more transfer offices or agencies where stock
of the Corporation shall be transferable. The Corporation shall also maintain
one or more registry offices where such stock shall be registered. The Board may
make such rules and regulations as it may deem expedient concerning the issue,
transfer and registration of stock certificates in accordance with applicable
law.
5.6 Fixing Record Date for Determination of Stockholders of Record. (a)
The Board may fix, in advance, a date as the record date for the purpose of
determining the stockholders entitled to notice of, or to vote at, any meeting
of the stockholders or any adjournment thereof, which record date shall not
precede the date upon which the resolution fixing the record date is adopted by
the Board, and which record date shall not be more than 60 days nor less than
ten days before the date of a meeting of the stockholders. If no record date is
fixed by the Board, the record date for determining the stockholders entitled to
notice of or to vote at a stockholders' meeting shall be at the close of
business on the day next preceding the day on which notice is given, or, if
notice is waived, at the close of business on the day next preceding the day on
which the meeting is held. A determination of stockholders of record entitled to
notice of or to vote at a meeting of stockholders shall apply to any adjournment
of the meeting; provided, however, that the Board may fix a new record date for
the adjourned meeting.
(b) The Board may fix, in advance, a date as the record date for the
purpose of determining the stockholders entitled to receive payment of any
dividend or other distribution or the allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock,
or in order to make a determination of the stockholders for the purpose of any
other lawful action, which record date shall not precede
<PAGE> 34
29
the date upon which the resolution fixing the record date is adopted by the
Board, and which record date shall not be more than 60 calendar days prior to
such action. If no record date is fixed by the Board, the record date for
determining the stockholders for any such purpose shall be at the close of
business on the day on which the Board adopts the resolution relating thereto.
6. SECURITIES HELD BY THE CORPORATION.
6.1 Voting. Unless the Board shall otherwise order, the Chairman of the
Board, the Chief Executive Officer and President, any Executive Vice President,
any Senior Vice President, any Vice President, the Chief Financial Officer, the
Controller, the Treasurer or the Secretary shall have full power and authority,
on behalf of the Corporation, to attend, act and vote at any meeting of the
stockholders of any corporation in which the Corporation may hold stock and at
such meeting to exercise any or all rights and powers incident to the ownership
of such stock, and to execute on behalf of the Corporation a proxy or proxies
empowering another or others to act as aforesaid. The Board from time to time
may confer like powers upon any other person or persons.
6.2 General Authorization to Transfer Securities Held by the
Corporation. (a) Any of the following officers, to wit: the Chairman of the
Board, the Chief Executive Officer and President, any Executive Vice President,
any Senior Vice President, any Vice President, the Chief Financial Officer, the
Controller, the Treasurer, any Assistant Controller, any Assistant Treasurer,
and each of them, hereby is authorized and empowered to transfer, convert,
endorse, sell, assign and deliver any and all shares of stock, bonds,
debentures, notes, subscription warrants, stock purchase warrants, evidences of
indebtedness, or other securities now or hereafter standing in the name of or
owned by the Corporation, and to make, execute and deliver any and all written
instruments of assignment and transfer necessary or proper to effectuate the
authority hereby conferred.
(b) Whenever there shall be annexed to any instrument of assignment and
transfer executed pursuant to and in accordance with the foregoing Section
6.2(a), a certificate of the Secretary or any Assistant Secretary in office at
the date of such certificate setting forth the provisions hereof and stating
that they are in full
<PAGE> 35
30
force and effect and setting forth the names of persons who are then officers of
the corporation, all persons to whom such instrument and annexed certificate
shall thereafter come shall be entitled, without further inquiry or
investigation and regardless of the date of such certificate, to assume and to
act in reliance upon the assumption that (i) the shares of stock or other
securities named in such instrument were theretofore duly and properly
transferred, endorsed, sold, assigned, set over and delivered by the
Corporation, and (ii) with respect to such securities, the authority of these
provisions of these By-laws and of such officers is still in full force and
effect.
7. DEPOSITARIES AND SIGNATORIES.
7.1 Depositaries. The Chairman of the Board, the Chief Executive
Officer and President, the Chief Financial Officer, and the Treasurer are each
authorized to designate depositaries for the funds of the Corporation deposited
in its name or that of a division of the Corporation, or both, and the
signatories with respect thereto in each case, and from time to time, to change
such depositaries and signatories, with the same force and effect as if each
such depositary and the signatories with respect thereto and changes therein had
been specifically designated or authorized by the Board; and each depositary
designated by the Board or by the Chairman of the Board, the Chief Executive
Officer and President, the Chief Financial Officer, or the Treasurer shall be
entitled to rely upon the certificate of the Secretary or any Assistant
Secretary of the Corporation or of a division of the Corporation setting forth
the fact of such designation and of the appointment of the officers of the
Corporation or of the division or of both or of other persons who are to be
signatories with respect to the withdrawal of funds deposited with such
depositary, or from time to time the fact of any change in any depositary or in
the signatories with respect thereto.
7.2 Signatories. Unless otherwise designated by the Board or by the
Chairman of the Board, the Chief Executive Officer and President, the Chief
Financial Officer or the Treasurer, all notes, drafts, checks, acceptances,
orders for the payment of money and all other negotiable instruments obligating
the Corporation for the payment of money shall be (a) signed by the
<PAGE> 36
31
Treasurer or any Assistant Treasurer and (b) countersigned by the Controller or
any Assistant Controller, or (c) either signed or countersigned by the Chairman
of the Board, the Chief Executive Officer and President, any Executive Vice
President, any Senior Vice President or any Vice President in lieu of either of
the officers designated in clause (a) or the officers designated in clause (b)
of this Section 7.2.
8. SEAL.
The seal of the Corporation shall be in such form and shall have such
content as the Board shall from time to time determine.
9. FISCAL YEAR.
The fiscal year of the Corporation shall end on December 31 in each
year, or on such other date as the Board shall determine.
10. WAIVER OF OR DISPENSING WITH NOTICE.
(a) Whenever any notice of the time, place or purpose of any meeting of
the stockholders is required to be given by applicable law, the Certificate or
these By-laws, a written waiver of notice, signed by a stockholder entitled to
notice of a stockholders' meeting, in whatever form, whether signed before or
after the time set for a given meeting, shall be deemed equivalent to notice of
such meeting. Attendance of a stockholder in person or by proxy at a
stockholders' meeting shall constitute a waiver of notice to such stockholder of
such meeting, except when the stockholder attends the meeting for the express
purpose of objecting at the beginning of the meeting to the transaction of any
business because the meeting was not lawfully called or convened.
(b) Whenever any notice of the time or place of any meeting of the
Board or Committee of the Board is required to be given by applicable law, the
Certificate or these By-laws, a written waiver of notice signed by a Director,
in whatever form, whether signed before or after the time set for a given
meeting, shall be deemed equivalent to notice of such meeting. Attendance of a
Director at a meeting in person (or by conference telephone or similar
communications equipment) shall
<PAGE> 37
32
constitute a waiver of notice to such Director of such meeting, except when the
Director attends the meeting for the express purpose of objecting at the
beginning of the meeting to the transaction of any business because the meeting
was not lawfully called or convened.
(c) No notice need be given to any person with whom communication is
made unlawful by any law of the United States or any rule, regulation,
proclamation or executive order issued under any such law.
11. AMENDMENT OF BY-LAWS.
Except as otherwise provided in the Certificate, these By-laws, or any
of them, may from time to time be supplemented, amended or repealed, or new
By-laws may be adopted, by the Board at any regular or special meeting of the
Board, if such supplement, amendment, repeal or adoption is approved by a
majority of the entire Board. These By-laws, or any of them, may from time to
time be supplemented, amended or repealed, or new By-laws may be adopted, by the
stockholders at any regular or special meeting of the stockholders at which a
quorum is present, if such supplement, amendment, repeal or adoption is approved
by the affirmative vote of the holders of at least a majority of the voting
power of all outstanding shares of stock of the Corporation entitled to vote
generally in an election of directors.
12. OFFICES AND AGENT
(a) Registered Office and Agent. The registered office of the
Corporation in the State of Delaware shall be 1209 Orange Street, Wilmington,
Delaware 19801. The name of the registered agent is The Corporation Trust
Company. Such registered agent has a business office identical with such
registered office.
(b) Other Offices. The Corporation may also have offices at other
places, either within or outside the State of Delaware, as the Board of
Directors may from time to time determine or as the business of the Corporation
may require.
