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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 (Fee Required)
For the fiscal year ended December 31, 1994
OR
[ ] Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 (No Fee Required)
For the transition period from ..........to............
Commission file number 2-89516
HARTFORD LIFE INSURANCE COMPANY
Incorporated in the State of Connecticut
06-0974148
(I.R.S. Employer
Identification Number)
P.O. Box 2999, Hartford, Connecticut 06104-2999
(Principal Executive Offices)
Telephone number (203) 843-6996
Securities registered pursuant to Section 12 (b) of the Act:
None
Securities registered pursuant to Section 12 (g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing requirements for the
past 90 days. Yes X No .
---- ----
As of February 24, 1995 there were outstanding 1,000 shares of Common Stock,
$5,690 par value per share, of the registrant, all of which were directly owned
by Hartford Life and Accident Insurance Company.
The registrant meets the conditions set forth in General Instruction J (1) (a)
and (b) of Form 10-K and is therefore filing this form with the reduced
disclosure format.
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HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT FOR 1994 ON FORM 10-K
TABLE OF CONTENTS
Item Page
---- ----
PART I 1 Business of Hartford Life**................................ 3
2 Properties** .............................................. 10
3 Legal Proceedings.......................................... 10
4 *
PART II 5 Market for Hartford Life's Common Stock and Related Stockholder
Matters ................................................... 11
6 *
7 Management's Narrative Analysis of Results of
Operations**............................................... 11
8 Consolidated Financial Statements and Supplementary Data... 11
9 Disagreements on Accounting and Financial Disclosure....... 12
PART III 10 *
11 *
12 *
13 *
PART IV 14 Exhibits, Financial Statements, Schedules and Reports on
Form 8-K .................................................. 12
Signatures ............................................... II-1
Exhibit Index ............................................ II-2
* Omitted pursuant to General Instruction J (2) of Form 10-K
** Item prepared in accordance with General Instruction J (2)
of Form 10-K
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PART I
ITEM 1. BUSINESS OF HARTFORD LIFE
A. ORGANIZATION
Hartford Life Insurance Company (the Company or HLIC) covers the insurance and
retirement needs of millions of Americans. HLIC has been among the fastest-
growing major life insurance companies in the United States for the past several
years as measured by assets. HLIC's total assets of $47.8 billion at December
31, 1994, include 28.1% of fixed maturities and 47.6% of separate accounts with
the remainder representing stocks, cash, mortgage loans, policy loans,
reinsurance recoverables and other assets. HLIC is engaged in a business that
is highly competitive because of the large number of stock and mutual life
insurance companies and other entities marketing insurance products. There are
approximately 2,000 stock, mutual, and other types of insurers in the life
insurance business in the United States. In the July 1994 edition of BEST'S
REVIEW, Life-Health Insurance magazine, HLIC ranked 14th among all life
insurance companies in the United States based upon total assets. AM Best
assigned HLIC its highest ranking classification, A++, as of December 31, 1993.
The Company was organized in 1902 and is incorporated under the laws of the
State of Connecticut. It is ultimately a wholly-owned subsidiary of Hartford
Fire Insurance (Hartford Fire) Company which is a subsidiary of ITT Hartford
Group, Inc., a wholly-owned subsidiary of ITT Corporation. HLIC is the parent
of ITT Hartford Life and Annuity Insurance Company (ILA), formerly ITT Life
Insurance Corporation, and ITT Hartford International Life Reassurance
Corporation (HLR), formerly American Skandia Life Reinsurance Corporation, which
was purchased in 1993.
The reportable segments and product groups of HLIC and its subsidiaries are:
INDIVIDUAL LIFE AND ANNUITIES
-Individual life
-Fixed and variable retirement annuities
ASSET MANAGEMENT SERVICES
-Group Pension Plans products and services
-Deferred Compensation Plans products and services
-Structured Settlements and lottery annuities
SPECIALTY
-Corporate Owned Life Insurance (COLI) and HLR
Additionally, the Company has an Employee Benefits segment (EBD) which markets
group life, group short and long term managed disability, stop loss and
supplementary medical coverage to employers and employer-sponsored plans. It
also offers voluntary AD&D, travel and special risk coverage primarily to
associations. EBD also offers disability underwriting administration and claims
processing services to other insurers and self-insured employer plans. These
products are sold through brokers, licensed agents and Third Party
Administrators through an internal sales force. The markets for group life and
disability are highly competitive based on price and quality of services. All
of this business is reinsured to HLIC's parent, Hartford Life and Accident
Insurance Company (HLA).
B. FINANCIAL DATA FOR INDUSTRY SEGMENTS
Revenue, income from continuing operations before income taxes and assets by
industry segment are set forth in Note 6 to the financial statements and are
incorporated herein by reference.
C. BRIEF DESCRIPTION OF BUSINESS SEGMENTS
The following is a description of HLIC's key products and services, distribution
methods, competition and certain other relative data for each of its industry
segments.
INDIVIDUAL LIFE AND ANNUITIES (ILAD)
HLIC is a leader in the annuity marketplace, selling both variable and fixed
products through a wide distribution of broker-dealers, financial and other
institutions. HLIC ranks number one in the individual variable annuities market
with a 9.6% share per VARDS (Variable Annuity Research and Data Service) at the
end of 1994, excluding Teachers Insurance Annuity Association and College
Retirement Equities Fund (TIAA and CREF). The individual annuity market is
highly competitive with insurance companies and other financial institutions
selling these products. Selection depends on fund performance, an array of fund
and product options, product design, credited rates and a company's financial
strength ratings.
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The Company earns fees for managing these assets and maintaining policyholders'
accounts. The HLIC policyholder has a variety of fund and product choices, some
of which are managed internally; however, most of the HLIC's investment funds
are managed by Wellington Management Company, Putnam or Dean Witter.
Sales reached $7.0 billion in 1994 bringing assets under management to $20.1
billion as of December 31, 1994. Of the total assets under management, $13.1
billion relate to variable annuities with $11.6 billion of these assets held in
separate accounts where the policyholder selects the investment vehicle and
bears the risk of asset performance, and $1.5 billion represents the fixed
option assets that are held in the general account. The remaining $7.0 billion
of the individual annuity assets under management are in guaranteed separate
accounts. The guaranteed separate account's products offer fixed rate
guarantees if held to maturity, but are market value adjusted, the majority of
which have no minimum guarantees should policyholders withdraw early. The
guaranteed rates, when held to maturity, range from 3% to 12% with durations
from one to ten years. These guarantees are supported by the general account of
HLIC. Deposits to these fixed and variable annuity accumulation accounts are
subject to withdrawal restrictions and to surrender charges which dissipate on a
sliding scale, usually within seven years. Fixed and variable annuity
policyholder reserves are held at account value. The minimum death benefit
associated with some 1994 annuity sales was reinsured to a third party.
Guaranteed contractholders' account balances are held at book value with amounts
held for deferred expenses.
Individual Life products include: universal life, traditional and interest
sensitive whole life, term, modified guaranteed life, and variable life. These
products are primarily sold through life professionals, broker-dealers, and
property-casualty agents, assisted by HLIC's own sales offices or other
marketing groups. The Company competes primarily in the up-scale estate and
business planning markets. Significant competition comes from large,
financially strong insurers based on price, credit quality, and quality of
distribution systems. Some of these products permit borrowing against the
accumulated cash surrender value of the policy. As of December 31, 1994, the
outstanding policy loan balance on individual life policies was $227 million.
Interest rates on policy loans ranged from 6% to 8%. Investment income earned
on outstanding policy loans was $12.4 million for the year ended December 31,
1994. Universal life and interest sensitive whole life reserves are set equal
to premiums collected, plus interest credited , less charges. Other fixed death
benefit reserves are based on assumed investment yield, persistency, mortality
and morbidity per commonly used actuarial tables, expenses, and margins for
adverse deviation. HLIC reinsures all individual life business written by HLA.
The maximum retention on any one individual life is $1 million.
ASSET MANAGEMENT SERVICES (AMS)
This segment offers retirement products and services to employer groups marketed
to plan administrators through a direct sales force, assisted by home office
personnel. This includes managing assets and acting as plan administrator for
plans qualified under sections 401, 403 and 457 of the Internal Revenue Code.
The segment markets some products for which the investments and reserves are
held in separate accounts. The separate account assets as of December 31, 1994
totaled $2.8 billion. The separate account options were expanded to include
funds managed by Fidelity. Other options include 20th Century funds and HLIC's
own funds which are managed by Wellington Management Group or are internally
managed. Investment performance relative to non-guaranteed separate account
products is borne by the participants. For Group Pension products and services,
competition is significant from a number of financial institutions, including
other insurance companies, based on rate and credit quality. HLIC has
positioned itself to enhance its competitive position in the 401k full service
and group tax deferred annuity markets. The Section 457 plan market place is a
closed market for which growth is primarily through takeover business from
competing companies and through increased contributions from existing
participants.
The most significant product type in this segment is the guaranteed rate
contract (GRC) which represents $7.0 billion out of $13.7 billion of invested
assets under management (including separate accounts) for the entire segment.
GRC's offer fixed or indexed rates that are guaranteed for a specified period.
The remaining $6.7 billion represent assets managed for the various IRS
qualified plans and other pension plan products. Credited rates for these
product vary with interest rate conditions. The related policyholder
liabilities are held at account value with amounts held for deferred expenses.
SPECIALTY
Individual and group corporate owned life insurance (COLI) products are sold
through a marketing company in which Hartford Life & Accident owns a 60%
interest. Marketing for COLI is also done through HLR, a wholly owned
subsidiary of HLIC. As of December 31, 1994, the policy loans outstanding were
$2 billion. Investment income from these loans totaled $299 million during 1994.
A significant portion of the COLI business is reinsured with third party
companies. Policy reserves are at gross cash surrender value; however, the
Company has the right of offset against outstanding policy
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loans. Therefore, the net amount of risk relative to these policies is minimal.
HLIC earns fees for management and cost
of insurance. Policyholders may receive dividends based on experience. The
Company began offering a new COLI product in 1994 for which the investments and
liabilities are held in a separate account. No policy loans are permitted under
this product and the policy owner bears the investment risks.
