<PAGE>
As filed with the Securities and Exchange Commission on June 25, 1997
File No. 333-28023
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Pre-Effective Amendment No. 1 to
FORM S-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
HARTFORD LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
CONNECTICUT
(State or other jurisdiction of incorporation or organization)
6355
(Primary Standard Industrial Classification Code Number)
06-094148
(I.R.S. Employer Identification Number)
P.O. BOX 2999
HARTFORD, CONNECTICUT 06104-2999
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
MARIANNE O'DOHERTY, ESQ.
HARTFORD LIFE INSURANCE COMPANIES
P.O. BOX 2999
HARTFORD, CONNECTICUT 06104-2999
(860) 843-6733
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11 (a)(1)
of this form, check the following box. [ ]
<PAGE>
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] _________
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offer. [ ] _________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
Title of Each Proposed Proposed
Class of Amount Offering Aggregate Amount of
Securities to to be Price per Offering Registration
be Registered Registered Unit Price Fee
- ------------- ---------- --------- --------- ------------
Deferred Annuity * * $90,960,000* $None**
Contracts & Participating
Interests Therein
*The maximum aggregate offering price is estimated solely for the purpose of
determining the registration fee. The amount being registered and the
proposed maximum offering price per unit are not applicable in that these
contracts are not issued in predetermined amounts or units.
**All of the $90,960,000 aggregate offering price, was previously registered
on Form S-1 File Number 33-35260 filed on June 6, 1990. Accordingly, the
registrant hereby removes the remaining $90,960,000 in aggregate offering
price from registration under File Number 33-35260 and registers such amount
under this Registration Statement and no registration fee is due under this
Registration Statement.
The Registrant hereby amends this Registration Statement on such date or
dated as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a) may determine.
<PAGE>
HARTFORD LIFE INSURANCE COMPANY
Cross Reference Sheet Pursuant to
Regulation S-K, Item 501(b)
FORM S-2 ITEM NUMBER AND CAPTION HEADING IN PROSPECTUS
<TABLE>
<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus. . . . . . . . . . . . . . . . . Outside Front Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus . . . . . . . . . . . . . . . . . . . . . . . . . . Inside Front Cover Page
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges. . . . . . . . . . . . . . . . . . . Summary; Description of Certificates;
Financial Statements
4. Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investments by Hartford
5. Determination of Offering Price . . . . . . . . . . . . . . . . . . . . Not Applicable
6. Dilution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Not Applicable
7. Selling Security Holders. . . . . . . . . . . . . . . . . . . . . . . . Not Applicable
8. Plan of Distribution. . . . . . . . . . . . . . . . . . . . . . . . . . Distribution of Certificates
9. Description of Securities to be Registered. . . . . . . . . . . . . . . Description of Certificates;
Amendment of Certificates
10. Interests and Named Experts and Counsel . . . . . . . . . . . . . . . . Not Applicable
11. Information with Respect to the Registrant. . . . . . . . . . . . . . . The Company; Financial Statements
12. Incorporation of Certain Information by Reference . . . . . . . . . . . Incorporation of Certain
Information by Reference
13. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities. . . . . . . . . . . . . Not Applicable
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUPPLEMENTER
[LOGO] PROSPECTUS
MODIFIED GUARANTEED ANNUITY CONTRACTS
HARTFORD LIFE INSURANCE COMPANY
P.O. BOX 5085
HARTFORD, CONNECTICUT 06102-5085
TELEPHONE: 1-800-528-9009
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This Prospectus describes participating interests in a group deferred annuity
contract designed and offered to provide retirement programs for you if you are
an eligible individual. Eligible individuals include certain persons who are
employees, retirees or the dependents of employees of employers as well as
certain persons who are members or dependents of members of trade unions, bona
fide associations and other entities who have entered into group deferred
annuity contracts with Hartford Life Insurance Company ("Hartford" or the
"Company"). Eligible individuals also include members or dependents of members
of employee organizations or customers of financial institutions which are
participating in group annuity contracts with the Company.
An individually allocated deferred annuity certificate is offered in certain
states and this certificate may be purchased to accept monies which are eligible
for roll-over to an Individual Retirement Account with a value of $5,000 or
more.