<PAGE> 1
Exhibit 10.7
1997 HARTFORD LIFE, INC. INCENTIVE STOCK PLAN
1. PURPOSE
The purpose of the 1997 Hartford Life, Inc. Incentive Stock Plan is to
motivate and reward superior performance on the part of employees of Hartford
Life, Inc. and its subsidiaries and Participating Companies and to thereby
attract and retain employees of superior ability. In addition, the Plan is
intended to further opportunities for stock ownership by such employees in order
to increase their proprietary interest in the Company, and, as a result, their
interest in the success of the Company. Awards will be made, in the discretion
of the Committee, to Key Employees (including officers and directors who are
also employees) whose responsibilities and decisions directly affect the
performance of any Participating Company and its subsidiaries. Such incentive
awards may consist of stock options, stock appreciation rights payable in stock
or cash, performance shares, restricted stock or any combination of the
foregoing, as the Committee may determine.
2. DEFINITIONS
When used herein, the following terms shall have the following meanings:
"ACCELERATION EVENT" means the occurrence of an event defined in Section 9 of
the Plan.
"ACT" means the Securities Exchange Act of 1934.
"ANNUAL LIMIT" means the maximum number of shares of Stock for which Awards
may be granted under the Plan in each Plan Year as provided in Section 3 of the
Plan.
"AWARD" means an award granted to any Key Employee in accordance with the
provisions of the Plan in the form of Options, Rights, Performance Shares or
Restricted Stock, or any combination of the foregoing.
"AWARD AGREEMENT" means the written agreement evidencing each Award granted
to a Key Employee under the Plan.
"BENEFICIARY" means the beneficiary or beneficiaries designated pursuant to
Section 10 to receive the amount, if any, payable under the Plan upon the death
of a Key Employee.
"BOARD" means the Board of Directors of the Company.
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"RESTRICTED STOCK" means Stock awarded under Section 7 of the Plan subject to
such restrictions as the Committee deems appropriate or desirable.
"RIGHT" means a stock appreciation right awarded in connection with an Option
under Section 5 of the Plan.
"STOCK" means the Class A common stock ($.01 par value) of the Company.
"TOTAL DISABILITY" means the complete and permanent inability of a Key
Employee to perform all of his or her duties under the terms of his or her
employment with any Participating Company, as determined by the Committee upon
the basis of such evidence, including independent medical reports and data, as
the Committee deems appropriate or necessary.
"Transferee" means any person or entity to whom or to which a non-qualified
stock option has been transferred and assigned in accordance with Section 5(h)
of the Plan."
3. SHARES SUBJECT TO THE PLAN
The aggregate number of shares of Stock which may be awarded under the Plan
in any Plan Year shall be subject to an annual limit. The maximum number of
shares of Stock for which Awards may be granted under the Plan in each Plan Year
shall be 1.5 percent (1.5%) of the total of the issued and outstanding shares of
Class A common Stock and Class B Common Stock, and Class A and Class B Treasury
Stock as reported in the Annual Report on Form 10-K of the Company for the
fiscal year ending immediately prior to any Plan Year, except that for the Plan
year that includes the initial public offering of stock of the Company, such
maximum number shall be 1.5% of the issued and outstanding shares of Class A
common stock and Class B Common Stock, of the Company immediately following such
offering (excluding shares issued by virtue of underwriters' over-allotments).
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, in no event shall more than five million
(5,000,000) shares of Stock be cumulatively available for Awards of incentive
Stock options under the Plan, and provided further, that no more than twenty
percent (20%) of the total number of shares on a cumulative basis shall be
available for restricted stock and performance shares Awards. For any Plan Year,
no individual employee may receive an Award of Stock options for more than the
lesser of (i) ten percent (10%) of the Annual Limit on available shares
applicable to that Plan Year and (ii) 500,000 shares; except that, for the Plan
Year that follows initial public offering of stock of the Company, each
individual employee may receive in addition to the foregoing limit that number
of substitute Stock options equitably determined by the Committee to be required
to replace ITT Hartford Group, Inc. stock options surrendered by such employee
in connection with such offering.
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with the grant of the Option or at any time thereafter during the term of the
Option; (iii) determine the number of shares of Stock subject to each Option or
the number of shares of Stock that shall be used to determine the value of a
Right; and (iv) determine the time or times when and the manner in which each
Option or Right shall be exercisable and the duration of the exercise period.
(b) Any option issued hereunder which is intended to qualify as an Incentive
Stock Option shall be subject to such limitations or requirements as may be
necessary for the purposes of Section 422 of the Code or any regulations and
rulings thereunder to the extent and in such form as determined by the Committee
in its discretion.
(c) The exercise period for a non-qualified Stock option and any related
Right shall not exceed ten years and two days from the date of grant, and the
exercise period for an Incentive Stock Option and any related Right shall not
exceed ten years from the date of grant.
(d) The Option price per share shall be determined by the Committee at the
time any Option is granted and shall be not less than the Fair Market Value of
one share of Stock on the date the Option is granted.
(e) No part of any Option or Right may be exercised until the Key Employee
who has been granted the Award shall have remained in the employ of a
Participating Company for such period after the date of grant as the Committee
may specify, if any, and the Committee may further require exercisability in
installments.
(f) The purchase price of the shares as to which an Option shall be exercised
shall be paid to the Company at the time of exercise either in cash or Stock
already owned by the optionee having a total Fair Market Value equal to the
purchase price, or a combination of cash and Stock having a total fair market
value, as so determined, equal to the purchase price. The Committee shall
determine acceptable methods for tendering Stock as payment upon exercise of an
Option and may impose such limitations and prohibitions on the use of Stock to
exercise an Option as it deems appropriate.
(g) In case of termination of employment, the following provisions shall
apply:
(A) If a Key Employee who has been granted an Option shall die before such
Option has expired, his or her Option may be exercised in full by (i) the
person or persons to whom the Key Employee's rights under the Option pass by
will, or if no such person has such right, by his or her executors or
administrators; (ii) his or her Transferee(s) (with respect to non-qualified
stock options); or (iii) his or her Beneficiary designated pursuant to
Section 10, at any time, or from time to time, within five years after the
date of the Key Employee's death or within such other period, and subject to
such terms and conditions as the Committee may specify, but not later than
the expiration date specified in Section 5(c) above.
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(B) If the Key Employee's employment by any Participating Company
terminates because of his or her Retirement or Total Disability, he or she
may exercise his or her Options in full at any time, or from time to time,
within five years after the date of the termination of his or her employment
or within such other period, and subject to such terms and conditions as the
Committee may specify, but not later than the expiration date specified in
Section 5(d) above. Any such Options not fully exercisable immediately prior
to such optionee's retirement shall become fully exercisable upon such
retirement unless the Committee, in its sole discretion, shall otherwise
determine.
(C) Except as provided in Section 9, if the Key Employee shall voluntarily
resign before eligibility for Retirement or he or she is terminated for cause
as determined by the Committee, the Options or Rights shall be canceled
coincident with the effective date of the termination of employment.
(D) If the Key Employee's employment terminates for any other reason, he
or she may exercise his or her Options, to the extent that he or she shall
have been entitled to do so at the date of the termination of his or her
employment, at any time, or from time to time, within three months after the
date of the termination of his or her employment or within such other period,
and subject to such terms and conditions as the Committee may specify, but
not later than the expiration date specified in Section 5(c) above.
(h) Except as provided in this Section 5(h), no Option or Right granted under
the Plan shall be transferable other than by will or by the laws of descent and
distribution. During the lifetime of the optionee, an Option or Right shall be
exercisable only by the Key Employee to whom the Option or Right is granted (or
his or her estate or designated beneficiary). Notwithstanding the foregoing, all
or a portion of a non-qualified stock option may be transferred and assigned by
such persons designated by the Committee, to such persons designated by the
Committee, and upon such terms and conditions as the Committee may from time to
time authorize and determine in its sole discretion.
(i) With respect to an Incentive Stock Option, the Committee shall specify
such terms and provisions as the Committee may determine to be necessary or
desirable in order to qualify such Option as an "incentive stock option" within
the meaning of Section 422 of the Code.
(j) With respect to the exercisability and settlement of Rights:
(i) Upon exercise of a Right, the Key Employee shall be entitled, subject
to such terms and conditions the Committee may specify, to receive upon
exercise thereof all or a portion of the excess of (A) the Fair Market Value
of a specified number of shares of Stock at the time of exercise, as
determined by the Committee, over (B) a specified amount which shall not,
subject to Section 5(e), be less than the Fair Market Value of such specified
number of shares of Stock at the time the Right is granted. Upon exercise of
a Right, payment of such excess shall be made as the Committee shall specify
in cash, the issuance or transfer to the Key Employee of whole shares of
Stock with a Fair Market Value at such time equal to any excess, or a
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an Incentive Stock Option, the Fair Market Value of the Stock at the time of
such exercise shall be substituted for the Formula Price. Each such Limited
Stock Appreciation Right shall be exercisable only during the period
beginning on the first business day following the occurrence of such
Acceleration Event and ending on the 60th day following such date and only to
the same extent the related Option is exercisable. Upon exercise of a Limited
Stock Appreciation Right and surrender of the related Option, or portion
thereof, such Option, to the extent surrendered, shall not thereafter be
exercisable.