D. REGULATION
The insurance business of HLIC is subject to comprehensive and detailed
regulation and supervision throughout the United States. The laws of the
various jurisdictions establish supervisory agencies with broad administrative
powers with respect to licensing to transact business, overseeing trade
practices, licensing agents, approving policy forms, establishing reserve
requirements, fixing maximum interest rates on life insurance policy loans and
minimum rates for accumulation of surrender values, prescribing the form and
content of required statutory financial statements and regulating the type and
amounts of investments permitted. Each insurance company is required to file
detailed annual reports with supervisory agencies in each of the jurisdictions
in which it does business and its operations and accounts are subject to
examination by such agencies at regular intervals. In the accompanying
financial statements, insurance reserves are determined in accordance with
generally accepted accounting principles, which may vary from statutory
requirements.
In addition, several states, including Connecticut, regulate affiliated groups
of insurers, such as HLIC, under insurance holding company legislation. Under
such laws, intercompany transfers of assets and dividend payments from insurance
subsidiaries may be subject to prior notice or approval, depending on the size
of such transfers and payments in relation to the financial positions of the
companies.
The National Association of Insurance Commissioners (NAIC) has recently
developed new model solvency laws that relate an insurance company's capital
requirements to the risks inherent in its overall operations. These new rules
are known as Risk Based Capital (RBC). As of December 31, 1994, the Company
exceeds the RBC standards.
Although the federal government does not directly regulate the business of
insurance, federal initiatives often have an impact on the business in a variety
of ways. Current and proposed federal measures which may significantly affect
the insurance business include removal of barriers preventing banks from
engaging in the insurance business, limits to medical testing for insurability,
tax law changes affecting the taxation of insurance companies, tax treatment of
insurance products and its impact on the relative desirability of various
personal investment vehicles and proposed legislation to prohibit the use of
gender in determining insurance and pension rates and benefits.
In accordance with the insurance laws and regulations under which HLIC operates,
it is obligated to carry on its books, as liabilities, actuarially determined
reserves to meet its obligations on its outstanding life insurance contracts and
reserves for its universal life and investment contracts. Reserves for life
insurance contracts are based on mortality and morbidity tables in general use
in the United States modified to reflect Company experience. 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, will be
sufficient to meet HLIC's policy obligations at their maturities or in the event
of an insured's death. Reserves for universal life insurance and investment
products represent policy account balances before applicable surrender charges.
In the accompanying financial statements these life insurance reserves are
determined in accordance with generally accepted accounting principles, which
may vary from statutory requirements.
E. INVESTMENT OPERATIONS
POLICY LIABILITY CHARACTERISTICS:
Policy liabilities totaled $17.8 billion (net of ceded reinsurance)
at December 31, 1994 which are backed by $19.5 billion in total
assets (including insurance investments of $16.5 billion). Matching
of the duration of the Company's investments with respective
policyholder obligations is an explicit objective of the Company's
management strategy. Policy liabilities in the Company's operations,
along with estimated duration periods can be summarized based on
investment needs in the following 5 categories at December 31, 1994
(in billions):
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<TABLE>
<CAPTION>
ESTIMATED DURATION (YEARS)
DESCRIPTION BALANCE DEC 31, 1994 LESS THAN 1 1 - 5 6 - 10 OVER 10
----------- -------------------- ----------- ----- ------ -------
<S> <C> <C> <C> <C> <C>
Fixed rate asset accumulation vehicles $6.6 $1.3 $5.2 $0.1 $0.0
Indexed asset accumulation vehicles 0.9 0.5 0.1 0.0 0.3
Interest credited asset accumulation vehicles 9.4 0.2 5.0 3.2 1.0
Long-term payout liabilities 0.9 0.0 0.3 0.4 0.2
------------ ----------- ----- ------ -------
TOTAL $17.8 $2.0 $10.6 $3.7 $1.5
------------ ----------- ----- ------ -------
------------ ----------- ----- ------ -------
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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, and
the liabilities have protection against the early withdrawal of funds
through surrender charges. The primary risk associated with these
products is that the spread between investment return and credited
rate is not sufficient to earn the required return. Product examples
include fixed rate guaranteed investment contracts. Contract
duration is reflected above and is dependent on the policyholder's
choice of guarantee period. The weighted average credited
policyholder rate for these policyholder liabilities is 7.5%.
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 risks inherent in these products are similar to the fixed asset
accumulation vehicles, with an additional risk of changes in the index
adversely affecting profitability. The weighted average credited rate
for these contracts is 5.8%. Product examples include indexed
guaranteed investment contracts with an estimated duration of 2
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. The risks vary depending on the degree of insurance element
contained in the product. Product examples include universal life
contracts and fixed account variable annuity contracts. Liability
duration is short to intermediate term and is reflected in the table
above. The average credited rate for these liabilities is 5.75%.
LONG TERM PAY OUT LIABILITIES
Products in this category are long term in nature and contain
significant actuarial (mortality, morbidity) pricing risks. The cash
flows are not interest sensitive, but do vary based on the timing and
amount of benefit payments. The risks associated with these products
are that the benefits will exceed expected actuarial pricing and/or
the investment return is lower than assumed in pricing. Product
examples include structured settlement contracts, and on-benefit
annuities and long-term disability contracts. Contract duration is
generally 6 to 10 years but, at times, exceeds 30 years. Policy
liabilities under these contracts are not interest sensitive. Asset
and liability durations are matched with the cash flow characteristics
of the claim.
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SEPARATE ACCOUNT PRODUCTS
Represent products for which a separate investment and liability
account is maintained on behalf of the policyholder who bears the
investment risk as well as fixed rate annuities with a market rate
adjustment. Investment strategy varies by fund choice, as outlined in
the prospectus or separate account plan of operations. Products
include group pension, modified guaranteed life and annuity and
variable life and annuity contracts. Separate account assets and
liabilities totaled $22.8 billion at December 31, 1994.
INVESTED ASSET CHARACTERISTICS AND DERIVATIVE STRATEGIES TO FACILITATE
ASSET-LIABILITY MANAGEMENT:
Consistent with the nature of the Company's policyholder obligations,
invested assets are primarily intermediate to long-term taxable fixed
maturity investments and collateralized mortgage obligations (CMO's).
The majority of the investment income earned in the Company's
investment portfolios is credited to policyholders (group pension
contractholders and individual life and annuity policyholders). The
investment objective is to maximize after-tax yields consistent with
acceptable risk while maintaining appropriate liquidity and matching
policyholder liabilities. Investments in fixed maturities include
bonds which are carried at fair market value. Significant portfolio
activity may occur to match contract obligations and not for the
purpose of trading. The impact on net income and portfolio yields as
a result of these sales has not been significant. The net unrealized
after-tax loss on securities was $654 million at December 31, 1994.
Invested assets, excluding separate account assets, totaled $16.5
billion at December 31, 1994 and are comprised of asset-backed
securities ($5.6 billion ), other bonds and notes ($7.3 billion ),
inverse floating securities ($.5 billion ), and other investments,
primarily policy loans ($3.1 billion ). The estimated maturities of
these fixed and variable rate investments, along with the respective
yields at December 31, 1994, are reflected below . Asset-backed
securities are distributed to maturity year based on the Company's
estimate of the rate of future prepayments of principal over the
remaining life of the securities. Expected maturities differ from
contractual maturities reflecting borrower's rights to call or prepay
their obligations.
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<TABLE>
<CAPTION>
ESTIMATED MATURITY
MATURITY YEAR
1995 1996 1997 1998 1999 2000+ TOTAL
------ ------ ------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSET BACKED SECURITIES
VARIABLE RATE *
Book Value $ 89 $ 119 $ 108 $ 84 $ 53 $ 414 $ 867
Market Value $ 84 $ 141 $ 126 $ 102 $ 65 $ 293 $ 811
Taxable Equivalent Yield 6.74% 7.13% 6.86% 7.25% 7.55% 7.67% 7.35%
FIXED RATE
Book Value $ 713 $ 873 $ 498 $ 421 $ 753 $ 1,898 $ 5,156
Market Value $ 709 $ 849 $ 476 $ 374 $ 698 $ 1,722 $ 4,828
Taxable Equivalent Yield 7.36% 6.92% 7.33% 7.14% 6.82% 7.17% 7.12%
SUBTOTAL ASSET BACKED SECURITIES
Book Value $ 802 $ 992 $ 606 $ 505 $ 806 $ 2,312 $ 6,023
Market Value $ 793 $ 990 $ 602 $ 476 $ 763 $ 2,015 $ 5,639
Taxable Equivalent Yield 7.29% 6.95% 7.25% 7.16% 6.87% 7.26% 7.15%
BONDS AND NOTES
VARIABLE RATE *
Book Value $ 250 $ 114 $ 129 $ 20 $ 141 $ 355 $ 1,009
Market Value $ 247 $ 111 $ 119 $ 21 $ 126 $ 303 $ 927
Taxable Equivalent Yield 6.83% 4.53% 5.33% 5.60% 6.43% 6.50% 6.18%
FIXED RATE
Book Value $ 1,149 $ 1,122 $ 967 $ 629 $ 820 $ 2,076 $ 6,763
Market Value $ 1,133 $ 1,085 $ 923 $ 583 $ 740 $ 1,923 $ 6,387
Taxable Equivalent Yield 6.22% 6.04% 6.23% 6.21% 6.90% 7.18% 6.57%
SUBTOTAL BONDS AND NOTES
Book Value $ 1,399 $ 1,236 $ 1,096 $ 649 $ 961 $ 2,431 $ 7,772
Market Value $ 1,380 $ 1,196 $ 1,042 $ 604 $ 866 $ 2,226 $ 7,314
Taxable Equivalent Yield 6.33% 5.90% 6.12% 6.19% 6.83% 7.08% 6.52%
INVERSE FLOATING
Book Value $ 10 $ 34 $ 53 $ 29 $ 33 $ 512 $ 671
Market Value $ 12 $ 27 $ 41 $ 21 $ 19 $ 356 $ 476
Taxable Equivalent Yield 13.42% 7.92% 6.23% 8.82% 8.71% 7.79% 7.89%
TOTAL FIXED MATURITIES
Book Value $ 2,211 $ 2,262 1,755 $ 1,183 $ 1,800 $ 5,255 $14,466
Market Value $ 2,185 $ 2,213 1,685 $ 1,101 $ 1,648 $ 4,597 $13,429
Taxable Equivalent Yield 6.71% 6.39% 6.51% 6.67% 6.88% 7.23% 6.85%
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<FN>
In addition, other investments comprised primarily of policy loans,
totaled $3.1 at December 31, 1994. These loans, which carry a current
weighted average interest rate of 10%, are secured by the cash value
of the life policy. These loans do not mature in a conventional sense
but expire in conjunction with the supporting actuarial assumptions
and developments.