Participation in a Group Contract will be separately accounted for by the
issuance of a Certificate evidencing your interest under the Contract. The
Certificate and Individual Annuity Certificate are hereafter referred to as "the
Certificate."
A minimum single purchase payment of at least $5,000 must accompany the
application for a Certificate. Hartford reserves the right to limit the maximum
single purchase payment amount. No additional payment is permitted on a
Certificate although eligible individuals may purchase more than one
Certificate. (See "Application and Purchase Payment," page 7.)
Purchase payments become part of the general assets of Hartford. Hartford
intends generally to invest proceeds from the Certificates in investment-grade
securities. (See "Investments by Hartford," page 10.)
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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ANNUITIES AND INSURANCE PRODUCTS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED BY ANY BANK, NOR ARE THEY INSURED BY THE FDIC; THEY ARE SUBJECT TO
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED. FOR
A MORE DETAILED DESCRIPTION OF THE RISKS ASSOCIATED WITH PURCHASING A
CERTIFICATE, PLEASE REFER TO PAGES 7 THROUGH 9 OF THIS PROSPECTUS.
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THE DATE OF THIS PROSPECTUS IS JUNE , 1997.
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2 HARTFORD LIFE INSURANCE COMPANY
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AVAILABLE INFORMATION
Hartford is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and in accordance therewith
files reports and other information with the Securities and Exchange Commission
(the "Commission"). Such reports and other information can be inspected and
copied at the public reference facilities of the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C., and at the Commission's Regional Offices
located at 75 Park Place, New York, New York and Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois. Copies of such materials
also can be obtained from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission
maintains a WebSite that contains reports, proxy and information statements and
other information regarding Hartford, which files such documents electronically
with the Commission, at the following address: http://www.sec.gov.
Hartford has filed a registration statement (the "Registration Statement")
relating to the Certificates offered by this Prospectus with the Commission
under the Securities Act of 1933. This Prospectus has been filed as a part of
the Registration Statement and does not contain all of the information set forth
in the Registration Statement and exhibits thereto, and reference is hereby made
to such Registration Statement and exhibits for further information relating to
Hartford and the Certificates. The Registration Statement and the exhibits
thereto may be inspected and copied, and copies can be obtained at prescribed
rates, in the manner set forth in the preceding paragraph.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Annual Report on Form 10-K for the fiscal year ended December 31, 1996,
dated March 31, 1997, and Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997, previously filed by Hartford with the Commission under the
Exchange Act are incorporated herein by reference.
Hartford will provide without charge to each person to whom a copy of this
Prospectus has been delivered, upon the written or oral request of such person,
a copy of the document referred to above which has been incorporated by
reference in this Prospectus, other than exhibits to such document. Requests for
such copies should be directed to Hartford Life Insurance Company, P. O. Box
5085, Hartford, Connecticut 06102-5085, telephone: 1-800-528-9009.
<PAGE>
HARTFORD LIFE INSURANCE COMPANY 3
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TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C> <C> <C> <C>
SUMMARY.......................................................................................................... 5
GLOSSARY OF SPECIAL TERMS........................................................................................ 6
DESCRIPTION OF CERTIFICATES...................................................................................... 7
A. Application and Purchase Payment........................................................................... 7
B. Accumulation Period........................................................................................ 7
1. Initial and Subsequent Guarantee Periods............................................................. 7
2. Establishment of Guarantee Rates and Current Rates................................................... 7
3. Surrenders........................................................................................... 8
(a) General........................................................................................ 8
(b) Market Value Adjustment........................................................................ 8
(c) Special Surrenders............................................................................. 8
4. Premium Taxes........................................................................................ 8
5. Death Benefit........................................................................................ 8
6. Payment Upon Partial or Full Surrender............................................................... 9
C. Annuity Period............................................................................................. 9
1. Electing the Annuity Commencement Date and Form of Annuity........................................... 9
2. Change of Annuity Commencement Date or Annuity Option................................................ 9
3. Annuity Options...................................................................................... 9
4. Annuity Payment...................................................................................... 10
5. Death of Annuitant After Annuity Commencement Date................................................... 10
INVESTMENTS BY HARTFORD.......................................................................................... 10
AMENDMENT OF CERTIFICATES........................................................................................ 11