(v) The restrictions applicable to Awards of Restricted Stock issued
pursuant to Section 7 shall lapse upon the occurrence of an Acceleration
Event and the Company shall issue Stock certificates without a restrictive
legend. Key Employees holding Restricted Stock on the date of an Acceleration
Event may tender such Restricted Stock to the Company which shall pay the
Formula Price as that term is defined in Section 9; provided, such Restricted
Stock must be tendered to the Company within 60 calendar days of the
Acceleration Event.
(vi) If an Acceleration Event occurs during the course of a Performance
Period applicable to an Award of Performance Shares pursuant to Section 6,
then the Key Employee shall be deemed to have satisfied the Performance
Objectives and settlement of such Performance Shares shall be based on the
Formula Price, as defined in this Section 9.
10. BENEFICIARY
(a) Each Key Employee and/or his or her Transferee may file with the Company
a written designation of one or more persons as the Beneficiary who shall be
entitled to receive the Award, if any, payable under the Plan upon his or her
death. A Key Employee or Transferee may from time to time revoke or change his
or her Beneficiary designation without the consent of any prior Beneficiary by
filing a new designation with the Company. The last such designation received
by the Company shall be controlling; provided, however, that no designation, or
change or revocation thereof, shall be effective unless received by the Company
prior to the Key Employee's or Transferee's death, as the case may be, and in
no event shall it be effective as of a date prior to such receipt.
(b) If no such Beneficiary designation is in effect at the time of a Key
Employee's or Transferee's death, as the case may be, or if no designated
Beneficiary survives the Key Employee or Transferee or if such designation
conflicts with law, the Key Employee's or Transferee's estate as the case may
be, shall be entitled to receive the Award, if any, payable under the Plan upon
his or her death. If the Committee is in doubt as to the right of any person to
receive such Award, the Company may retain such Award, without liability for
any interest thereon, until the Committee determines the rights thereto, or the
Company may pay such Award into any court of appropriate jurisdiction and such
payment shall be a complete discharge of the liability of the Company therefor.
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EXHIBIT 10.12
KEY EXECUTIVE EMPLOYMENT PROTECTION AGREEMENT
THIS AGREEMENT, dated as of July 1, 1997, by and between Hartford
Life, Inc., a Delaware corporation (the "Company"), and ________ ("Executive").
W I T N E S S E T H :
WHEREAS, the Company has employed the Executive in an officer
position and has determined that the Executive holds an important position with
the Company;
WHEREAS, the Company believes that, in the event it is confronted
with a situation that could result in a change in ownership or control of the
Company, continuity of management will be essential to its ability to evaluate
and respond to such situation in the best interests of shareholders;
WHEREAS, the Company understands that any such situation will
present significant concerns for Executive with respect to Executive's financial
and job security;
WHEREAS, the Company desires to assure itself of Executive's
services during the period in which it is confronting such a situation, and to
provide Executive with certain financial assurances to enable Executive to
perform the responsibilities of Executive's position without undue distraction
and to exercise judgment without bias due to Executive's personal circumstances;
WHEREAS, to achieve these objectives, the Company and Executive
desire to enter into an agreement providing the Company and Executive with
certain rights and obligations upon the occurrence of a Change of Control or
Potential Change of Control (as defined in Section 2 hereof);
NOW, THEREFORE, in consideration of the premises and mutual
covenants herein contained, it is hereby agreed by and between the Company and
Executive as follows:
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1. OPERATION OF AGREEMENT.
(a) EFFECTIVE DATE. The effective date of this Agreement (the "Effective
Date") shall be the earlier of: (i) the date on which a Potential Change
of Control occurs, or (ii) the date on which a Change of Control occurs,
provided that if Executive is not actively employed by the Company on the
Effective Date, this Agreement shall be void and without effect.
(b) TERMINATION FOLLOWING A POTENTIAL CHANGE OF CONTROL. Consonant with
Section 1(a), in the event that Executive's employment is terminated by
the Company in a Termination Without Cause or is terminated by Executive
in a Termination For Good Reason (as defined herein) after the occurrence
of a Potential Change of Control, and a Change of Control occurs within
one year following the date of such Termination Without Cause or
Termination For Good Reason, then solely for purposes of this Agreement,
Executive shall be deemed to have remained in the Company's employ until
the occurrence of such Change of Control and to have then been terminated
by the Company in a Termination Without Cause, and Executive shall be
entitled to receive the benefits payable under Section 7 of this
Agreement, but reduced by any amounts paid to Executive by the Company on
account of the termination of Executive's employment prior to the
occurrence of such Change of Control.
2. CERTAIN APPLICABLE DEFINITIONS.
(a) BENEFICIAL OWNER. For purposes of this Agreement, "Beneficial Owner"
means any Person who, directly or indirectly, has the right to vote or
dispose of or has "beneficial ownership" (within the meaning of Rule 13d-3
under the Securities and Exchange Act of 1934, as amended (the "Act")) of
any securities of a company, including any such right pursuant to any
agreement, arrangement or understanding (whether or not in writing),
provided that: (i) a Person shall not be deemed the Beneficial Owner of
any security as a result of an agreement, arrangement or understanding to
vote such security (A) arising solely from a revocable proxy or consent
given in response to a public proxy or consent solicitation made pursuant
to, and in accordance with, the Act and the applicable rules and
regulations thereunder, or (B) made in connection with, or to otherwise
participate in, a proxy or consent solicitation made, or to be made,
pursuant to, and in accordance with, the applicable provisions of the Act
and the applicable rules and regulations thereunder, in either case
described in clause (A) or (B) above, whether or not such agreement,
arrangement or understanding
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is also then reportable by such Person on Schedule 13D under the Act (or
any comparable or successor report); and (ii) a Person engaged in business
as an underwriter of securities shall not be deemed to be the Beneficial
Owner of any security acquired through such Person's participation in good
faith in a firm commitment underwriting until the expiration of forty days
after the date of such acquisition.
(b) CHANGE OF CONTROL. For purposes of this Agreement, "Change of Control"
means:
(i) a report on Schedule 13D shall be filed with the Securities and
Exchange Commission pursuant to Section 13(d) of the Act disclosing
that any person (within the meaning of Section 13(d) of the Act),
other the Company or The Hartford Financial Services Group, Inc.
("The Hartford") or a subsidiary of either of the foregoing or any
employee benefit plan sponsored by the Company or The Hartford or a
subsidiary of either of the foregoing, is the Beneficial Owner of
the greater of (A) the percentage of the outstanding stock of the
Company owned at such time by The Hartford, or (B) twenty percent or
more of the outstanding stock of the Company;
(ii) any person (within the meaning of Section 13(d) of the Act),
other than the Company or The Hartford or a subsidiary of either of
the foregoing or any employee benefit plan sponsored by the Company
or The Hartford or a subsidiary of either of the foregoing, shall
purchase shares pursuant to a tender offer or exchange offer to
acquire any stock of the Company (or securities convertible into
stock) for cash, securities or any other consideration, provided
that after consummation of the offer, the person in question is the
Beneficial Owner, directly or indirectly, of the greater of (A) the
percentage of the outstanding stock of the Company owned at such
time by The Hartford, or (B) fifteen percent or more of the
outstanding stock of the Company (calculated as provided in
paragraph (d) of Rule 13d-3 under the Act in the case of rights to
acquire stock);
(iii) the stockholders of the Company shall approve (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 stock of the Company would be converted into cash, securities or
other property, other than a merger of the Company in which holders
of stock of the Company immediately prior to the merger have the
same proportionate ownership of
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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) within any 12 month period, the persons who were directors of
the Company immediately before the beginning of such period (the
"Incumbent Directors") shall cease (for any reason other than death)
to constitute at least a majority of the board of directors of the
Company (the "Board") or the board of directors of any successor to
the Company, provided that any director who was not a director at
the beginning of such period shall be deemed to be an Incumbent
Director if such director (A) was elected to the Board of the
Company by, or on the recommendation of or with the approval of, at
least two-thirds of the directors who then qualified as Incumbent
Directors either actually or by prior operation of this clause (iv),
and (B) was not designated by a person who has entered into an
agreement with the Company to effect a transaction described in the
immediately preceding clause (iii); or
(v) a Change of Control as defined in any of the foregoing clauses
(i), (ii), (iii) or (iv) occurs with respect to The Hartford at a
time when The Hartford directly or indirectly owns more than 50% of
the combined voting power and the value of the capital stock of the
Company, provided that a sale of all of the interest of The Hartford
in the Company shall not be considered a Change of Control
hereunder.