*Variable rate securities are instruments for which the coupon rates
move directly with an index rate. Included in this caption are the
Company's holdings of residuals and interest-only securities which
represent less than 1% of the investment assets. Residuals, for
which cost approximates market, have an average life of 4.9 years,
earn an average yield of 11.7%. Interest-only securities, for which
cost approximates market, have an average life of 7 years and earn an
average of 10.7%.
</TABLE>
The Company's investments are managed to conform with the various
liability-driven objectives discussed above. Derivatives play an important
role in facilitating the management of interest rate risk, in creating
opportunities to develop asset packages which efficiently fund product
obligations, in hedging against indexation risks which affect the value of
certain liabilities, and in adjusting broad investment risk characteristics
when dictated by significant changes in market risks. As an end user of
derivatives, the Company uses a variety of derivative financial
instruments, including swaps, caps, floors and exchange traded financial
futures and options as a means of prudently hedging exposure to price,
foreign currency and/or interest rate risk on anticipated investment
purchases or existing assets and liabilities. The notional amounts of
derivative contracts represent the basis upon which payment and receipt of
amounts are calculated and are not reflective of credit risk. Credit risk
is limited to the amounts calculated to be due to the Company on such
contracts. Payment obligations between the Company and its counterparties
are typically netted on a quarterly basis. The Company has strict policies
regarding the financial stability and credit standing of its major
counterparties and typically requires credit enhancement requirements to
further limit its credit risk. Notional amounts pertaining to derivative
financial instruments totaled $8.6 billion at December 31, 1994 ($6.9
billion related to the Company investments and $1.7 billion on the
liabilities).
The following strategies are used to manage the aforementioned risks
associated with the Company's obligations:
ANTICIPATORY HEDGING
For certain liability types, the Company commits to the price of the
product in advance of the receipt of the associated premium or deposit. To
hedge the Company's expected cash flows against adverse changes in
marinterest rates, the Company routinely executes anticipatory hedges which
immunize the Company against asset price changes which would result from
changes in market interest rates. Typically, these hedges involve taking a
long position in an interest rate future or swap which has a duration
equivalent to the anticipated investments, which in turn approximate the
duration of the associated liabilities. The notional amounts of
derivatives used for anticipatory hedges totaled $.8 billion at
December 31, 1994.
LIABILITY RISK ADJUSTMENTS
Several products obligate the Company to credit a return to the
contractholder which is indexed to a market rate. Derivatives, typically
in the form of swaps, are extensively used to convert the specific
liability indexation risk to a risk which is more common, such as a fixed
rate or a floating rate of LIBOR. By swapping the liability risk into a
more common asset risk, a broader array of assets may be effectively
matched against these liabilities. This strategy permits the customization
of liability indexation to meet customer objectives without the need to
identify assets which directly match each index. The notional amounts of
derivatives used for liability risk adjustment totaled $1.7 billion at
December 31, 1994.
ASSET HEDGES/SYNTHETIC ASSET INVESTMENTS
The selection of investment risk characteristics is driven by the
liability-specific needs of each obligation. Investment needs may range
from very short duration to very long duration, from floating rate to fixed
rate, from callable to non-callable. To meet the obligations of the
Company's policyholders, investment managers consider a range of available
investment alternatives. In order to provide greater risk diversification,
the Company often invests in securities for which most, but not all, of the
desired investment characteristics are met. The Company may choose to
create a synthetic asset by combining two or more instruments to achieve
the desired investments characteristics. Many times, the undesireable risks
can be effectively managed through the use of derivatives. As an example,
currency-linked notes or inverse floating rate characteristics can be
converted to
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alternative fixed or floating rate notes with any currency or undesireable
interest rate risk eliminated or reduced. The choice of a derivative
instrument for hedging depends upon the investment risk to be offset, the
cost efficiency and liquidity of the derivative instrument, as well as the
ongoing need to review the overall balance of asset and liability
characteristics in the Company's operations. The notional amounts of
derivatives used for hedges of physical or synthetic assets totaled $2.8
billion at December 31, 1994.
PORTFOLIO / DURATION HEDGES
The term "duration" refers to the degree of change in the value or return
of an asset (or group of assets) which results from an external market
change, such as a change in the level of current interest rates. As market
conditions change, these duration characteristics sometimes require
adjustments in order to preserve the appropriate asset-liability balance.
As an example, a precipitous drop in interest rates may accelerate mortgage
prepayments and shorten the expected maturity of a portfolio of mortgage
securities. Duration hedges compensate for this risk by adjusting average
asset duration parameters. The notional amounts of derivatives used for
duration hedges totaled $3.3 billion as of December 31, 1994.
The Company is committed to maintaining an effective risk management
discipline. Approved derivatives usage must support at least one of the
following objectives: to manage the risk to the operation arising from
price, interest rate and foreign currency volatility, to manage liquidity,
or control transaction costs. All investment activity is subject to
regular review procedures for all credit risk whether borrower, issuer, or
counterparty have been established. HLIC analyzes the aggregate interest
rate risk through the use of a proprietary, multi-scenario cash flow
projection model which encompasses all liabilities and their associated
investments, including derivatives.
HLIC has established an independent risk management to continually monitor
and evaluate the Company's financial exposure to asset and liability risks
under various economic conditions.
F. OTHER MATTERS
As of December 31, 1994, HLIC and its parent HLA have 3,481 direct employees,
1,872 of whom are employed at the Home Office in Simsbury, Connecticut, and
1,609 of whom are employed at various branch offices throughout the United
States and elsewhere. ILA employs 481 people in Minneapolis, Minnesota and HLR
has 19 employees in Westport, Connecticut.
ITEM 2. PROPERTIES
The Company occupies office space leased by Hartford Fire. Expenses associated
with these offices are allocated on a direct and indirect basis to the Life
subsidiaries of Hartford Fire.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in pending and threatened litigation in which claims for
monetary damages are asserted. Management, after consultation with legal
counsel, does not anticipate that the ultimate liability arising from such
pending or threatened litigation would have a material effect on the financial
position of the Company.
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PART II
ITEM 5. MARKET FOR HARTFORD LIFE'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
All of HLIC's outstanding shares are ultimately owned by Hartford Fire which is
a subsidiary of ITT Hartford Group, Inc., a wholly-owned subsidiary of ITT
Corporation.
HLIC has issued and outstanding 1,000 shares of common stock at a par value of
$5,690 per share.
ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
(DOLLAR AMOUNTS IN MILLIONS)
<TABLE>
<CAPTION>
ILAD AMS SPECIALTY TOTAL
1994 1993 1994 1993 1994 1993 1994 1993
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $691 $595 $789 $794 $919 $425 $2,399 $1,814
Benefits, claims,
expenses and taxes 595 511 765 748 901 412 2,261 1,671
----- ----- ----- ----- ----- ----- ----- -----
NET INCOME $96 $84 $24 $46 $18 $13 $138 $143
----- ----- ----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- ----- ----- -----
</TABLE>
INDIVIDUAL LIFE & ANNUITY (ILAD)
ILAD is the largest of HLIC's segments in terms of assets under management and
net income. The annuity line continues to be a leader in the industry (see
business section). In 1994, the segment assumed life and annuity policies from
Pacific Standard Life Insurance Company, adding $219 million of annual life
premiums and $181 million of annuity assets. In 1993, ILAD assumed $3.2 billion
in fixed and variable annuity assets and $.9 billion of modified guaranteed life
insurance from Fidelity Bankers Life Insurance Company. The significant growth
from these assumptions along with new deposits from fixed and variable annuity
sales of $7.0 billion in 1994 and $4.2 billion in 1993 increased assets under
management, but are not reported as revenues. The management and maintenance
fees and cost of insurance associated with this growing policyholder base were
the source of ILAD's increased revenues and net income. The growth in this
segment has caused the ratio of benefits, claims and expenses to average assets
under management has declined from 3.6% in 1993 to 2.6% in 1994.
ASSET MANAGEMENT SERVICES (AMS)
Sales in the AMS segment have been strong relative to its competitors. Market
share has grown in its key products. Consistent with industry experience, 1994
investment income declined due to interest rate drops which occurred through the
latter part of 1993. This particularly impacted the GRC line which experienced
prepayments in excess of expectations. Though most of the underlying mortgage-
backed securities for GRC were PAC CMO's (planned amortization class
collateralized mortgage obligations) which fall into the lower end of the
investment risk spectrum for this investment class, offering some prepayment
protection and less market volatility, the portfolio was not completely
insulated, which contributed to the drop in net income in 1994.
Although income for this line will continue to be impacted from these
prepayments, hedging strategies are in place that limit volatility against
future interest rate movements.
SPECIALTY
Specialty is growing in size from revenue and net income perspectives relative
to the total Company and in comparison to the prior year. The segment assumed a
large block of COLI business in 1994. Life insurance in force has grown from
this assumption and from new sales to $39.5 billion in 1994 from $16.7 billion
in 1993. HLIC's Specialty segment is one of the industry's leading underwriters
and reinsurers of COLI products.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements and Schedules.
11
<PAGE>
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents Filed
(1) See Index to Consolidated Financial Statements and Schedules
(2) See Exhibit Index
(b) No reports on Form 8-K have been filed during the last quarter of
1994
12
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SCHEDULES
Report of Independent Public Accountants............................. F-2
Consolidated Statements of Income for the three years ended
December 31, 1994.................................................. F-3
Consolidated Balance Sheets as of December 31, 1994 and 1993......... F-4
Consolidated Statements of Stockholder's Equity for the three years
ended December 31, 1994............................................ F-5
Consolidated Statements of Cash Flow for the three years ended
December 31, 1994.................................................. F-6
Notes to Consolidated Financial Statements.......................... F 7-19
Summary of Investments Other Than Investments in Affiliates.......... S-1
Supplementary Insurance Information.................................. S-2
Reinsurance.......................................................... S-3
All schedules not listed above have been omitted because they are not applicable
or the amounts are insignificant, immaterial or the information has been
otherwise supplied in the financial statements or notes thereto.