ASSIGNMENT OF CERTIFICATES....................................................................................... 11
DISTRIBUTION OF CERTIFICATES..................................................................................... 11
FEDERAL TAX CONSIDERATIONS....................................................................................... 11
A. General.................................................................................................... 11
B. Taxation of Hartford....................................................................................... 11
C. Taxation of Annuities -- General Provisions Affecting Purchasers Other than Qualified Retirement Plans..... 11
1. Non-Natural Persons, Corporations, Etc............................................................... 11
2. Other Certificate Owners (Natural Persons)........................................................... 12
a. Distributions Prior to the Annuity Commencement Date........................................... 12
b. Distributions After Annuity Commencement Date.................................................. 12
c. Aggregation of Two or More Annuity Certificates................................................ 13
d. 10% Penalty Tax -- Applicable to Certain Withdrawals and Annuity Payments...................... 13
e. Special Provisions Affecting Certificates Obtained through a Tax-Free Exchange
of Other Annuity or Life Insurance Contracts Purchased Prior to August 14, 1982................ 13
f. Required Distributions......................................................................... 13
D. Information Regarding IRAs and Deferred Compensation Plans................................................. 14
1. Deferred Compensation Plans Under Section 457........................................................ 14
2. Individual Retirement Annuities Under Section 408.................................................... 14
3. Tax Penalties........................................................................................ 15
a. Premature Distributions........................................................................ 15
b. Minimum Distribution Tax....................................................................... 15
c. Excess Distribution Tax........................................................................ 15
E. Federal Income Tax Withholding............................................................................. 15
1. Non-Periodic Distributions........................................................................... 15
2. Periodic Distributions............................................................................... 15
3. Deferred Compensation Plans.......................................................................... 15
</TABLE>
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4 HARTFORD LIFE INSURANCE COMPANY
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<TABLE>
<CAPTION>
PAGE
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<S> <C> <C> <C> <C>
THE COMPANY...................................................................................................... 16
A. Business of Hartford Life Insurance Company................................................................ 16
B. Selected Financial Data.................................................................................... 17
C. Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 18
1. Consolidated Results................................................................................. 18
2. Business Segment Information......................................................................... 20
D. Reinsurance................................................................................................ 20
E. Reserves................................................................................................... 20
F. Investments................................................................................................ 20
G. Competition................................................................................................ 24
H. Employees.................................................................................................. 24
I. Properties................................................................................................. 24
J. Regulation................................................................................................. 24
LEGAL OPINION.................................................................................................... 24
EXPERTS.......................................................................................................... 25
APPENDIX A (MARKET VALUE ADJUSTMENT)............................................................................. 26
FINANCIAL STATEMENTS............................................................................................. 30
</TABLE>
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO DEALER, SALES PERSON, OR OTHER PERSON
IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATION IN CONNECTION
WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE RELIED ON.
THIS CERTIFICATE IS NOT AVAILABLE IN ALL STATES.
<PAGE>
HARTFORD LIFE INSURANCE COMPANY 5
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SUMMARY
Upon application, you select an initial Guarantee Period from among those
then offered by Hartford. During this Guarantee Period, your purchase payment
earns interest at the applicable Initial Guarantee Rate as established by
Hartford. (See, "Initial and Subsequent Guarantee Periods," page 7 and
"Establishment of Guarantee Rates and Current Rates," page 7.)
At the end of each Guarantee Period, a subsequent Guarantee Period of the
same duration will begin unless, within the thirty day period preceding the end
of such Guarantee Period, you elect a different duration from among those
offered by us at that time. In no event may subsequent Guarantee Periods extend
beyond the Annuity Commencement date then in effect.
The Account Value as of the first day of each subsequent Guarantee Period
will earn interest at the Subsequent Guarantee Rate. HARTFORD'S MANAGEMENT WILL
MAKE THE FINAL DETERMINATION AS TO GUARANTEE RATES TO BE DECLARED. WE CANNOT
PREDICT NOR CAN WE GUARANTEE FUTURE GUARANTEE RATES. (See, "Initial and
Subsequent Guarantee Periods," page 7 and "Establishment of Guarantee Rates and
Current Rates," page 7.)