(c) PERSON. For purposes of this Agreement, "Person" has the meaning
ascribed to such term in Section 3(a)(9) of the Act, as supplemented by
Section 13(d)(3) of the Act; provided, however, that Person shall not
include (i) the Company, any subsidiary of the Company or any other Person
controlled by the Company, (ii) any trustee or other fiduciary holding
securities under any employee benefit plan of the Company or of any
subsidiary of the Company, or (iii) a corporation owned, directly or
indirectly, by the stockholders of the Company in substantially the same
proportions as their ownership of securities of the Company.
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(d) POTENTIAL CHANGE OF CONTROL. For purposes of this Agreement,
"Potential Change of Control" means:
(i) a Person shall commence a tender offer, which if successfully
consummated, would result in such Person being the Beneficial Owner
of the greater of: (A) the percentage of outstanding stock of the
Company owned by The Hartford at the time of such commencement, or
(B) 15% or more of the voting securities of the Company;
(ii) the Company shall enter into an agreement, the consummation of
which shall constitute a Change of Control;
(iii) proxies for the election of directors of the Company shall be
solicited by anyone other than the Company;
(iv) a Potential Change of Control as defined in any of the
foregoing clauses (i), (ii) or (iii) occurs with respect to The
Hartford at a time when The Hartford owns more than 50% of the
combined voting power and the value of the capital stock of the
Company; or
(V) any other event shall occur which is deemed to be a Potential
Change of Control by the relevant Board or the appropriate committee
thereof.
3. EMPLOYMENT PERIOD.
Subject to Section 7 of this Agreement, the Company agrees to continue Executive
in its employ, and Executive agrees to remain in the employ of the Company, for
the period commencing on the Effective Date and ending on the third anniversary
of the date on which a Change of Control occurs (the "Employment Period").
Notwithstanding the foregoing, if, prior to the Effective Date, Executive is
demoted to a position lower than the position held by Executive as of the date
first above written, or is otherwise determined by the chairman of the Company
(the "Chairman") prior to the Effective Date to hold a position inappropriate
for coverage under this Agreement, this Agreement shall be void and without
effect, unless the Board, any appropriate committee thereof, or the Chairman
declares that this Agreement shall continue in effect by written notice
delivered to Executive within 60 days following such demotion, placement or
determination.
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4. POSITION AND DUTIES.
(a) NO REDUCTION IN POSITION. During the Employment Period, Executive's
position (including titles), authority and responsibilities shall be at
least commensurate with those held, exercised and assigned immediately
prior to the Effective Date. It is understood that, for purposes of this
Agreement, such position, authority and responsibilities shall not be
regarded as not commensurate merely by virtue of the fact that a successor
shall have acquired all or substantially all of the business and/or assets
of the Company as contemplated by Section 11(d) of this Agreement.
(b) BUSINESS TIME. On and after the Effective Date, Executive agrees to
devote full attention during normal business hours to the business and
affairs of the Company and to use best efforts to perform faithfully and
efficiently the responsibilities assigned to Executive hereunder, to the
extent necessary to discharge such responsibilities, except for (i) time
spent (A) serving on the board of directors of any business corporation
with the consent of the Board, the appropriate committee of the Board, or
the Chairman, (B) serving on the board of, or working for, any charitable
or community organization (with the consent of the Board or the Chairman
if any such service or work is to be performed during normal business
hours), or (C) pursuing Executive's personal financial and legal affairs,
so long as the foregoing activities, individually or collectively, do not
substantially interfere with the performance of Executive's
responsibilities hereunder or violate any of the provisions of Section 10
hereof, and (ii) periods of vacation, sick leave or other leave to which
Executive is entitled under the programs and policies of the Company that
apply to similarly situated executives. It is expressly understood and
agreed that Executive's continuing to serve on any boards and committees
on which Executive is serving or with which Executive is otherwise
associated immediately preceding the Effective Date shall not be deemed to
interfere substantially with the performance of Executive's
responsibilities hereunder.
5. COMPENSATION.
(a) BASE SALARY. During the Employment Period, the Company shall pay
Executive a base salary at an annual rate no less than the annual rate in
effect immediately prior to the Effective Date. Such base salary shall be
reviewed at least once during each calendar year of the Employment Period,
and may be in-
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creased at any time and from time to time by action of the Board or the
appropriate committee thereof or any individual having authority to take
such action in accordance with the Company's regular practices, but shall
not be reduced below the annual rate in effect immediately prior to the
Effective Date. Executive's base salary, as it may be increased from time
to time, shall be referred to herein as "Base Salary." Neither the Base
Salary nor any increase in Base Salary after the Effective Date shall
serve to limit or reduce any obligation of the Company hereunder.
(b) ANNUAL BONUS. For each calendar year ending during the Employment
Period, Executive shall have the opportunity to earn and receive an annual
bonus, based on the achievement of target levels of performance, equal to
no less than the percentage of Executive's Base Salary used to calculate
such bonus immediately prior to the Effective Date. Executive's annual
bonus opportunity, as it may be increased from time to time during the
Employment Period, shall be referred to herein as "Target Bonus." The
actual bonus, if any, payable for any calendar year during the Employment
Period shall be determined in accordance with the terms of the Company's
Annual Executive Bonus Program or any successor annual incentive plan (the
"Annual Plan") based upon the performance of the Company and/or its
applicable affiliates and/or Executive against target objectives
established under such Annual Plan. Subject to Executive's election to
defer all or a portion of any annual bonus payable hereunder pursuant to
the terms of any deferred compensation or savings plan or arrangement
maintained or established by the Company or its affiliates and made
available to Executive, any annual bonus payable under this Section 5(b)
shall be paid to Executive in accordance with the terms of the Annual
Plan.
(c) LONG-TERM INCENTIVE COMPENSATION. During the Employment Period,
Executive shall participate in all of the Company's existing and future
long-term incentive compensation programs for key executives at a level
commensurate with Executive's participation in such programs immediately
prior to the Effective Date, or, if more favorable to the Executive, at
the level made available to Executive or other similarly situated
executives at any time thereafter.
6. BENEFITS, PERQUISITES AND EXPENSES.
(a) BENEFITS. During the Employment Period, Executive (and, to the extent
applicable, his or her dependents) shall be entitled to participate in or
be
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covered under (i) each welfare benefit plan maintained or as hereafter
amended or established by the Company or its applicable affiliates,
including, without limitation, each group life, hospitalization, medical,
dental, health, accident or disability insurance or similar plan or
program thereof, and (ii) each pension, retirement, savings, deferred
compensation, stock purchase or other similar plan or program maintained
or as hereafter amended or established by the Company or its applicable
affiliates, in each case at a level commensurate with the Executive's
participation in such plans or programs immediately prior to the Effective
Date, or, if more favorable to the Executive, at the level made available
to Executive or other similarly situated executives at any time
thereafter.
(b) PERQUISITES. For each calendar year during the Employment Period,
Executive shall be entitled to no less than the number of paid vacation
days per year that Executive was entitled to immediately prior to the
Effective Date, and shall also be entitled to receive such other
perquisites commensurate with those generally provided to Executive
immediately prior to the Effective Date, or, if more favorable to the
Executive, at the level made available from time to time to Executive or
other similarly situated executives at any time thereafter.
(c) BUSINESS EXPENSES. During the Employment Period, the Company shall pay
or reimburse Executive for all reasonable business expenses incurred or
paid by Executive in the performance of Executive's duties, upon
presentation of expense statements or vouchers and such other information
as the Company may require and in accordance with the generally applicable
policies and procedures of the Company as in effect immediately prior to
the Effective Date, or, if more favorable to the Executive, in accordance
with the policies and procedures in effect at any time thereafter.
(d) OFFICE AND SUPPORT STAFF. During the Employment Period, Executive
shall be entitled to an office with furnishings and other material
appointments, and to secretarial and other assistance, at a level
commensurate with the foregoing provided immediately prior to the
Effective Date, or, if more favorable to the Executive, in accordance with
the policies and procedures in effect at any time thereafter.
(e) INDEMNIFICATION. The Company shall indemnify Executive and hold
Executive harmless from and against any claim, loss or cause of action,
regardless whether asserted during or after the Employment Period, arising
from or out of Executive's performance as an officer, director or employee
of
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the Company or any of its affiliates or in any other capacity, including
any fiduciary capacity, in which Executive serves at the request of the
Company, to the maximum extent permitted by applicable law and under the
Certificate of Incorporation and By-Laws of the Company, as may be amended
from time to time (the "Governing Documents"), provided that in no event
shall the protection afforded to Executive be less than that afforded
under the Governing Documents as in effect immediately prior to the
Effective Date.
7. EARLY TERMINATION OF THE EMPLOYMENT PERIOD.
(a) TERMINATION. Notwithstanding Section 3 hereof, the Employment Period
shall end upon the earliest to occur of (i) a Termination For Cause, (ii)
a Termination Without Cause, (iii) a Termination For Good Reason, (iv) a
Voluntary Termination, (v) a Termination Due to Retirement, (vi) a
Termination Due to Disability, or (vii) a Termination Due to Death.