REPORT OF MANAGEMENT
The management of Hartford Life Insurance Company and subsidiaries (the Company)
is responsible for the preparation and integrity of the information contained in
the accompanying consolidated financial statements and other sections of the
Annual Report. The consolidated 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. Other
information in the Annual Report is consistent with the financial statements.
The Company's consolidated financial statements are audited by Arthur Andersen
LLP, independent public accountants. Management has made available to Arthur
Andersen LLP the Company's financial records and related data and believes that
the representations made to the independent public accountants are valid and
complete.
The Company's system of internal controls is a major component of management's
responsibility for the fair presentation of the consolidated financial
statements. The internal controls, including accounting controls and the
internal auditing program, are designed to provide reasonable assurance that the
assets are safeguarded, transactions are executed in accordance with
management's authorization and are properly recorded, and fraudulent financial
reporting is prevented or detected.
The Company's internal controls provide for the careful selection and training
of personnel and for appropriate segregation of responsibilities. The controls
are documented in written codes of conduct, policies, and procedures that are
communicated to the Company's employees. Management continually monitors the
system of internal controls for compliance. The Company's internal auditors
perform independent tests of accounting procedures and records to assess the
overall effectiveness of the Company's internal controls. They also make
recommendations for improving internal controls, policies and practices.
Management takes appropriate action in response to each recommendation from the
internal auditors and the independent public accountants.
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Hartford Life Insurance Company and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Hartford Life
Insurance Company (a Connecticut corporation and wholly-owned subsidiary of
Hartford Life and Accident Insurance Company) and subsidiaries as of December
31, 1994 and 1993, and the related consolidated statements of income,
stockholder's equity and cash flow for each of the three years in the period
ended December 31, 1994. These consolidated financial statements and the
schedules referred to below are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Hartford Life Insurance Company and subsidiaries as of December 31, 1994 and
1993, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1994 in conformity with generally
accepted accounting principles.
As discussed in the accompanying notes to the consolidated financial statements,
the Company adopted new accounting standards promulgated by the Financial
Accounting Standards Board, changing its methods of accounting, as of January 1,
1994, for debt and equity securities, and, effective January 1, 1992, for
postretirement benefits other than pensions and postemployment benefits.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedules listed in the
Index to Consolidated Financial Statements and Schedules are presented for
purposes of complying with the Securities and Exchange Commission's rules and
are not a required part of the basic consolidated financial statements. These
schedules have been subjected to the auditing procedures applied in the audits
of the basic consolidated 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 consolidated financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Hartford, Connecticut
January 30, 1995
F-2
<PAGE>
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1994 1993 1992
<S> <C> <C> <C>
REVENUES:
Premiums and other considerations $1,100 $ 747 $ 259
Net investment income 1,292 1,051 907
Net realized gains on investments 7 16 5
------ ------ ------
2,399 1,814 1,171
BENEFITS, CLAIMS AND EXPENSES:
Benefits, claims and claim
adjustment expenses 1,405 1,046 797
Amortization of deferred policy
acquisition costs 145 113 55
Dividends to policyholders 419 227 47
Other insurance expenses 227 210 138
------ ------ ------
2,196 1,596 1,037
INCOME BEFORE INCOME TAX AND
CUMULATIVE EFFECT OF CHANGES IN
ACCOUNTING PRINCIPLES 203 218 134
Income tax expense 65 75 45
------ ------ ------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGES IN ACCOUNTING PRINCIPLES 138 143 89
Cumulative effect of changes in
accounting principles net of tax benefit of $7 - - (13)
------ ------ ------
NET INCOME $ 138 $ 143 $ 76
------ ------ ------
------ ------ ------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-3
<PAGE>
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
1994 1993
-------- --------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, available for sale, at fair
value in 1994 and at amortized cost in 1993
(amortized cost, $14,464 in 1994; fair
value, $12,845 in 1993) $13,429 $12,597
Equity securities, at fair value 68 90
Mortgage loans, at outstanding principal balance 316 228
Policy loans, at outstanding balance 2,614 1,397
Other investments 107 40
------- -------
16,534 14,352
Cash 20 1
Premiums and amounts receivable 160 327
Reinsurance recoverable 5,466 5,532
Accrued investment income 378 241
Deferred policy acquisition costs 1,809 1,334
Deferred income tax 590 114
Other assets 83 101
Separate account assets 22,809 16,284
------- -------
$47,849 $38,286
------- -------
------- -------
LIABILITIES AND STOCKHOLDER'S EQUITY
Future policy benefits $1,890 $1,659
Other policyholder funds 21,328 18,234
Other liabilities 1,000 916
Separate account liabilities 22,809 16,284
------- -------
47,027 37,093
Common stock - authorized 1,000 shares, $5,690
par value, issued and outstanding 1,000 shares 6 6
Capital surplus 826 676
Unrealized losses on securities, net of tax (654) (5)
Retained earnings 644 516
------- -------
822 1,193
------- -------
$47,849 $38,286
------- -------
------- -------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-4
<PAGE>
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(IN MILLIONS)
<TABLE>
<CAPTION>
UNREALIZED
GAINS(LOSSES) TOTAL
COMMON CAPITAL ON RETAINED STOCKHOLDER'S
STOCK SURPLUS SECURITIES EARNINGS EQUITY
----- ------- ---------- -------- ------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1991 $ 6 $ 439 $ 1 $ 297 $ 743
Net Income 76 76
Capital Contribution - 25 - - 25
Excess of assets over liabilities on
reinsurance assumed from affiliate - 34 - - 34
Change in unrealized losses on equity
securities, net of tax - - (1) - (1)
------ ------- ------- ------- -------
BALANCE, DECEMBER 31, 1992 6 498 0 373 877
------ ------- ------- ------- -------
Net Income - - - 143 143
Capital Contribution - 180 - - 180
Excess of assets over liabilities on
reinsurance assumed from affiliate - (2) - - (2)
Change in unrealized losses on equity
securities, net of tax - - (5) - (5)
------ ------- ------- ------- -------
BALANCE, DECEMBER 31, 1993 6 676 (5) 516 1,193
------ ------- ------- ------- -------
Net Income - - - 138 138
Capital Contribution - 150 - - 150
Dividends Paid - - - (10) (10)
Change in unrealized losses on securities,
net of tax * - - (649) - (649)
------ ------- ------- ------- -------
BALANCE, DECEMBER 31, 1994 $ 6 $ 826 $ (654) $ 644 $ 822
------ ------- ------- ------- -------
------ ------- ------- ------- -------
<FN>
* The 1994 change in unrealized losses on securities, net of tax, includes a
gain of $91 due to adoption of SFAS #115 as discussed in note 1b to the
consolidated financial statements.
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-5
<PAGE>
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASHFLOW
(IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
NET INCOME $ 138 $ 143 $ 76
Cumulative effect of accounting changes - - 13
Adjustments to net income:
Net realized investment gains before tax (7) (16) (5)
Net policyholder investment losses
(gains) before tax 5 (15) (15)
Net deferred policy acquisition costs (441) (292) (278)
Net amortization of premium (discount) on
fixed maturities 41 2 (16)
Deferred income tax benefits (128) (121) (14)
(Increase) decrease in premiums and
amounts receivable 10 (28) (14)
Increase in accrued investment income (106) (4) (116)
Decrease(increase) in other assets 101 (36) 88
Decrease(increase) in reinsurance
recoverable 75 (121) 0
Increase in liability for future policy
benefits 224 360 527
Increase in other liabilities 191 176 92
-------- --------- --------
CASH PROVIDED BY OPERATING ACTIVITIES 103 48 338
-------- --------- --------
INVESTING ACTIVITIES:
Purchases of fixed maturity investments (9,127) (12,406) (8,948)
Proceeds from sales of fixed maturity
investments 5,708 8,813 5,728
Maturities and principal paydowns of
long-term investments 1,931 2,596 1,207
Net purchases of other investments (1,338) (206) (106)
Net sales (purchases) of short-term
investments 135 (564) 221
-------- --------- --------
CASH USED FOR INVESTING ACTIVITIES (2,691) (1,767) (1,898)
-------- --------- --------
FINANCING ACTIVITIES:
Net receipts from investment and UL-type
contracts credited to policyholder account
balances 2,467 1,513 1,512
Capital contribution 150 180 25
Excess of assets over liabilities on
reinsurance assumed from affiliate - - 34
Dividends paid (10) - -
-------- --------- --------
CASH PROVIDED BY FINANCING
ACTIVITIES 2,607 1,693 1,571
-------- --------- --------
NET INCREASE(DECREASE) IN CASH 19 (26) 11
Cash at beginning of period 1 27 16
-------- --------- --------
CASH AT END OF PERIOD $ 20 $ 1 $ 27
-------- --------- --------
-------- --------- --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-6
<PAGE>
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN MILLIONS)
1. SIGNIFICANT ACCOUNTING POLICIES
(A) BASIS OF PRESENTATION:
These consolidated financial statements include Hartford Life
Insurance Company (the Company or HLIC) and its wholly-owned
subsidiaries, ITT Hartford Life and Annuity Company (ILA) and ITT
Hartford International Life Reassurance Corporation (HLR), formerly
American Skandia Life Reinsurance Corporation. HLIC is a wholly-owned
subsidiary of Hartford Life and Accident Insurance Company (HLA).
The Company is ultimately owned by Hartford Fire Insurance Company
(Hartford Fire), which is ultimately owned by ITT Hartford Group,
Inc., a subsidiary of ITT Corporation (ITT).
The consolidated financial statements are prepared in conformity with
generally accepted accounting principles which differ in certain
material respects from the accounting practices prescribed or
permitted by various insurance regulatory authorities.
Certain reclassifications have been made to prior year financial
statements to conform to current year classifications.
(B) CHANGES IN ACCOUNTING PRINCIPLES:
Effective January 1, 1992, the Company adopted Statement of Financial
Accounting Standards (SFAS)No. 106, "Employers' Accounting for
Postretirement Benefits Other than Pensions" and SFAS No. 112,
Employers' Accounting for Postemployment Benefits", using the
immediate recognition method. Accordingly, a cumulative adjustment
(through December 31, 1991) of $7 after-tax has been recognized at
January 1, 1992.
Effective January 1, 1994, the Company adopted SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities".