Subject to certain restrictions, total surrenders are permitted. However,
such surrenders may be subject to a Market Value Adjustment. A full surrender
made prior to the end of a Guarantee Period will be subject to a Market Value
Adjustment. A REQUEST FOR SURRENDER AT THE END OF A GUARANTEE PERIOD MUST BE
RECEIVED IN WRITING 30 DAYS PRECEDING THE END OF THE GUARANTEE PERIOD. A MARKET
VALUE ADJUSTMENT WILL NOT BE APPLIED.
A Market Value Adjustment will be applied to your Account Value to purchase
an annuity on the Annuity Commencement Date if the Annuity Commencement Date is
not at the end of a Guarantee Period. To elect an Annuity Option you must notify
us at least 30 days before the end of that Guarantee Period.
In addition, at the end of a Certificate Year we will send you any interest
that has been credited during the Certificate Year if you so request in writing.
No Market Value Adjustment will be imposed on such interest payments. Any such
surrender may, however, be subject to tax. (See, "Surrenders," page 8 and "Tax
Considerations," page 11.)
The Market Value Adjustment reflects the relationship between the Current
Rate for the duration remaining in the Guarantee Period at the time you request
the surrender and the then applicable Guarantee Rate being applied to your
Account Value. Since Current Rates are based in part upon the investment yields
available to Hartford (see "Investments by Hartford," page 10), the effect of
the Market Value Adjustment will be closely related to the levels of such
yields. It is possible, therefore, that, should such yields increase
significantly from the time you purchased your Certificate, the amount you would
receive upon a full surrender of your Certificate may be less than your original
purchase payment. If such yields should decrease significantly, the amount you
would receive upon a full surrender may be more than your original purchase
payment.
We may defer payment of a full surrender for a period not exceeding 6 months
from the date of our receipt of your written notice of surrender or the period
permitted by state insurance law, if less, but such a deferral of payment will
be for a period greater than thirty days only under highly unusual
circumstances. Interest of at least 4% per annum will be paid on any amounts
deferred for more than 30 days if Hartford chooses to exercise this deferral
right. (See, "Payment Upon Partial or Full Surrender," page 9.)
On the Annuity Commencement Date specified by you, Hartford will make a
lump-sum payment or start to pay a series of payments based on the Annuity
Options selected by you. (See, "Annuity Period," page 9.)
The Certificate provides for a Death Benefit. If the Participant dies before
the Annuity Commencement Date and there is no designated Contingent Annuitant
surviving, the Death Benefit will be payable to the Beneficiary as determined
under the Certificate Control Provisions. The Death Benefit is calculated as of
the date we receive written notification of Due Proof of Death at the offices of
Hartford.
If the death occurs on or prior to the Annuity Commencement Date and on or
prior to the Annuitant attaining age 65, then the Death Benefit equals the
higher of the Account Value or the Net Surrender Value as each is calculated as
of the date the Company receives written notification of Due Proof of Death. If
the death occurs prior to the Annuity Commencement Date after the Annuitant
attains age 65, then the death benefit equals the Net Surrender Value. If the
named Beneficiary is the spouse of the Participant and the Annuitant is living,
the spouse may elect, in lieu of receiving the Death Benefit, to become the
Participant and continue the Certificate. (See, "Death Benefit," page 8.)
On any Certificate subject to premium tax, Hartford will pay premium taxes
at the time imposed under applicable law. At its sole discretion, Hartford may
deduct premium taxes at the time Hartford pays such taxes to the applicable
taxing authorities, at the time the Certificate is surrendered or at the time
the Certificate annuitizes. (See, "Premium Taxes," page 8.)
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6 HARTFORD LIFE INSURANCE COMPANY
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GLOSSARY OF SPECIAL TERMS
In this Prospectus "We," "Us" and "Our" refer to Hartford Life Insurance
Company. "You," "Yours" and "Participant" refer to a person/persons who has/have
been issued a Certificate under the group deferred annuity contract.
In addition, as used in this Prospectus, the following terms have the indicated
meanings:
ACCOUNT VALUE: As of any date, the Account Value is the sum of the purchase
payment and all interest earned to that date.
ANNUAL EFFECTIVE RATE OF INTEREST: At the beginning of a year, the rate of
return an investment will earn during that year, where interest is not paid
until the end of the year (i.e., no surrenders or interest withdrawals are made
during the year). If interest withdrawals are taken more frequently than
annually, the total interest for a given year will be less than the Annual
Effective Rate of Interest times the Account Value at the beginning of the year.