(b) NOTICE OF TERMINATION. Communication of termination of the Employment
Period shall be made to the other party by Notice of Termination (as
defined in this Section 7) in the case of (i) a Termination For Cause,
(ii) a Termination Without Cause, (iii) a Termination For Good Reason, or
(iv) a Voluntary Termination.
(c) BENEFITS PAYABLE UPON TERMINATION; RULES FOR DETERMINING REASON FOR
TERMINATION.
(i) BENEFITS PAYABLE UPON TERMINATION. Following the end of the
Employment Period, Executive (or in the event of the Executive's
death, his or her surviving spouse, if any, or if none, his or her
estate) shall be paid the type or types of compensation determined
to be payable in accordance with the following table, such payment
to be made in the form specified in such table and at the time
established pursuant to Section 8 hereof. Capitalized terms used in
such table shall have the meanings set forth in Section 7(d) hereof.
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(ii) RULES FOR DETERMINING REASON FOR TERMINATION.
(A) No Termination Without Cause or Termination For Good
Reason shall be treated as a Termination Due to Retirement or
a Termination Due to Disability for purposes of any Pro Rata
Target Bonus, Severance Payment, Equity Awards or Vested
Benefits Enhancement, notwithstanding the fact that, either
on, before or after the Date of Termination with respect
thereto, (I) Executive was eligible for Retirement as defined
in The Hartford Investment and Savings Plan, as may be amended
from time to time, or any successor plan thereof (the "Savings
Plan"), (II) Executive requested to be treated as a retiree
for purposes of the Savings Plan or any other plan or program
of the Company or its affiliates, or (III) Executive or the
Company could have terminated Executive's employment in a
Termination Due to Disability hereunder.
(B) No Termination Due to Retirement shall be treated as a
Voluntary Termination.
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BENEFITS PAYABLE
<TABLE>
<CAPTION>
Accrued Pro Rata Severance Equity Awards Vested Benefits Vested Welfare
BENEFIT Salary Target Bonus Payment Benefits Benefits
Enhancement Continuation
==============================================================================================================
FORM OF Lump Lump Sum Lump Determined Under Determined Lump Sum Determined
PAYMENT Sum Sum the Applicable Under the Under the
Plan Applicable Plan Applicable
Plan
==============================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Termination Payable Not Payable Not Determined Determined Not Payable Not
For Cause Payable Under the Under the Available
Applicable Plan Applicable Plan
- --------------------------------------------------------------------------------------------------------------
Termination Payable Payable Payable Determined Determined Payable Available
Without Under the Under the
Cause Applicable Plan Applicable Plan
- --------------------------------------------------------------------------------------------------------------
Termination Payable Payable Payable Determined Determined Payable Available
For Good Under the Under the
Reason Applicable Plan Applicable Plan
- --------------------------------------------------------------------------------------------------------------
Voluntary Payable Not Payable Not Determined Determined Not Payable Not
Termination Payable Under the Under the Available
Applicable Plan Applicable Plan
- --------------------------------------------------------------------------------------------------------------
Termination Payable Determined Not Determined Determined Not Payable Available
Due to Under the Payable Under the Under the
Retirement Applicable Applicable Plan Applicable Plan
Plan
- --------------------------------------------------------------------------------------------------------------
Termination Payable Payable Not Determined Determined Not Payable Available
Due to Payable Under the Under the
Disability Applicable Plan Applicable Plan
- --------------------------------------------------------------------------------------------------------------
Termination Payable Payable Not Determined Determined Not Payable Not
Due to Payable Under the Under the Available
Death Applicable Plan Applicable Plan
- --------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 12
(d) DEFINITIONS. For purposes of this Agreement, the following capitalized terms
used herein shall have the following meanings:
"ACCRUED SALARY" means Base Salary earned, but unpaid, for services
rendered to the Company on or prior to the Date of Termination (other than
Base Salary deferred pursuant to Executive's election, as contemplated by
Section 5(b) hereof), plus any vacation pay accrued by Executive as of
such date.
"AVAILABLE" means that a particular benefit shall be made available to
Executive to the extent specifically provided herein or required by
applicable law.
"DATE OF TERMINATION" means (i) in the case of a termination for which a
Notice of Termination is required, the date of receipt of such Notice of
Termination or, if later, the date specified therein, as the case may be,
or (ii) in all other cases, the actual date on which Executive's
employment terminates during the Employment Period.
"DETERMINED UNDER THE APPLICABLE PLAN" means that the determination of
whether a particular benefit shall or shall not be paid to Executive, and,
where specifically provided by this Agreement, the timing or form of any
benefit payment, shall be made solely by application of the terms of the
plan or program providing such benefit, except to the extent that the
terms of such plan or program are expressly superseded or modified by this
Agreement.
"EQUITY AWARDS" means the outstanding stock option, restricted stock,
performance share and other equity or long-term incentive compensation
awards, if any, held by Executive as of the Date of Termination.
"ERPs" means any excess retirement plans maintained or as hereafter
amended or established by the Company or its applicable affiliates.
"ESPS" means any excess investment and savings plans maintained or as
hereafter amended or established by the Company or its applicable
affiliates.
"LUMP SUM" means a single lump sum cash payment.
"NOT AVAILABLE" means that the particular benefit shall not be made
available to Executive, except to the extent required by applicable law.
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<PAGE> 13
"NOT PAYABLE" means that the particular benefit shall not be paid or
otherwise provided to Executive.
"NOTICE OF TERMINATION" means (i) in the case of a Termination For Cause,
a written notice given by the Company to Executive, within 30 calendar
days of the Company's having actual knowledge of the events giving rise to
such Termination For Cause, (ii) in the case of a Termination Without
Cause, a written notice given by the Company to Executive at least 30
calendar days before the effective date of such Termination Without Cause,
(iii) in the case of a Termination For Good Reason, a written notice given
by Executive to the Company within 180 days of Executive's having actual
knowledge of the events giving rise to such Termination For Good Reason,
and which (A) indicates the specific termination provision in this
Agreement relied upon, (B) sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the
Executive's employment under the provision so indicated, and (C) if the
applicable Date of Termination is other than the date of receipt of such
notice, specifies such Date of Termination (which date shall be not more
than 15 days after the giving of such notice), provided that the failure
by Executive to set forth in such Notice of Termination any fact or
circumstance that contributes to a showing of Good Reason shall not waive
any right of Executive hereunder or preclude Executive from asserting such
fact or circumstance in enforcing his or her rights hereunder, and (iv) in
the case of a Voluntary Termination, a written notice given by Executive
to the Company at least 30 calendar days before the Date of Termination
specified therein.
"PAYABLE" means that a particular benefit shall be paid to Executive in
the amount, at the time, and in the form specified herein.
"PRO-RATA TARGET BONUS" means an amount equal to the product of: (i)
Executive's Target Bonus under Section 5(b) for the calendar year in which
the Date of Termination occurs, multiplied by (ii) a fraction (the
"Service Fraction"), the numerator of which is equal to the number of
rounded months in such calendar year which have elapsed as of such Date of
Termination, and the denominator of which is 12; provided that, if the
Date of Termination occurs in the last quarter of any calendar year,
Pro-Rata Target Bonus shall mean the amount determined under the above
formula or, if greater, the product of: (A) the bonus that would have been
paid to Executive based on actual performance for such calendar year, and
(B) the Service Fraction.
13
<PAGE> 14
"SEVERANCE PAYMENT" means a cash amount equal to two times the sum of: (i)
Executive's Base Salary at the rate in effect as of the Date of
Termination, and (ii) Executive's Target Bonus amount under Section 5(b)
hereof for the calendar year in which the Date of Termination occurs.
"TERMINATION DUE TO DEATH" means a termination of Executive's employment
due to the death of Executive.
"TERMINATION DUE TO DISABILITY" means: (i) a termination of Executive's
employment by the Company as a result of a determination by the Board, the
appropriate committee thereof or the Chairman that Executive has been
incapable of substantially fulfilling the positions, duties,
responsibilities and obligations set forth in this Agreement on account of
physical, mental or emotional incapacity resulting from injury, sickness
or disease for a period of (A) at least four consecutive months, or (B)
more than six months in any twelve month period, or (ii) Executive's
termination of employment on account of Disability as defined in the
Savings Plan.
"TERMINATION DUE TO RETIREMENT" means Executive's termination of
employment on account of Executive's Retirement as defined in the Savings
Plan.
"TERMINATION FOR CAUSE" means the Company's termination of Executive's
employment due to (i) Executive's conviction of a felony; (ii) an act or
acts of extreme dishonesty or gross misconduct on Executive's part which
result or are intended to result in material damage to the Company's
business or reputation; or (iii) repeated material violations by Executive
of his or her obligations under Section 4 of this Agreement, which
violations are demonstrably willful and deliberate on the Executive's part
and which result in material damage to the Company's business or
reputation.