The new standard requires, among other things, that fixed maturities
be classified as "held-to-maturity", "available-for-sale" or "trading"
based on the Company's intentions with respect to the ultimate
disposition of the security and its ability to effect those
intentions. The classification determines the appropriate accounting
carrying value (cost basis or fair value) and, in the case of fair
value, whether the adjustment impacts Stockholder's Equity directly or
is reflected in the Consolidated Statements of Income. Investments in
equity securities had previously been recorded at fair value with the
corresponding impact included in Stockholder's Equity. Under SFAS No.
115, the Company's fixed maturities are classified as "available for
sale" and accordingly, these investments are reflected at fair value
with the corresponding impact included as a component of Stockholder's
Equity designated as "Unrealized Loss on Securities, Net of Tax."
As with the underlying investment security, unrealized gains and
losses on derivative financial instruments are considered in
determining the fair value of the portfolios. The impact of adoption
was an increase to stockholder's equity of $91.
The Company's cash flows were not impacted by these changes in
accounting principles.
(C) REVENUE RECOGNITION:
Revenues for universal life policies and investment products consist
of policy charges for the cost of insurance,
F-7
<PAGE>
policy administration and surrender charges assessed to policy account
balances. Premiums for traditional life insurance policies are
recognized as revenues when they are due from policyholders. Deferred
acquisition costs are amortized using the retrospective deposit method
for universal life and other types of contracts where the payment
pattern is irregular or surrender charges are a significant source of
profit and the prospective deposit method is used where investment
margins are the primary source of profit.
(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, mortality and morbidity assumptions which vary by
plan, year of issue and policy durations and include a provision for
adverse deviation. Liabilities for universal life insurance and
investment products represent policy account balances before
applicable surrender charges.
(E) POLICYHOLDER REALIZED GAINS AND LOSSES:
Realized gains and losses on security transactions associated with the
Company's immediate participation guaranteed contracts are excluded
from revenues, 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) DEFERRED POLICY ACQUISITION COSTS:
Policy acquisition costs, including commissions and certain
underwriting expenses associated with acquiring traditional life
insurance products, are deferred and amortized over the lesser of the
estimated or actual contract life. For universal life insurance and
investment products, acquisition costs are being amortized generally
in proportion to the present value of expected gross profits from
surrender charges, investment, mortality and expense margins.
(G) INVESTMENTS:
Investments in fixed maturities are classified as available for sale
and accordingly reflected at fair value with the corresponding impact
of unrealized gains and losses, net of tax, included as a component of
stockholder's equity. Securities and derivative instruments,
including swaps, caps, floors, futures, forward commitments and
collars, are based on dealer quotes or quoted market prices for the
same or similar securities. While the Company has the ability and
intent to hold all fixed income securities until maturity, due to
contract obligations, interest rates and tax laws, portfolio activity
occurs. These trades are motivated by the need to optimally position
investment portfolios in reaction to movements in capital markets or
distribution of policyholder liabilities. When an other than temporary
reduction in the value of publicly traded securities occurs, the
decrease is reported as a realized loss and the carrying value is
adjusted accordingly. Real estate is carried at cost less accumulated
depreciation. Equity securities, which include common stocks, are
carried at market value with the after-tax difference from cost
reflected in stockholder's equity. Realized investment gains and
losses, after deducting life and pension policyholders share are
reported as a component of revenue and are determined on a specific
identification basis.
(H) DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses a variety of derivative financial instruments as part
of an overall risk management strategy. These instruments, including
swaps, caps, collars and exchange traded financial futures, 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. The Company does not hold or issue derivative
financial instruments for trading purposes. The Company'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. Gains
or losses on futures purchased in anticipation of the future receipt
of product cash flows are deferred and, at the time of the ultimate
purchase, reflected as a basis adjustment to the purchased asset.
Gains or losses on futures used in invested asset risk management are
deferred and adjusted into the basis of the hedged asset when the
contract is closed. The basis adjustments are amortized into
investment income over the remaining asset life.
F-8
<PAGE>
Open forward commitment contracts are marked to market through
Stockholder's Equity. Such contracts are recorded at settlement by
recording the purchase of the specified securities at the previously
committed price. Gains or losses resulting from the termination of
the forward commitment contracts before the delivery of the securities
are recognized immediately in the income statement as a component of
investment income.
The Company's accounting for interest rate swaps and purchased or
written caps, floors, and options used to manage risk is in accordance
with the concepts established in SFAS 80, "Accounting for Futures
Contracts", the American Institute of Certified Public Accountants
Statement of Position 86-2, "Accounting for Options" and various EITF
pronouncements, except for written options which are written in all
cases in conjunction with other assets and derivatives as part of an
overall risk management strategy. Such synthetic instruments are
accounted for as hedges. Derivatives, used as part of a risk
management strategy, must be designated at inception and have
consistency of terms between the synthetic instrument and the
financial instrument being replicated. Synthetic instrument
accounting, consistent with industry practice, provides that the
synthetic asset is accounted for like the financial instrument it is
intended to replicate. Interest rate swaps and purchased or written
caps, floors and options which fail to meet management criteria are
accounted for at fair market value with the impact reflected in net
income.
Interest rate swaps involve the periodic exchange of payments without
the exchange of underlying principal or notional amounts. Net
payments are recognized as an adjustment to income. Should the swap
be terminated, the gains or losses are adjusted into the basis of the
asset or liability and amortized over the remaining life. The basis
of the underlying asset or liability is adjusted to reflect changing
market conditions such as prepayment experience. Should the asset be
sold or liability terminated, the gains or losses on the terminated
position are immediately recognized in earnings. Interest rate swaps
purchased in anticipation of an asset purchase ("anticipatory
transaction") are recognized consistent with the underlying asset
components. That is, the settlement component is recognized in the
Statement of Income while the change in market is recognized as an
unrealized 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,
as well as the net payments, 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.
Forward exchange contracts and foreign currency swaps are accounted
for in accordance with SFAS 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 adjustment
component of stockholder's equity.
(I) RELATED PARTY TRANSACTIONS:
Transactions of the Company with its parent and affiliates relate
principally to tax settlements, insurance coverage, rental and service
fees and payment of dividends and capital contributions. In addition,
certain affiliated insurance companies purchased group annuity
contracts from the Company to fund pension costs and claim annuities
to settle casualty claims.
Substantially all general insurance expenses related to the Company,
including rent expenses, are initially paid by Hartford Fire. Direct
expenses are allocated to the Company using specific identification
and indirect expenses are allocated using other applicable methods.
The rent paid to Hartford Fire for the space occupied by the Company
was $3 in 1994, 1993, and 1992 respectively. The Company expects to
pay rent of $3 in 1995, 1996, 1997,1998, and 1999 respectively and
$60 thereafter, over the contract life of the lease.
See also Note (4) for the related party coinsurance agreements.
F-9
<PAGE>
2. INVESTMENTS
(A) COMPONENTS OF NET INVESTMENT INCOME:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Interest income $1,247 $1,007 $894
Income from other investments 54 53 15
------ ------ ------
GROSS INVESTMENT INCOME 1,301 1,060 909
Less: investment expenses 9 9 2
------ ------ ------
NET INVESTMENT INCOME $1,292 $1,051 $907
------ ------ ------
------ ------ ------
</TABLE>
(B) UNREALIZED GAINS (LOSSES) ON EQUITY SECURITIES:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Gross unrealized gains $ 2 $ 3 $ 2
Gross unrealized losses (11) (11) (2)
Deferred income tax expense (benefit) (3) (3) 0
------ ------ ------
NET UNREALIZED LOSSES AFTER TAX (6) (5) 0
Balance at beginning of year (5) 0 1
------ ------ ------
CHANGE IN NET UNREALIZED LOSSES ON
EQUITY SECURITIES $ (1) $ (5) $(1)
------ ------ ------
------ ------ ------
</TABLE>
(C) UNREALIZED GAINS (LOSSES) ON FIXED MATURITIES:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Gross unrealized gains $ 150 $ 538 $ 521
Gross unrealized losses (1,185) (290) (302)
-------- ------ ------
NET UNREALIZED (LOSSES) GAINS (1,035) 248 219
Unrealized losses credited to policyholders 37 0 0
Deferred income tax expense (benefit) (350) 87 75
-------- ------ ------
NET UNREALIZED (LOSSES) GAINS AFTER TAX (648) 161 144
Balance at beginning of year 161 144 297
-------- ------ ------
CHANGE IN NET UNREALIZED (LOSSES)GAINS ON
FIXED MATURITIES $ (809) $ 17 $(153)
-------- ------ ------
-------- ------ ------
</TABLE>
(D) COMPONENTS OF NET REALIZED GAINS:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Fixed maturities $(34) $(12) $20
Equity securities (11) 0 3
Real estate and other 47 43 (3)
Less: (decrease)increase in liability
to policyholders for realized gains (5) 15 15
------ ------ ------
NET REALIZED GAINS $ 7 $ 16 $ 5
------ ------ ------
------ ------ ------
</TABLE>
F-10
<PAGE>
(E) DERIVATIVE INVESTMENTS:
A summary of investments, segregated by major category along with the
types of derivatives and their respective notional amounts, are as
follows as of December 31, 1994 :
<TABLE>
<CAPTION>
SUMMARY OF INVESTMENTS
AS OF DECEMBER 31, 1994
(CARRYING AMOUNTS)
ISSUED CAPS, PURCHASED
TOTAL CARRYING NON- FLOORS & CAPS, FLOORS FUTURES SWAPS
VALUE DERIVATIVE OPTIONS (B) & OPTIONS (C) (D) (F)
-------------- ---------- ------------ ------------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Asset Backed Securities $5,670 $5,690 $(31) $24 $0 $(13)
Inverse Floaters (A) 474 482 (9) 4 0 (3)
Anticipatory (E) (30) 0 0 2 0 (32)
-------- ------- ------ ------ ------ ------
TOTAL ASSET BACKED SECURITIES 6,114 6,172 (40) 30 0 (48)
Other Bonds and Notes 6,533 6,606 0 0 0 (73)
Short-Term Investments 782 782 0 0 0 0
-------- ------- ------ ------ ------ ------
TOTAL FIXED MATURITIES 13,429 13,560 (40) 30 0 (121)
Other Investments 3,105 3,105 0 0 0 0
-------- ------- ------ ------ ------ ------
TOTAL INVESTMENTS $16,534 $16,665 $(40) $30 $0 $(121)
-------- ------- ------ ------ ------ ------
-------- ------- ------ ------ ------ ------
</TABLE>
SUMMARY OF INVESTMENTS IN DERIVATIVES
AS OF DECEMBER 31, 1994
(NOTIONAL AMOUNTS)
<TABLE>
<CAPTION>
ISSUED CAPS, PURCHASED
TOTAL NOTIONAL FLOORS, & CAPS, FLOORS, FUTURES SWAPS
AMOUNT OPTIONS (B) & OPTIONS (C) (D) (F)
-------------- ------------ ------------- -------- ------
<S> <C> <C> <C> <C> <C>
Asset Backed Securities $4,244 $1,311 $2,546 $75 $312
Inverse Floaters (A) 1,129 277 63 3 786
Anticipatory (E) 835 0 209 101 525
------- ------- ------- ------- -------
TOTAL ASSET BACKED 6,208 1,588 2,818 179 1,623
Other Bonds and Notes 670 0 72 74 524
Short-Term Investments 0 0 0 0 0
------- ------- ------- ------- -------
TOTAL FIXED MATURITIES 6,878 1,588 2,890 253 2,147
Other Investments 16 0 3 0 13
------- ------- ------- ------- -------
TOTAL INVESTMENTS $6,894 $1,588 $2,893 $253 $2,160
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
F-11
<PAGE>
A summary of the notional and fair value of derivatives with off Balance Sheet
risk as of December 31, 1993 is as follows:
<TABLE>
<CAPTION>
ISSUED SWAPS, CAPS
FLOORS AND COLLARS FUTURES FORWARDS TOTAL
------------------ ------- -------- -----
<S> <C> <C> <C> <C>
Notional $7,015 $1,792 $91 $8,898
Fair Value $(4) $0 $1 $(3)
</TABLE>
(A) Inverse floaters, which are variations of CMO's for which the coupon
rates move inversely with an index rate (e.g. LIBOR). The risk to
principal is considered negligible as the underlying collateral for
the securities is guaranteed or sponsored by government agencies. To
address the volatility risk created by the coupon variability, the
Company uses a variety of derivative instruments, primarily interest
rate swaps and issued floors.