ANNUITANT: The person upon whose life the Certificate is issued. The Participant
must also be the Annuitant.
ANNUITY COMMENCEMENT DATE: The date designated in the Certificate or otherwise
by the Participant on which annuity payments are to start.
BENEFICIARY: The person entitled to receive benefits per the terms of the
Certificate in case of the death of the Participant.
CERTIFICATE: The Certificate evidencing a participating interest in the group
annuity contract as set forth in this Prospectus. Any reference in this
Prospectus to Certificate also includes the group annuity contract. Likewise,
any reference in this Prospectus to Contract includes the underlying
Certificate.
CERTIFICATE DATE: The effective date of participation under the group annuity
contract as designated in the Certificate or date of issue of an individual
annuity Certificate.
CERTIFICATE YEAR: A continuous 12 month period commencing on the Certificate
Date and each anniversary thereof.
COMPOUND INTEREST METHOD: The process of interest being reinvested to earn
additional interest on a daily basis. This method results in an exponential
calculation of daily interest.
CONTINGENT ANNUITANT: The spouse of the Participant, if designated by the
Participant, who upon the Annuitant's death, prior to the Annuity Commencement
Date, becomes the Annuitant and also the Participant.
CURRENT RATE: The applicable effective annual interest rate contained in a
schedule of rates established by us from time to time for various durations.
DEPENDENT: The spouse or child of an Employee or Retiree eligible to participate
in this Certificate.
DUE PROOF OF DEATH: A certified copy of the death certificate, an order of a
court of competent jurisdiction, a statement from a physician who attended the
deceased, or any other proof acceptable to the Company.
GROSS SURRENDER VALUE: As of any date, the Account Value specified by you for a
full surrender.
GUARANTEE PERIOD: The period for which either an Initial or Subsequent Guarantee
Rate is credited.
HOME OFFICE: Our offices at P.O. Box 2999, Hartford, CT 06104-2999 or 200
Hopmeadow St., Simsbury, CT 06089.
INITIAL GUARANTEE RATE: The effective annual rate of interest credited and
compounded annually during the initial Guarantee Period.
IN WRITING: A written form satisfactory to us and received at our offices at
P.O. Box 2999, Hartford, Connecticut 06104-2999.
MARKET VALUE ADJUSTMENT: The amount payable as a partial or full surrender made
prior to the end of any Guarantee Period may be adjusted up or down by the
application of this formula.
NET SURRENDER VALUE: The amount payable to you on a full surrender under the
Certificate after the application of any Market Value Adjustment.
SUBSEQUENT GUARANTEE RATE: The effective annual rate of interest established by
us for the applicable subsequent Guarantee Period.
<PAGE>
HARTFORD LIFE INSURANCE COMPANY 7
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DESCRIPTION OF CERTIFICATES
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A. APPLICATION AND PURCHASE PAYMENT
To apply for a Certificate, you need only complete an enrollment form and
make your purchase payment. This Certificate is purchased by completing an
enrollment form and submitting it to Hartford along with your purchase payment
for its approval.
The Certificates are issued within a reasonable time after the receipt of a
properly completed application and the payment of a single purchase payment. You
may not contribute additional purchase payments to a Certificate in the future.
You may, however, purchase additional Certificates, if you are an eligible
individual, at then prevailing Guarantee Rates and terms.
The minimum purchase payment in relation to a Certificate is $5,000.
Hartford retains the right to limit the amount of the maximum purchase payment.
Your purchase payment becomes part of our general assets and is credited to
an account we establish for you. We will issue your Certificate and confirm your
purchase payment in writing within five business days of receipt. You start
earning interest on your account the day the purchase payment is applied.
In the event that your application or an order to purchase is not properly
completed, we will attempt to contact you in writing or by telephone. We will
return the purchase payment three weeks after its receipt by us if the
application or an order to purchase has not, by that time, been properly
completed.
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B. ACCUMULATION PERIOD
1. INITIAL AND SUBSEQUENT GUARANTEE PERIODS
Upon enrollment, you will select the duration of your Initial Guarantee
Period from among those durations offered by us. The duration you select and
amount of your purchase payment will determine your Initial Guarantee Rate, and
your purchase payment (less applicable premium taxes, if any) will earn interest
at this Initial Guarantee Rate which is an Annual Effective Rate of Interest.