"TERMINATION FOR GOOD REASON" means the occurrence of any of the following
after the occurrence of a Potential Change of Control or a Change of
Control:
(i) (A) the assignment to Executive of any duties inconsistent in
any material adverse respect with Executive's position, duties,
authority or responsibilities as contemplated by Section 4 of this
Agreement, or (B) any other material adverse change in such
position, including titles, duties, authority or responsibilities;
14
<PAGE> 15
(ii) any failure by the Company to comply with any of the provisions
of Sections 5 and 6 of this Agreement at a level of least equal to
that in effect immediately preceding such Change of Control or
Potential Change of Control, other than an insubstantial or
inadvertent failure remedied by the Company promptly after receipt
of notice thereof given by Executive;
(iii) the Company's requiring Executive to be based at any office or
location more than 25 miles from the location at which Executive
performed the services specified under Section 4 hereof immediately
prior to such Change of Control or Potential Change of Control,
except for travel reasonably required in the performance of
Executive's responsibilities;
(iv) any failure by the Company to obtain the assumption and
agreement to perform this Agreement by a successor as contemplated
by Section 11(d); or
(v) any attempt by the Company to terminate Executive's employment
in a Termination For Cause that is determined in a proceeding
pursuant to Section 10 or Section 11 hereof not to constitute a
Termination For Cause.
Notwithstanding the foregoing, a termination of Executive's employment
shall not be treated as a Termination For Good Reason (I) if Executive
shall have consented in writing to the occurrence of the event giving rise
to the claim of Termination For Good Reason, or (II) if Executive shall
have delivered a Notice of Termination to the Company, and the facts and
circumstances specified therein as providing a basis for such Termination
For Good Reason are cured by the Company within 10 days of its receipt of
such Notice of Termination.
"TERMINATION WITHOUT CAUSE" means any involuntary termination of
Executive's employment by the Company, other than a Termination For Cause,
a Termination Due to Disability by the Company or a Termination Due to
Death.
"VESTED BENEFITS" means amounts that are vested or that Executive is
otherwise entitled to receive, without the performance by Executive of
further services or the resolution of a contingency, under the terms of or
in accordance with any investment and savings plan or retirement plan
(including any plan providing retiree medical benefits) of the Company or
its affiliates,
15
<PAGE> 16
and any ERPs or ESPs related thereto, and any deferred compensation or
employee stock purchase plan or similar plan or program of the Company or
its affiliates.
"VESTED BENEFITS ENHANCEMENT" means (i) a cash amount equal to the present
value, calculated using a discount rate equal to the then prevailing
applicable Federal rate as determined under Section 1274(d) of the
Internal Revenue Code of 1986, as amended (the "Code"), of the additional
retirement benefits that would have been payable or available to Executive
under any ERPs, based on (A) the age and service Executive would have
attained or completed had Executive continued in the Company's employ
until the second anniversary of the Date of Termination, and (B) where
compensation is a relevant factor, Executive's pensionable compensation as
of such Date of Termination, such compensation to include, on the same
terms as apply to other executives, any Severance Payment made to
Executive, and (ii) solely for purposes of vesting in any benefits under
any ESPs, Executive shall be treated as having continued in the Company's
employ until the second anniversary of such Date of Termination.
"VOLUNTARY TERMINATION" means any voluntary termination of Executive's
employment by Executive, other than a Termination For Good Reason, a
Termination Due to Retirement, or a Termination Due to Disability by
Executive.
"WELFARE BENEFITS CONTINUATION" means that until the second anniversary of
the Date of Termination, Executive and, if applicable, his or her
dependents, shall be entitled to continue participation in the life and
health insurance benefit plans of the Company or its affiliates in which
Executive and/or such dependents were participating as of the Date of
Termination, and such other welfare benefit plans thereof in which the
Company is required by law to permit the participation of Executive and/or
his dependents, (collectively, the "Welfare Benefit Plans"). Such
participation shall be on the same terms and conditions (including the
requirement that Executive pay any premiums generally paid by an employee)
as would apply if Executive were still in the employ of the Company;
provided that the continued participation of Executive and/or the
dependents of Executive in such Welfare Benefit Plans shall cease on such
earlier date as Executive may become eligible for comparable welfare
benefits provided by a subsequent employer. To the extent that Welfare
Benefits Continuation cannot be provided under the terms of the applicable
plan, policy or program, the Company shall provide a comparable benefit
under another plan or from the Company's general assets.
16
<PAGE> 17
(d) OUT-PLACEMENT SERVICES. If the Employment Period terminates because of a
Termination Without Cause or a Termination For Good Reason, Executive shall be
entitled to out-placement services, provided by the Company or its designee at
the Company's expense, for 12 months following the Date of Termination, or such
lesser period as the Executive may require such services.
(e) CERTAIN FURTHER PAYMENTS BY COMPANY.
(i) TAX REIMBURSEMENT PAYMENT. In the event that any amount or benefit
paid or distributed to Executive pursuant to this Agreement, taken
together with any amounts or benefits otherwise paid or distributed to
Executive by the Company or any affiliate (collectively, the "Covered
Payments"), are or become subject to the tax (the "Excise Tax") imposed
under Section 4999 of the Code, or any similar tax that may hereafter be
imposed, the Company shall pay to Executive at the time specified in this
Section an additional amount (the "Tax Reimbursement Payment") such that
the net amount retained by the Executive with respect to such Covered
Payments, after deduction of any Excise Tax on the Covered Payments and
any Federal, state and local income tax and other tax on the Tax
Reimbursement Payment provided for by this Section, but before deduction
for any Federal, state or local income or employment tax withholding on
such Covered Payments, shall be equal to the amount of the Covered
Payments.
(ii) APPLICABLE RULES. For purposes of determining whether any of the
Covered Payments will be subject to the Excise Tax and the amount of such
Excise Tax:
(A) Such Covered Payments shall be treated as "parachute payments"
within the meaning of Section 280G of the Code, and all "parachute
payments" in excess of the "base amount" (as defined under Section
280G(b)(3) of the Code) shall be treated as subject to the Excise
Tax, unless, and except to the extent that, in the good faith
judgment of the Company's independent certified public accountants
appointed prior to the Effective Date or tax counsel selected by
such accountants (the "Accountants"), the Company has a reasonable
basis to conclude that such Covered Payments (in whole or in part)
either do not constitute "parachute payments" or represent
reasonable compensation for personal services actually rendered
(within the meaning of Section 280G(b)(4)(B) of the Code) in excess
of the "base amount," or such "parachute payments" are otherwise not
subject to such Excise Tax, and
17
<PAGE> 18
(B) The value of any non-cash benefits or any deferred payment or
benefit shall be determined by the Accountants in accordance with
the principles of Section 280G of the Code.
(iii) ADDITIONAL RULES. For purposes of determining the amount of the Tax
Reimbursement Payment, the Executive shall be deemed to pay: (A) Federal
income taxes at the highest applicable marginal rate of Federal income
taxation for the calendar year in which the Tax Reimbursement Payment is
to be made, and (B) any applicable state and local income and other taxes
at the highest applicable marginal rate of taxation for the calendar year
in which the Tax Reimbursement Payment is to be made, net of the maximum
reduction in Federal incomes taxes which could be obtained from the
deduction of such state or local taxes if paid in such year.
(iv) REPAYMENT OR ADDITIONAL PAYMENT IN CERTAIN CIRCUMSTANCES.
(A) REPAYMENT. In the event that the Excise Tax is subsequently
determined by the Accountants or pursuant to any proceeding or
negotiations with the Internal Revenue Service to be less than the
amount taken into account hereunder in calculating the Tax
Reimbursement Payment made, Executive shall repay to the Company, at
the time that the amount of such reduction in the Excise Tax is
finally determined, the portion of such prior Tax Reimbursement
Payment that would not have been paid if such lesser Excise Tax had
been applied in initially calculating such Tax Reimbursement
Payment, plus interest on the amount of such repayment at the rate
provided in Section 1274(b)(2)(B) of the Code. Notwithstanding the
foregoing, in the event any portion of the Tax Reimbursement Payment
to be repaid to the Company has been paid to any Federal, state or
local tax authority, repayment thereof shall not be required until
actual refund or credit of such portion has been made to Executive
by the applicable tax authority, and interest payable to the Company
shall not exceed interest received or credited to the Executive by
such tax authority for the period it held such portion. Executive
and the Company shall mutually agree upon the course of action to be
pursued (and the method of allocating the expenses thereof) if
Executive's good faith claim for refund or credit is denied.