(B) Comprised primarily of caps ($1,459) with a weighted average strike
rate of 7.7% (ranging from 6.8% to 10.2%). Over 70% mature in 1997
and 1998. Issued floors total $125 with a weighted average strike
rate of 8.3% and mature in 2004.
(C) Comprised of purchased floors ($1,856), purchased options and collars
($633) and purchased caps ($404). The floors have a weighted average
strike price of 5.8% (ranging from 4.8% and 6.6%) and over 85% mature
in 1997 and 1998. The options and collars generally mature in 1995
and 2002. The caps have a weighted average strike price of 7.2%
(ranging from 4.5% and 8.9%) and over 66% mature in 1997 through
1999.
(D) Over 95% of futures contracts expire before December 31, 1995.
(E) Deferred gains and losses on anticipatory transactions are included in
the carrying value of bond investments in the consolidated balance
sheets. At the time of the ultimate purchase, they are reflected as
a basis adjustment to the purchased asset. At December 31, 1994,
these were $(33) million in net deferred losses for futures, interest
rate swaps and purchased options.
(F) The following table summarizes the maturities of interest rate and
foreign currency swaps outstanding at December 31, 1994 and the
related weighted average interest pay rate or receive rate assuming
current market conditions:
MATURITY OF SWAPS ON INVESTMENTS AS OF DECEMBER 31, 1994
<TABLE>
<CAPTION>
MATURITY
DERIVATIVE TYPE 1995 1996 1997 1998 1999 2000+ TOTAL LAST
--------------- ---- ---- ---- ---- ---- ----- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST RATE SWAPS:
PAY FIXED/RECEIVE VARIABLE:
Notional Value $0 $15 $50 $0 $446 $268 $779 2004
Weighted Average Pay Rate 0.0% 5.0% 7.2% 0.0% 8.2% 7.8% 7.9%
Weighted Average Receive Rate 0.0% 6.4% 5.7% 0.0% 7.5% 6.5% 7.0%
PAY VARIABLE/RECEIVE FIXED:
Notional Value $311 $50 $100 $25 $175 $100 $761 2002
Weighted Average Pay Rate 5.1% 5.3% 5.5% 5.3% 5.4% 6.0% 5.4%
Weighted Average Receive Rate 8.0% 8.0% 7.5% 4.0% 4.5% 7.2% 6.9%
PAY VARIABLE/RECEIVE DIFFERENT VARIABLE:
Notional Value $95 $50 $18 $15 $5 $232 $415 2005
Weighted Average Pay Rate 4.2% 6.4% 6.8% 6.2% 0.0% 6.0% 5.7%
Weighted Average Receive Rate 9.1% 6.3% 9.5% 6.4% 0.0% 6.3% 7.1%
TOTAL INTEREST RATE SWAPS $406 $115 $168 $40 $626 $600 $1,955 2004
Total Weighted Average Pay Rate 4.9% 5.7% 6.1% 5.6% 7.4% 6.8% 6.5%
Total Weighted Average Receive Rate 8.2% 7.1% 7.2% 4.9% 6.7% 6.5% 7.0%
FOREIGN CURRENCY SWAPS $35 $46 $29 $15 $10 $70 $205 2002
TOTAL SWAPS $441 $161 $197 $55 $636 $670 $2,160 2005
</TABLE>
F-12
<PAGE>
In addition to risk management through derivative financial
instruments pertaining to the investment portfolio, interest rate
sensitivity related to certain Company liabilities was altered
primarily through interest rate swap agreements. The notional amount
of the liability agreements in which the Company generally pays one
variable rate in exchange for another, was $1.7 billion and $1.3
billion at December 31, 1994 and 1993 respectively. The weighted
average pay rate is 6.2%; the weighted average receive rate is 6.6% ,
and these agreements mature at various times through 2004.
(F) CONCENTRATION OF CREDIT RISK:
The Company has a reinsurance recoverable of $4.4 billion from
Mutual Benefit Life Assurance Corporation (Mutual Benefit). 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. Excluding investments in U.S.
government and agencies, the Company has no other significant
concentrations of credit risk.
The Company currently owns $39.2 million par value of Orange County,
California Pension Obligation Bonds, $17.1 million of which it
continues to carry as available for sale under FASB 115 and $22.1
million which are included in the Separate Account Assets. While
Orange County is currently operating under Protection of Chapter 9 of
the Federal Bankruptcy Laws, the Company believes it is probable that
it will collect all amounts due under the contractual terms of the
bonds and that the bonds are not permanently or other than temporarily
impaired.
As of December 31, 1994 the Company owned $66.1 million of Mexican
bonds, $52.3 million of which are payable in Mexican pesos but are
fully hedged back to U.S. dollars, and $13.8 million of U.S. Dollar
Denomination Mexican bonds. The primary risks associated with these
securities is a default by the Mexican government or imposition of
currency controls that prevent conversion of Mexican pesos to U.S.
dollars. The Company believes both of these risks are remote.
(G) FIXED MATURITIES:
The schedule below details the amortized cost and fair values of the
Company's fixed maturities by component, along with the gross
unrealized gains and losses:
<TABLE>
<CAPTION>
1994
----
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
--------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Government and government
agencies and authorities:
- guaranteed and sponsored $1,516 $1 $(87) $1,430
- guaranteed and sponsored
- asset backed 4,256 78 (571) 3,763
States, municipalities and
political subdivisions 148 1 (12) 137
International governments 189 1 (14) 176
Public utilities 531 1 (32) 500
All other corporate 3,717 38 (297) 3,458
All other corporate
- asset backed 2,442 30 (121) 2,351
Short-term investments 1,665 0 (51) 1,614
------- ----- -------- -------
TOTAL $14,464 $150 $(1,185) $13,429
------- ----- -------- -------
------- ----- -------- -------
</TABLE>
F-13
<PAGE>
<TABLE>
<CAPTION>
1993
----
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
U.S. Government and government
agencies and authorities:
- guaranteed and sponsored $ 1,637 $ 15 $ (12) $ 1,640
- guaranteed and sponsored
- asset backed 4,070 235 (219) 4,086
States, municipalities and
political subdivisions 73 9 0 82
International governments 100 5 (3) 102
Public utilities 423 20 (2) 441
All other corporate 3,598 180 (42) 3,736
All other corporate
- asset backed 1,806 74 (12) 1,868
Short-term investments 890 0 0 890
-------- ------- -------- --------
TOTAL $12,597 $ 538 $ (290) $12,845
-------- ------- -------- --------
-------- ------- -------- --------
</TABLE>
The amortized cost and estimated fair value of fixed maturity
investments at December 31, 1994, by maturity, are shown below. Asset
backed securities are distributed to maturity year based on the
Company's estimate of the rate of future prepayments of principal over
the remaining life of the securities. Expected maturities differ from
contractual maturities reflecting the borrowers' rights to call or
prepay their obligations.
<TABLE>
<CAPTION>
AMORTIZED COST ESTIMATED FAIR VALUE
-------------- --------------------
MATURITY
--------
<S> <C> <C>
Due in one year or less $ 2,214 $ 2,183
Due after one year through five years 7,000 6,647
Due after five years through ten years 3,678 3,334
Due after ten years 1,572 1,265
--------- ---------
$14,464 $13,429
--------- ---------
--------- ---------
</TABLE>
Sales of fixed maturities excluding short-term fixed maturities for
the years ended 1994, 1993, and 1992 resulted in proceeds of $5,708,
$8,813, and $5,728, respectively, resulting in gross realized gains of
$71, $192, and $140, and gross realized losses of $100, $219, and
$135, respectively, not including policyholder gains and losses.
Sales of equity securities and other investments for the years ended
December 31, 1994, 1993, and 1992 resulted in proceeds of $159, $127
and $7, respectively, resulting in gross realized gains of $3, $0, and
$3, and gross realized losses of $14, $0, and $0, respectively, not
including policyholder gains and losses.