Interest is credited daily to Your account using the Compound Interest Method.
With compound interest, the total investment of principal and interest earned to
date is invested at all times. You continue to earn interest on interest already
earned. However, when withdrawals are made during the year, interest on the
amount of the withdrawals is lost for the remainder of the year.
Unless you elect to make a full surrender or elect an annuity option (see,
"Surrenders," page 8), a subsequent Guarantee Period will automatically commence
at the end of a Guarantee Period. Each subsequent Guarantee Period will be the
same duration as the previous Guarantee Period unless you elect in writing on
any day within the thirty day period preceding the end of the previous Guarantee
Period, a Guarantee Period of a different duration from among those offered by
us at that time.
In no event may subsequent Guarantee Periods extend beyond the Annuity
Commencement Date then in effect. For example, if you are age 62 upon the
expiration of a Guarantee Period and you have chosen age 65 as an Annuity
Commencement Date, we will provide a three year Guarantee Period to equal the
number of years remaining before your Annuity Commencement Date. Your Account
Value will then earn interest at a Guarantee Rate which we have declared for
that duration. The Guarantee Rate for the Guarantee Period automatically applied
in these circumstances may be higher or lower than the Guarantee Rate for longer
durations.
The Account Value at the beginning of any subsequent Guarantee Period will
be equal to the Account Value at the end of the Guarantee Period just ending.
This Account Value will earn interest at the Subsequent Guarantee Rate.
Within thirty days preceding the end of a Guarantee Period, we will notify
you of the expiration of the current Guarantee Period.
2. ESTABLISHMENT OF GUARANTEE RATES AND CURRENT RATES
The Initial Guarantee Rate for the Guarantee Period you choose will be
determined on the date your Purchase Payment and enrollment form are received in
good order at the Home Office. Current Rates will be established periodically
along with the Guarantee Rates which will be applicable to subsequent Guarantee
Periods. After the end of each Certificate Year, we will send you a confirmation
which will show (a) your Account Value as of the end of the preceding
Certificate Year, (b) your Account Value at the end of the current Certificate
Year, and (c) the rate of interest being credited to your Certificate.
Hartford has no specific formula for determining the rate of interest that
it will declare as Current Rates or Guarantee Rates in the future. The
determination of Current Rates and Guarantee Rates will be reflective of
interest rates available on the types of debt instruments in which Hartford
intends to invest the proceeds attributable to the Certificates. (See,
"Investments by Hartford," page 10.) In addition, Hartford's management may also
consider various other factors in determining Current Rates and Guarantee Rates
for a given period, including, regulatory and tax requirements; sales
commissions and administrative expenses borne by Hartford; general economic
trends; and
<PAGE>
8 HARTFORD LIFE INSURANCE COMPANY
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competitive factors. HARTFORD'S MANAGEMENT WILL MAKE THE FINAL DETERMINATION AS
TO CURRENT AND GUARANTEE RATES TO BE DECLARED. WE CANNOT PREDICT NOR CAN WE
GUARANTEE FUTURE CURRENT RATES OR GUARANTEE RATES.
3. SURRENDERS
(A) GENERAL
Full surrenders may be made under a Certificate at any time and will
terminate the Certificate.
In the case of all surrenders, the Account Value will be reduced by the
Gross Surrender Value on the Surrender Date and the Net Surrender Value will be
payable to you. The Net Surrender Value equals:
(A - B) X C, where:
A = the Gross Surrender Value,
B = any unpaid premium tax, (see page 8),
C = the Market Value Adjustment (see page 8).
Hartford will, upon request, inform you of the amount payable upon a full
surrender.
Any full, or special surrender may be subject to tax. (See, "Tax
Considerations," page 11.)
(B) MARKET VALUE ADJUSTMENT
The amount payable on a partial or full surrender made preceding the end of
any Guarantee Period may be adjusted up or down by the application of the Market
Value Adjustment. Where applicable, the Market Value Adjustment is applied to
Gross Surrender Value.