(B) ADDITIONAL TAX REIMBURSEMENT PAYMENT. In the event that the
Excise Tax is later determined by the Accountants or pursuant to any
proceeding or negotiations with the Internal Revenue Service to
exceed
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<PAGE> 19
the amount taken into account hereunder at the time the Tax
Reimbursement Payment is made (including, but not limited to, by
reason of any payment the existence or amount of which cannot be
determined at the time of the Tax Reimbursement Payment), the
Company shall make an additional Tax Reimbursement Payment in
respect of such excess (plus any interest or penalty payable with
respect to such excess) at the time that the amount of such excess
is finally determined.
(v) TIMING FOR TAX REIMBURSEMENT PAYMENT. The Tax Reimbursement Payment
(or portion thereof) provided for in this Section 7 shall be paid to
Executive not later than 10 business days following the payment of the
Covered Payments; provided, however, that if the amount of such Tax
Reimbursement Payment (or portion thereof) cannot be finally determined on
or before the date on which payment is due, the Company shall pay to
Executive by such date an amount estimated in good faith by the
Accountants to be the minimum amount of such Tax Reimbursement Payment and
shall pay the remainder of such Tax Reimbursement Payment (together with
interest at the rate provided in Section 1274(b)(2)(B) of the Code) as
soon as the amount thereof can be determined, but in no event later than
45 calendar days after payment of the related Covered Payment. In the
event that the amount of the estimated Tax Reimbursement Payment exceeds
the amount subsequently determined to have been due, such excess shall
constitute a loan by the Company to Executive, payable on the fifth
business day after written demand by the Company for payment (together
with interest at the rate provided in Section 1274(b)(2)(B) of the Code).
8. TIMING OF PAYMENTS.
Accrued Salary, Severance Payments and Vested Benefits Enhancements shall be
paid no later than 10 days following the Date of Termination. Pro-Rata Target
Bonus shall be paid no later than the same time as similar awards are paid to
other executives participating in the plans or programs under which the awards
are paid. Vested Benefits and Equity Awards shall be paid no later than the time
for payment Determined Under the Applicable Plan except as otherwise expressly
superseded or modified by this Agreement. Tax Reimbursement Payments shall be
paid at the time specified in Section 7 hereof.
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<PAGE> 20
9. FULL DISCHARGE OF COMPANY OBLIGATIONS.
Except as expressly provided in the last sentence of this Section 9, the amounts
payable to Executive pursuant to Section 7 following the Date of Termination
(including amounts payable with respect to Vested Benefits) shall be in full and
complete satisfaction of Executive's rights under this Agreement and any other
claims that Executive may have in respect of employment by the Company or any of
its affiliates. Such amounts shall constitute liquidated damages with respect to
any and all such rights and claims and, upon Executive's receipt of such
amounts, the Company shall be released and discharged from any and all liability
to Executive in connection with this Agreement or otherwise in connection with
Executive's employment with the Company and its affiliates. Nothing in this
Section 9 shall be construed to release the Company from its obligation to
indemnify Executive as provided in Section 6(e) hereof.
10. NONCOMPETITION, CONFIDENTIALITY AND OTHER COVENANTS. By and in
consideration of the compensation and benefits to be provided by the Company
hereunder, including the severance arrangements set forth herein, Executive
agrees to the following:
(a) NONCOMPETITION. During the Employment Period, Executive shall not
become associated with any entity, whether as a principal, partner,
employee, agent, consultant, shareholder (other than as a holder, or a
member of a group which is a holder, of not in excess of 1% of the
outstanding voting shares of any publicly traded company) or in any other
relationship or capacity, paid or unpaid, that is actively engaged in any
geographic area in any business which is in competition with the business
of the Company.
(b) CONFIDENTIALITY. Without the prior written consent of the Company,
except to the extent required by an order of a court having competent
jurisdiction or under subpoena from an appropriate government agency,
Executive shall not disclose to any third person, or permit the use of for
the benefit of any person or any entity other than The Company or its
affiliates, any trade secrets, customer lists, information regarding
product development, marketing plans, sales plans, management organization
information (including data and other information relating to members of
the Board and management), operating policies or manuals, business plans,
financial records, or other financial, organizational, commercial,
business, sales, marketing, technical, product or employee information
relating to the Company or its affiliates or information designated as
confidential, proprietary, and/or a trade secret, or any other information
relating to the Company or its affiliates that Executive knows from the
circumstances, in
20
<PAGE> 21
good faith and good conscience, should be treated as confidential, or any
information that the Company or its affiliates may receive belonging to
customers, agents or others who do business with the Company or its
affiliates, except to the extent that any such information previously has
been disclosed to the public by the Company or is in the public domain
(other than by reason of Executive's violation of this Section 10(b)).
(c) NON-SOLICITATION OF EMPLOYEES. During the Employment Period, Executive
shall not directly or indirectly solicit, encourage or induce any employee
of the Company or its affiliates to terminate employment with such entity,
and shall not directly or indirectly, either individually or as owner,
agent, employee, consultant or otherwise, employ or offer employment to
any person who is or was employed by the Company or an affiliate thereof
unless such person shall have ceased to be employed by such entity for a
period of at least six months.
(d) COMPANY PROPERTY. Except as expressly provided herein, promptly
following any termination of the Employment Period, Executive shall return
to the Company all property of the Company, and all copies thereof in
Executive's possession or under his control.
(e) INJUNCTIVE RELIEF AND OTHER REMEDIES WITH RESPECT TO COVENANTS.
Executive acknowledges and agrees that the covenants and obligations of
Executive with respect to noncompetition, confidentiality,
nonsolicitation, and Company property relate to special, unique and
extraordinary matters and that a violation of any of the terms of such
covenants and obligations will cause the Company irreparable injury for
which adequate remedies are not available at law. Therefore, Executive
agrees that the Company shall be entitled to an injunction, restraining
order or such other equitable relief (without the requirement to post
bond) restraining Executive from committing any violation of the covenants
and obligations contained in this Section 10. These remedies are
cumulative and are in addition to any other rights and remedies the
Company may have at law or in equity.
11. MISCELLANEOUS.
(a) SURVIVAL. All of the provisions of Sections 7 (relating to termination
of the Employment Period following a Change of Control or a Potential
Change of Control), 10 (relating to noncompetition, confidentiality,
nonsolicitation and
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<PAGE> 22
Company property), 11(b) (relating to arbitration), 11(c) (relating to
legal fees) and 11(n) (relating to governing law) of this Agreement shall
survive the termination of this Agreement.
(b) ARBITRATION. Except as provided in Section 10, any dispute or
controversy arising under or in connection with this Agreement shall be
resolved by binding arbitration. Such arbitration shall be held in the
city of Hartford, Connecticut and except to the extent inconsistent with
this Agreement, shall be conducted in accordance with the Commercial
Arbitration Rules of the American Arbitration Association in effect at the
time of the arbitration, and otherwise in accordance with the principles
that would be applied by a court of law or equity. The arbitrator shall be
acceptable to both the Company and Executive. If the parties cannot agree
on an acceptable arbitrator, the dispute or controversy shall be heard by
a panel of three arbitrators; one appointed by each of the parties and the
third appointed by the other two arbitrators. The Company and Executive
further agree that they will abide by and perform any award or awards
rendered by the arbitrators and that a judgment may be entered on any
award or awards rendered by any state or federal court having jurisdiction
over the Company or Executive or any of their respective property.
(c) LEGAL FEES AND EXPENSES. In any contest (whether initiated by
Executive or by the Company) as to the validity, enforceability or
interpretation of any provision of this Agreement, the Company shall pay
Executive's legal expenses (or cause such expenses to be paid) including,
without limitation, Executive's reasonable attorney's fees, on a quarterly
basis, upon presentation of proof of such expenses in a form acceptable to
the Company, provided that Executive shall reimburse the Company for such
amounts, plus simple interest thereon at the 90-day United States Treasury
Bill rate as in effect from time to time, compounded annually, if
Executive shall not prevail, in whole or in part, as to any material issue
as to the validity, enforceability or interpretation of any provision of
this Agreement.
(d) SUCCESSORS; BINDING EFFECT. This Agreement shall inure to the benefit
of and be binding upon the Company and its successors. The Company shall
require any successor to all or substantially all of the business and/or
assets of the Company, whether direct or indirect, by purchase, merger,
consolidation, acquisition of stock, or otherwise, by an agreement in form
and substance satisfactory to Executive, expressly to assume and agree to
perform this Agreement in the same manner and to the same extent as the
Company would be required to perform the Agreement if no such succession
had taken place. This
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<PAGE> 23
Agreement is personal to the Executive and, without the prior written
consent of the Company, shall not be assignable by Executive otherwise
than by will or the law of descent and distribution. This Agreement shall
inure to the benefit of and be enforceable by Executive's legal
representatives.
(e) ASSIGNMENT. Except as provided in Section 11(d), neither this
Agreement nor any of the rights or obligations hereunder shall be assigned
or delegated by any party hereto without the prior written consent of the
other party.
(f) ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties hereto with respect to the matters referred to herein.