F-14
<PAGE>
(H) FAIR VALUE OF FINANCIAL INSTRUMENTS NOT DISCLOSED ELSEWHERE :
BALANCE SHEET ITEMS:
<TABLE>
<CAPTION>
1994 1993
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- ------ -------- ------
<S> <C> <C> <C> <C>
ASSETS
Other invested assets:
Policy loans $2,614 $2,614 $1,397 $1,397
Mortgage loans 316 316 228 228
Investments in partnership
and trusts 36 42 14 34
Miscellaneous 67 67 22 63
LIABILITIES
Other policy claims and
benefits $13,001 $12,374 $11,140 $11,415
</TABLE>
The following methods and assumptions were used to estimate the fair
value of each class of financial instrument:policy and mortgage loan
carrying amounts approximate fair value; investments in partnerships
and trusts are based on external market valuations from partnership
and trust management; and other policy claims and benefits payable are
determined by estimating future cash flows discounted at the current
market rate.
3. INCOME TAX
The Company is included in ITT's consolidated U.S. Federal income tax
return and remits to (receives from) ITT a current income tax
provision (benefit) computed in accordance with the tax sharing
arrangements between ITTand its insurance subsidiaries. The
effective tax rate was 32% in 1994, and approximates the U.S.
statutory tax rates of 35% in 1993 and 34% in 1992. The provision for
income taxes was as follows:
<TABLE>
<CAPTION>
INCOME TAX EXPENSE:
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Current $185 $ $ 190 $ $ 124
Deferred (120) (115) (79)
------- -------- --------
$ 65 $ $ 75 $ $ 45
------- -------- --------
------- -------- --------
</TABLE>
F-15
<PAGE>
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
TAX PROVISION AT U.S. STATUTORY RATE $71 $76 $46
Tax-exempt income (3) 0 0
Foreign tax credit (1) 0 0
Other (2) (1) (1)
----- ----- -----
PROVISION FOR INCOME TAX $ 65 $75 $45
----- ----- -----
----- ----- -----
</TABLE>
Income taxes paid were $ 244 , $301 and $36 in 1994, 1993, and 1992
respectively. The current taxes due from or (to) Hartford Fire were $46,
and $19 in 1994 and 1993 respectively.
Deferred tax assets include the following:
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Tax deferred acquisition cost $284 $158
Book deferred acquisition costs and reserves (134) (30)
Employee benefits 7 7
Unrealized loss on "available for sale"
securities 353 3
Investments and other 80 (24)
------- -------
$590 $114
------- -------
------- -------
</TABLE>
Prior to the Tax Reform Act of 1984, the Life Insurance Company Income Tax
Act of 1959 permitted the deferral from taxation of a portion of statutory
income under certain circumstances. In 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, 1994 was $24.
4. REINSURANCE
The Company cedes insurance to non-affiliated insurers in order to limit
its maximum loss. Such transfer does not relieve the Company of its
primary liability. The Company also assumes insurance from other
insurers. Group life and accident and health insurance business is
substantially reinsured to affiliated companies.
Life insurance net retained premiums were comprised of the following:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Gross premiums $1,316 $1,135 $680
Reinsurance assumed 299 93 30
Reinsurance ceded 515 481 451
------- ------- -----
NET RETAINED PREMIUMS $1,100 $747 $259
------- ------- -----
------- ------- -----
</TABLE>
F-16
<PAGE>
Life reinsurance recoveries, which reduced death and other benefits, for
the years ended December 31, 1994, 1993 and 1992 approximated $164, $149,
and $73, respectively.
In December 1994, the Company assumed from a third party approximately
$500 million of corporate owned life insurance reserves on a coinsurance
basis. Also in December 1994, ILA ceded to ITT Lyndon Insurance Company
$1 billion in individual fixed and variable annuities on a modified
coinsurance basis. These transactions did not have a material impact on
consolidated net income.
In October 1994, HLR recaptured approximately $500 million of corporate
owned life insurance from a third party reinsurer. Subsequent to this
transaction, HLIC and HLR restructured their coinsurance agreement from
coinsurance to modified coinsurance, with the assets and policy liabilities
placed in the separate account. In May 1994, HLIC assumed and reinsured
the life insurance policies and the individual annuities of Pacific
Standard with reserves and account values of approximately $400 million.
The Company received cash and investment grade assets to support the life
insurance and individual annuity contract obligations assumed.
In June 1993, the Company assumed and partially reinsured the annuity, life
and accident and sickness insurance policies of Fidelity Bankers Life
Insurance Company in Receivership for Conservation and Rehabilitation, with
account values of $3.2 billion. The Company received cash and investment
grade assets to assume insurance and annuity contract obligations.
Substantially all of these contracts were placed in the Company's separate
accounts.
In November 1993, ILA acquired, through an assumption reinsurance
transaction, substantially all of the individual fixed and variable annuity
business of HLA. As a result of this transaction, the assets and
liabilities of the company increased approximately $1 billion. The excess
of liabilities assumed over assets received, of $2, was recorded as a
decrease to capital surplus. The impact on consolidated net income was not
significant.
On November 4, 1992, the Company entered into a definitive agreement
whereby the Company assumed the contract obligations of Mutual Benefit Life
Assurance Corporation's (Mutual Benefit) individual corporate owned life
insurance (COLI) contracts. The Company received $5.6 billion in cash and
invested assets, $5.3 billion of which were policy loans, from Mutual
Benefit for assuming the contract obligations. Simultaneously, the Company
coinsured approximately 84% of the contract obligations back to Mutual
Benefit, HLR and an unaffiliated reinsurer. In August 1993, the Company
received assets of $300 million for assuming the group COLI contract
obligations of Mutual Benefit, through an assumption reinsurance
transaction. Under the terms of the agreement, the Company coinsured back
75% of the liabilities to Mutual Benefit. All assets supporting Mutual
Benefit's reinsurance liability to HLIC are placed in a "security trust",
with Hartford Life as the sole beneficiary. The impact on 1992
consolidated net income was not significant.
In 1992, all ordinary individual life insurance written and in force in
HLA was assumed by HLIC. As a result of this transaction, the assets of
HLIC increased by approximately $437, liabilities increased approximately
$403. The excess of assets over liabilities of $34 was recorded as an
increase in capital.
5. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
The Company's employees are included in Hartford Fire's noncontributory
defined benefit pension plans. These plans provide pension benefits that
are based on years of service and the employee's compensation during the
last ten years of employment. The Company's funding policy is to
contribute annually an amount between the minimum funding requirements set
forth in the Employee Retirement Income Security Act of 1974 and the
maximum amount that can be deducted for Federal income tax purposes.
Generally, pension costs are funded through the purchase of the Company's
group pension contracts. The cost to the Company was approximately $2, $3
and $2 in 1994, 1993 and 1992, respectively.
The Company provides 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.
Effective January 1, 1992, the Company adopted SFAS No. 106, using the
immediate recognition method for all benefits accumulated to date. As of
June 1992, the Company amended its plans, effective January 1, 1993,
whereby 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 amendments increased deductibles and set a defined dollar cap which
F-17
<PAGE>
limits average company contributions. The effect of these changes is not
material. 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 Hartford Fire, was $1, $1,
and $1, for 1994, 1993, and 1992 respectively.
The assumed rate of future increases in the per capita cost of health care
(the health care trendrate) was 11% for 1994, decreasing ratably to 6 %
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. The assumed weighted average
discount rate was 8.5%. To the extent that the actual experience differs
from the inherent assumptions, the effect will be amortized over the
average future service of the covered employees.
6. BUSINESS SEGMENT INFORMATION
The reportable segments and product groups of HLIC and its subsidiaries are:
INDIVIDUAL LIFE AND ANNUITIES (ILAD)
-Individual life
-Fixed and variable retirement annuities
ASSET MANAGEMENT SERVICES (AMS)
-Group Pension Plans products and services
-Deferred Compensation Plans products and services
-Structured Settlements and lottery annuities
SPECIALTY
-Corporate Owned Life Insurance (COLI) and HLR
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
REVENUES:
ILAD $691 $595 $305
AMS 789 794 770
Specialty 919 425 96
------- ------- -------
$2,399 $1,814 $1,171
------- ------- -------
------- ------- -------
INCOME BEFORE INCOME TAX:
ILAD $139 $129 $73
AMS 38 71 56
Specialty 26 18 5
------- ------- -------
$203 $218 $134
------- ------- -------
------- ------- -------
IDENTIFIABLE ASSETS:
ILAD $26,668 $19,147 $9,474
AMS 13,334 12,416 11,198
Specialty 7,847 6,723 5,910
------- ------- -------
$47,849 $ 38,286 $ 26,582
------- ------- -------
------- ------- -------
</TABLE>
7. STATUTORY NET INCOME AND SURPLUS
Substantially all of the statutory surplus is permanently reinvested or is
subject to dividend restrictions relating to various state regulations
which limit the payment of dividends without prior approval.
Statutory net income and surplus as of December 31 were:
F-18
<PAGE>
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Statutory net income $58 $63 $65
Statutory surplus $941 $812 $614
</TABLE>
The Company prepares its statutory financial statements in accordance with
accounting practices prescribed by the State of Connecticut Insurance
Department. Prescribed statutory accounting practices include publications
of the National Association of Insurance Commissioners ("NAIC"), as well as
state laws, regulations, and general administrative rules.
8. SEPARATE ACCOUNTS:
The Company maintains separate account assets and liabilities totaling
$22.8 billion and $16.3 billion at December 31, 1994 and 1993, respectively
which are reported at fair value. Separate account assets are segregated
from other investments and are not subject to claims that arise out of any
other business of the Company. Investment income and gains and losses of
separate accounts accrue directly to the policyholder. Separate accounts
reflect two categories of risk assumption: non-guaranteed separate
accounts totaling $14.8 billion and $11.5 billion at December 31, 1994 and
1993, respectively, wherein the policyholder assumes the investment risk,
and guaranteed separate account assets totaling $8.0 billion and $4.8
billion at December 31, 1994 and 1993, respectively, wherein the Company
contractually guarantees either a minimum return or account value to the
policyholder. Investment income (including investment gains and losses) on
separate account assets are not reflected in the Consolidated Statements of
Income. Separate account management fees, net of minimum guarantees, were
$256, $189, and $92, in 1994, 1993, and 1992, respectively.