In the case of a full surrender, the Market Value Adjustment will reflect
the relationship between the Current Rate for the duration remaining in the
Guarantee Period at the time you request the surrender, and the Guarantee Rate
then applicable to your Certificate. Generally, if your Guarantee Rate is lower
than the applicable Current Rate, then the application of the Market Value
Adjustment will result in a lower payment upon surrender. Similarly, if your
Guarantee Rate is higher than the applicable Current Rate, the application of
the Market Value Adjustment will result in a higher payment upon surrender.
For example, assume you purchase a Certificate and select an initial
Guarantee Period of ten years and our Guarantee Rate for that duration is 7% per
annum. Assume at the end of seven years you make a total surrender. If the three
year Current Rate is then 5%, the amount payable upon surrender will increase
after the application of the Market Value Adjustment. On the other hand, if such
Current Rate is higher than your Guarantee Rate, for example, 8%, the
application of the Market Value Adjustment will cause a decrease in the amount
payable to you upon this surrender.
Since Current Rates are based in part upon the investment yields available
to Hartford (see, "Investments By Hartford," page 10), the effect of the Market
Value Adjustment will be closely related to the levels of such yields. It is
theoretically possible, therefore, that, should such yields increase
significantly from the time you purchased your Certificate, the amount you would
receive upon a full surrender of your Certificate could be less than your
original purchase payment.
The formula for calculating the Market Value Adjustment is set forth in
Appendix A to this Prospectus, which also contains an additional illustration of
the application of the Market Value Adjustment.
(C) SPECIAL SURRENDERS
A Market Value Adjustment will not be applied to a full surrender made at
the end of a Guarantee Period. A request for a surrender at the end of a
Guarantee Period must be received, in writing, during the 30 day period
preceding or within five business days after the end of said Guarantee Period.
A Market Value Adjustment will be applied to your account value to purchase
an annuity on the Annuity Commencement Date if the Annuity Commencement Date is
not at the end of a Guarantee Period. To elect an Annuity Option you must notify
us at least 30 days before the end of that Guarantee Period.
In addition, we will send you any interest that has been credited during the
prior Certificate Year if you so request in writing within 30 days prior to the
end of the Certificate Year. No Market Value Adjustment will be imposed on such
interest payments. Any such surrender may, however, be subject to tax.
4. PREMIUM TAXES
A deduction is also made for premium taxes, if applicable, imposed by a
state or other governmental entity. Certain states impose a premium tax,
currently ranging up to 3.5%. Some states assess the tax at the time purchase
payments are made; others assess the tax at the time of annuitization. Hartford
will pay premium taxes at the time imposed under applicable law. At its sole
discretion, Hartford may deduct premium taxes at the time Hartford pays such
taxes to the applicable taxing authorities, upon surrender, or when annuity
payments commence.
5. DEATH BENEFIT
If the Annuitant dies before the Annuity Commencement Date and there is no
designated Contingent Annuitant surviving, the Death Benefit will be payable to
the Beneficiary as determined under the Certificate Control Provisions. The
Death Benefit is calculated as of the date we receive written notification of
Due Proof of Death at the offices of Hartford.
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HARTFORD LIFE INSURANCE COMPANY 9
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If the death occurs prior to the Annuity Commencement Date and on or prior
to the Annuitant attaining age 65, then the death benefit equals the higher of
the Account Value or the Net Surrender Value as each is calculated as of the
date the Company receives written notification of Due Proof of Death. If the
death occurs prior to the Annuity Commencement Date after the Annuitant attains
age 65, then the death benefit equals the Net Surrender Value.
The Death Benefit may be taken in one sum, to be paid within six months
after the date we receive Due Proof of Death, or under any of the Annuity
Options available under the Contract, provided, however, that: (a) in the event
of the death of any Participant prior to the Annuity Commencement Date, any
Annuity Option selected must provide that any amount payable as a Death Benefit
will be distributed within 5 years of the date of death; and (b) if any
Participant or Annuitant dies on or after the Annuity Commencement Date, any
remaining interest in the Contract will be paid at least as rapidly as under the
method of distribution in effect at the time of death, or, if the benefit is
payable over a period not extending beyond the life expectancy of the
Beneficiary or over the life of the Beneficiary, such distribution must commence
within one year of the date of death. Notwithstanding the foregoing, in the
event of the Participant's death where the sole Beneficiary is the spouse of the
Participant and the Annuitant or Contingent Annuitant is living, such spouse may
elect, in lieu of receiving the Death Benefit, to be treated as the Participant.