This Agreement supersedes and replaces any prior or subsequent severance
plan or arrangement that otherwise would apply to Executive following a
Change of Control or a Potential Change of Control. No other agreement
relating to the terms of Executive's employment by the Company, oral or
otherwise, shall be binding between the parties unless it is in writing
and signed by the party against whom enforcement is sought. There are no
promises, representations, inducements or statements between the parties
other than those that are expressly contained herein. Executive
acknowledges that he or she is entering into this Agreement of his or her
own free will and accord, and with no duress, and that he or she has read
this Agreement and that he or she understands it and its legal
consequences.
(g) SEVERABILITY; REFORMATION. In the event that one or more of the
provisions of this Agreement shall become invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of
the remaining provisions contained herein shall not be affected thereby.
In the event of a determination that any of the provisions of Section
10(a), Section 10(b) or Section 10(c) are not enforce able in accordance
with their terms, Executive and the Company agree that such Sections shall
be reformed to make such Sections enforceable in a manner that provides
the Company the maximum rights permitted at law.
(h) WAIVER. Waiver by any party hereto of any breach or default by the
other party of any of the terms of this Agreement shall not operate as a
waiver of any other breach or default, whether similar to or different
from the breach or default waived. No waiver of any provision of this
Agreement shall be implied from any course of dealing between the parties
hereto or from any failure by either party hereto to assert its or his or
her rights hereunder on any occasion or series of occasions.
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<PAGE> 24
(i) NOTICES. Any notice required or desired to be delivered under this
Agreement shall be in writing and shall be delivered personally, by
courier service, by registered mail, return receipt requested, or by
telecopy and shall be effective upon actual receipt by the party to which
such notice shall be directed, and shall be addressed as follows (or to
such other address as the party entitled to notice shall hereafter
designate in accordance with the terms hereof):
If to the Company: Hartford Life, Inc.
Law Department
200 Hopmeadow Street
Simsbury, CT 06089
Attention: General Counsel
And: The Hartford Financial Services Group, Inc.
Law Department, HO-1-09
Hartford Plaza
690 Asylum Avenue
Hartford, CT 06115
Attention: Corporate Secretary
With a copy to: Debevoise & Plimpton
875 Third Avenue
New York, NY 10022
Attn: Lawrence K. Cagney, Esq.
If to Executive: The home address of Executive
shown on the records of the Company
(j) AMENDMENTS. This Agreement may not be altered, modified or amended
except by a written instrument signed by each of the parties hereto.
(k) HEADINGS. Except as expressly provided herein, headings to provisions
of this Agreement are for the convenience of the parties only and are not
intended to be part of or to affect the meaning or interpretation hereof.
(l) COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be deemed an original but all of which together shall
constitute one and the same instrument.
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(m) WITHHOLDING. Any payments provided for herein shall be reduced by any
amounts required to be withheld by the Company from time to time under
applicable Federal, State or local income or employment tax laws or
similar statutes or other provisions of law then in effect.
(n) GOVERNING LAW. This Agreement shall be governed by the laws of the
State of Connecticut, without reference to principles of conflicts or
choice of law under which the law of any other jurisdiction would apply.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its duly authorized officer, and Executive has hereunto set his or
her hand, as of the day and year first above written.
HARTFORD LIFE, INC.
WITNESSED:
------------------------------------
By: Ramani Ayer
Title: Chairman
- ----------------------------
EXECUTIVE
WITNESSED:
-------------------------
Name:
- ----------------------------
25
<PAGE> 1
EXHIBIT 11
HARTFORD LIFE, INC. AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND EARNINGS
TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(In millions)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EARNINGS $ 480 $ 31 $ 226 $ 223 $ 201
ADD:
FIXED CHARGES
Interest expense 58 55 35 29 25
Interest factor attributable to rentals 9 9 8 8 8
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED CHARGES 67 64 43 37 33
- -----------------------------------------------------------------------------------------------------------------------------------
EARNINGS, AS DEFINED $ 547 $ 95 $ 269 $ 260 $ 234
- -----------------------------------------------------------------------------------------------------------------------------------
FIXED CHARGES
Fixed charges above $ 67 $ 64 $ 43 $ 37 $ 33
Dividends on subsidiary preferred stock - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED CHARGES AND PREFERRED DIVIDEND REQUIREMENTS $ 67 $ 64 $ 43 $ 37 $ 33
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS
Earnings, as defined, to total fixed charges (1) 8.2 1.5 6.3 7.0 7.1
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings, as defined, to total fixed charges and
preferred dividend requirements 8.2 1.5 6.3 7.0 7.1
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The 1996 earnings to total fixed charges ratio, excluding charges of
$348, before taxes, primarily related to the recognition of losses on
Closed Book GRC, was 6.9.
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF HARTFORD LIFE, INC.
<TABLE>
<CAPTION>
JURISDICTION NAMES UNDER
OF WHICH THE COMPANY
COMPANY NAME INCORPORATION DOES BUSINESS
- ------------ ------------- -------------
<S> <C> <C>
Alpine Life Insurance Company New Jersey "Alpine"
American Maturity Life Insurance Company (60%) Connecticut "AML"
AML Financial, Inc. Connecticut n/a
Brazilcap Capitalizacao S.A. (17%) Brazil n/a
CAB Corporation (50%) British Virgin Islands n/a
Claridad Administradora de Fondos de Jubilaciones y
Pensiones S.A.(24%) Argentina n/a
Consultora de Capitales S.A
Sociedad Gerente De Fondos Corriunes De Enversion (50%) Argentina n/a
Galicia Vida Compania de Seguros S.A. (40%) Argentina n/a
Hartford Advisers Fund, Inc. Maryland n/a
Hartford Bond Fund, Inc. Maryland n/a
Hartford Calma Company (50%) Florida n/a
Hartford Capital Appreciation Fund, Inc. Maryland n/a
Hartford Comprehensive Employee Benefit Service Company Connecticut "CEBSCO"
Hartford Dividend and Growth Fund, Inc. Maryland n/a
Hartford Equity Sales Company, Inc. Connecticut "HESCO"
Hartford Financial Services Corporation Delaware n/a
Hartford Financial Services Life Insurance Company Connecticut n/a
Hartford Index Fund, Inc. Maryland n/a
Hartford International Advisers Fund, Inc. Maryland n/a
Hartford International Opportunities Fund, Inc. Maryland n/a
Hartford Investment Financial Services Company Delaware n/a
Hartford Life and Accident Insurance Company Connecticut "HLA"
Hartford Life and Annuity Insurance Company Connecticut n/a
Hartford Life Insurance Company of Canada (98.6%) Canada n/a
Hartford Life Insurance Company Connecticut n/a
Hartford MidCap Fund, Inc. Maryland n/a
Hartford Mortgage Securities Fund, Inc. Maryland n/a
Hartford Securities Distribution Company, Inc. Connecticut n/a
Hartford Seguros de Vida (17%) Uruguay n/a
Hartford Small Company Fund, Inc. Maryland n/a
Hartford Stock Fund, Inc. Maryland n/a
H.L. Funding Company, Inc. Connecticut n/a
HL Investment Advisors, Inc. Connecticut n/a
HVA Money Market Fund, Inc. Maryland n/a
Icatu Hartford Administrcao de Beneficios Ltda Brazil n/a
Icatu Hartford Fundo de Pensao Brazil n/a
Icatu Hartford Capitalizacao S.A. (45%) Brazil n/a
Icatu Hartford Seguros S.A. (22.5%) Brazil n/a
Instituto de Salta Campana de Seguros de Vida S.A. (90%) Argentina n/a
International Corporate Marketing Group, Inc. (60%) Connecticut n/a
ITT Hartford Canada Holdings, Inc. Canada n/a
</TABLE>
<PAGE> 1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Hartford Life, Inc.:
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-K, into the Company's previously filed
Registration Statements File Nos.333-28805 and 333-28807,on Form S-8, and
333-21865 on Form S-3.
ARTHUR ANDERSEN LLP
Hartford, Connecticut
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 16,848
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 181
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 20,970
<CASH> 88
<RECOVER-REINSURE> 5,765
<DEFERRED-ACQUISITION> 3,361
<TOTAL-ASSETS> 100,980
<POLICY-LOSSES> 4,939
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 21,139
<POLICY-HOLDER-FUNDS> 69,362
<NOTES-PAYABLE> 700
0
0
<COMMON> 1
<OTHER-SE> 2,143
<TOTAL-LIABILITY-AND-EQUITY> 100,980
3,163
<INVESTMENT-INCOME> 1,536
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 0
<BENEFITS> 2,671
<UNDERWRITING-AMORTIZATION> 345
<UNDERWRITING-OTHER> 1,118
<INCOME-PRETAX> 480
<INCOME-TAX> 174
<INCOME-CONTINUING> 306
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 306
<EPS-PRIMARY> 2.28
<EPS-DILUTED> 2.28
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