The guaranteed separate accounts include modified guaranteed individual
annuity, and modified guaranteed life insurance. The average credit
interest rate on these contracts is 6.44%. The assets that support these
liabilities are comprised of $7.5 billion in bonds and $.5 billion in
policy loans. The portfolios are segregated from other investments and
are managed so as to minimize liquidity and interest rate risk. In order
to minimize the risk of disintermediation associated with early
withdrawals, individual annuity and modified guaranteed life insurance
contracts carry a graded surrender charge as well as a market value
adjustment. Additional investment risk is hedged using a variety of
derivatives which total $(16.2) million in carrying value and $3.2 billion
in notional amounts.
9. COMMITMENTS AND CONTINGENCIES
In August 1994, HLIC renewed a two year note purchase facility agreement
which in certain instances obligates the Company to purchase up to $100
million in collateralized notes from a third party. The Company is
receiving fees for this commitment. At December 31, 1994, the Company has
not purchased any notes under this agreement.
In March 1987, HLIC guaranteed the commercial mortgages (principal and
accrued interest) that were sold under a pooling and servicing agreement of
the same date. Mortgages aggregating approximately $53.0million were sold
in this transaction, and the remaining balance on these loans is $21.1
million. There was no impact on operations due to this guarantee.
Under insurance guaranty fund laws in most states, insurers doing business
therein can be assessed up to prescribed limits for policyholder losses
incurred by insolvent companies. The amount of any future assessments on
HLIC under these laws cannot be reasonably estimated. Most of these laws
do provide, however, that an assessment may be excused or deferred if it
would threaten an insurer's own financial strength. Additionally, guaranty
fund assessments are used to reduce state premium taxes paid by the Company
in certain states.
The Company is involved in various legal actions, some of which involve
claims for substantial amounts. In the opinion of management the ultimate
liability with respect to such lawsuits, as well as other contingencies, is
not considered material in relation to the consolidated financial position
of the Company.
F-19
<PAGE>
SIGNATURES
Pursuant to the requirements of section 13 or 15d of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Hartford Life Insurance Company
February 24, 1995 by Stephen P. Minihan
------------------------------------- -----------------------------------
Date Stephen P. Minihan
Assistant Vice President and
Controller
Pursuant to the requirements of the Securities Exchange Act of 1934 this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date identified.
Signature Title Date
--------- ----- -----
Principal Executive Officer
Lowndes A. Smith
-----------------------------
Lowndes A. Smith President, Chief Operating February 24, 1995
Officer and Director
Principal Investment Officer
David A. Hall
-----------------------------
David A. Hall Senior Vice President, Chief February 24, 1995
Investment Officer and
Director
Principal Accounting Officer
Stephen P. Minihan
-----------------------------
Stephen P. Minihan Assistant Vice President February 24, 1995
and Controller
Donald R. Frahm
-----------------------------
Donald R. Frahm Chairman, Chief Executive February 24, 1995
Officer and Director
Thomas J. Marra
-----------------------------
Thomas J. Marra Senior Vice President and February 24, 1995
Director
John P. Ginnetti
-----------------------------
John P. Ginnetti Executive Vice President and February 24, 1995
Director
No annual report or proxy material has been sent to the stockholder.
II-1
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION LOCATION
2 Plan of acquisition, reorganization, None
arrangement, liquidation or succession
3(A) Restated Certificate of Incorporation Incorporated by
reference to Hartford
Life 10-K Registration
Statement filed March,
1985 (File No. 2-89516)
3(B) By-laws Incorporated by
reference to Hartford
Life 10-K Registration
Statement filed
March,1985 (File No. 2-
89516)
4 Instruments defining the rights of None
security holders, including indentures
9 Voting trust agreement None
10 Material contracts None
11 Statement of computation of per Not required to be
share earnings filed
12 Statements of computation of ratios Not required to be
filed
13 Annual report to security holder, Form None
10-K or quarterly report to security
holder
18 Letter regarding change in accounting None
principles
19 Previously unfiled documents None
22 Subsidiaries of the Registrant Not required to be
filed
23 Published report regarding matters None
submitted to vote of security holder
24 Consents of experts and counsel None
25 Power of attorney Incorporated by
reference to Hartford
Life S-1 Registration
Statement filed
February, 1984 (File
No. 2-89516)
28 Additional exhibits None
29 Information from reports furnished to Not required to be
state insurance regulatory authorities filed
II-2
<PAGE>
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN AFFILIATES
DECEMBER 31, 1994
(IN MILLIONS)
<TABLE>
<CAPTION>
AMOUNT
SHOWN ON
BALANCE
TYPE OF INVESTMENT COST FAIR VALUE SHEET
--------------------- ----- ---------- ---------
<S> <C> <C> <C>
FIXED MATURITIES
Bonds
U.S. Government and government agencies
and authorities:
- guaranteed and sponsored $1,516 $1,429 $1,429
- guaranteed and sponsored - asset backed 4,256 3,763 3,763
States, municipalities and political
subdivisions 148 137 137
International governments 189 176 176
Public utilities 531 500 500
All other corporate 3,717 3,458 3,458
All other corporate - asset backed 2,442 2,350 2,350
Short - term investments 1,665 1,616 1,616
-------- -------- --------
TOTAL FIXED MATURITIES 14,464 13,429 13,429
EQUITY SECURITIES
Common Stocks - industrial, miscellaneous
and all other 76 68 68
-------- -------- --------
TOTAL FIXED MATURITIES AND EQUITY
SECURITIES 14,540 13,497 13,497
Policy loans 2,614 2,614 2,614
Mortgage loans 316 316 316
Other investments 103 109 107
-------- -------- --------
TOTAL INVESTMENTS $17,573 $16,536 $16,534
-------- -------- --------
-------- -------- --------
</TABLE>
Note: Fair values for stocks and bonds approximate those quotations
published by applicable stock exchanges or are received from other
reliable sources. The fair value for short - term investments
approximates cost. Policy and mortgage loan carrying amounts
approximate fair value.
S-1
<PAGE>
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
(IN MILLIONS)
<TABLE>
<CAPTION>
BENEFITS, AMORTIZ-
CLAIMS ATION OF
AND CLAIM DEFERRED
DEFERRED FUTURE OTHER PREMIUMS NET ADJUST- POLICY OTHER
POLICY POLICY POLICYHOL- AND OTHER INVESTMENT MENT ACQUISI- INSURANCE
ACQUISITION BENEFITS DER FUNDS CONSIDERA- INCOME EXPENSES TION EXPENSES
SEGMENT COSTS * * TIONS (1 ) (2) COSTS (3)
--------------------- ----------- -------- ---------- ---------- ---------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED
DECEMBER 31,
1994
-------------
I LAD $1,708 $582 $4,257 $492 $199 $334 $137 $80
AMS 101 845 10,160 39 750 695 8 48
SPECIALTY 0 463 6,911 569 350 376 0 518
----------- -------- ---------- ---------- ---------- --------- -------- ---------
$1,809 $1,890 $21,328 $1,100 $1,299 $1,405 $145 $646
----------- -------- ---------- ---------- ---------- --------- -------- ---------
----------- -------- ---------- ---------- ---------- --------- -------- ---------
YEAR ENDED
DECEMBER 31,
1993
-------------
I LAD $1,237 $428 $3,535 $423 $172 $249 $97 $120
AMS 97 703 9,026 35 759 662 16 45
SPECIALTY 0 528 5,673 289 136 135 0 272
----------- -------- ---------- ---------- ---------- --------- -------- ---------
$1,334 $1,659 $18,234 $747 $1,067 $1,046 $113 $437
----------- -------- ---------- ---------- ---------- --------- -------- ---------
----------- -------- ---------- ---------- ---------- --------- -------- ---------
YEAR ENDED
DECEMBER 31,
1992
--------------
I LAD $698 $1,115 $1,004 $178 $127 $104 $49 $79
AMS 101 583 8,256 27 743 657 6 51
SPECIALTY 0 46 5,822 54 42 36 0 55
----------- -------- ---------- ---------- ---------- --------- -------- ---------
$799 $1,744 $15,082 $259 $912 $797 $55 $185
----------- -------- ---------- ---------- ---------- --------- -------- ---------
----------- -------- ---------- ---------- ---------- --------- -------- ---------
<FN>
(*) As Restated
(1) Investment income is allocated to the segments based on each segment's
share of investable funds or on a direct basis, where applicable, including
realized capital gains and losses.
(2) Benefits, claims and claim adjustment expenses includes the increase in
liability for future policy benefits and death, disability and other
contract benefit payments.
(3) Other insurance expenses are allocated to the segments based on specific
identification, where possible, and related activities, including dividends
to policyholders.
</TABLE>
S-2
<PAGE>
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE IV - REINSURANCE
(IN MILLIONS)
<TABLE>
<CAPTION>
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
--------- --------- ---------- -------- ----------
YEAR ENDED DECEMBER 31, 1994
----------------------------
<S> <C> <C> <C> <C> <C>
LIFE INSURANCE IN FORCE $136,929 $87,553 $35,016 $84,392 41.5%
--------- --------- ---------- --------
Premiums and other considerations
ILAD $448 $71 $106 $483 22.0%
AMS 39 0 0 39 0.0%
Specialty 521 140 188 569 33.0%
Accident and Health 308 304 5 9 55.6%
--------- --------- ---------- --------
TOTAL $1,316 515 299 1,100 27.2%
--------- --------- ---------- --------
--------- --------- ---------- --------
YEAR ENDED DECEMBER 31, 1993
----------------------------
LIFE INSURANCE IN FORCE $93,099 $71,415 $27,067 $48,751 55.5%
--------- --------- ---------- --------
Premiums and other considerations
ILAD $417 $85 $91 $423 21.5%
AMS 25 0 0 25 0.0%
Specialty 386 97 0 289 0.0%
Accident and Health 307 299 2 10 20.0%
--------- --------- ---------- --------
TOTAL $1,135 $481 $93 $747 12.4%
--------- --------- ---------- --------
--------- --------- ---------- --------
YEAR ENDED DECEMBER 31, 1992
----------------------------
LIFE INSURANCE IN FORCE $44,661 $64,207 $51,430 $31,8841 61.3%
--------- --------- ---------- --------
Premiums and other considerations
ILAD $208 $71 $27 $164 16.5%
AMS 27 0 0 27 0.0%
Specialty 153 99 0 54 0.0%
Accident and Health 292 281 3 14 21.4%
--------- --------- ---------- --------
TOTAL $680 $451 $30 $259 37.9%
--------- --------- ---------- --------
--------- --------- ---------- --------
</TABLE>
S-3