If the Certificate is owned by a corporation or other non-individual, the
Death Benefit payable upon the death of the Annuitant preceding the Annuity
Commencement Date will be payable only as one sum or under the same Annuity
Options and in the same manner as if an individual Certificate owner died on the
date of the Annuitant's death.
6. PAYMENT UPON PARTIAL OR FULL SURRENDER
We may defer payment of a full surrender for a period not exceeding 6 months
from date of our receipt of your notice of surrender or the period permitted by
state insurance law, if less. Only under highly unusual circumstances will we
defer a surrender payment more than thirty days, and if we defer payment for
more than 30 days, we will pay interest of at least 4% per annum on the amount
deferred. While all circumstances under which we could defer payment upon
surrender may not be foreseeable at this time, such circumstances could include,
for example, a time of an unusually high surrender rate among Participants,
accompanied by a radical shift in interest rates. If we intend to withhold
payment for more than thirty days, we will notify you in writing. We will not,
however, defer payment for more than thirty days for any surrender which is to
be effective at the end of any Guarantee Period.
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C. ANNUITY PERIOD
1. ELECTING THE ANNUITY COMMENCEMENT DATE AND
FORM OF ANNUITY
Upon application for a Certificate, you select an Annuity Commencement Date.
Within 30 days preceding your Annuity Commencement Date you may elect to have
all or a portion of your Net Surrender Value paid in a lump sum on your Annuity
Commencement Date. Alternatively, or with respect to any portion of your Net
Surrender Value not paid in a lump sum, you may elect, at least 30 days
preceding the Annuity Commencement Date, to have your Account Value with a
Market Value Adjustment, if applicable, (less applicable premium taxes, if any)
applied on the Annuity Commencement Date under any of the Annuity Options
described below. In the absence of such election, Account Value with a Market
Value Adjustment, if applicable, will be applied on the Annuity Commencement
Date under the Second Option to provide a life annuity with 120 monthly payments
certain.
2. CHANGE OF ANNUITY COMMENCEMENT DATE OR ANNUITY OPTION
You may change the Annuity Commencement Date and/or the Annuity Option from
time to time, but any such change must be made in writing and received by us at
least 30 days preceding the scheduled Annuity Commencement Date. Also, the
proposed Annuity Commencement Date may not be beyond the later of the
Annuitant's 90th birthday or the end of the Initial Guarantee Period provided
such Initial Guarantee Period is 10 years or less.
3. ANNUITY OPTIONS
Any one of the following Annuity Options may be elected:
FIRST OPTION -- Life Annuity
An annuity payable monthly during the lifetime of the Annuitant, and
terminating with the last monthly payment due preceding the death of the
Annuitant. It would be possible under this Option for an Annuitant to receive
only one Annuity payment if he died prior to the due date of the second Annuity
payment, two payments if he died before the due date of the third Annuity
payment and so on.
SECOND OPTION -- Life Annuity with 120, 180, or 240 Monthly Payments Certain
An annuity providing monthly income to the Annuitant for a fixed period of
120 months, 180 months, or 240 months (as selected), and for as long thereafter
as the Annuitant shall live.
THIRD OPTION -- Cash Refund Life Annuity
An annuity payable monthly during the lifetime of the Annuitant provided
that, at the death of the Annuitant, the Beneficiary will receive an additional
payment equal to the
<PAGE>
10 HARTFORD LIFE INSURANCE COMPANY
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excess, if any, of (a) over (b) where (a) is the Account Value applied on the
Annuity Commencement Date under this Option and (b) is the dollar amount of
annuity payments already paid.
FOURTH OPTION -- Joint and Last Survivor Life Annuity
An annuity payable monthly during the joint lifetime of the Annuitant and a
designated second person, and thereafter during the remaining lifetime of the
survivor, ceasing with the last payment preceding the death of the survivor. It
would be possible under this Option for the Annuitant, and designated second
person in the event of the common or simultaneous death of the parties, to
receive only one payment in the event of death prior to the due date for the
second payment and so on.
FIFTH OPTION -- Payments for a Designated Period
An amount payable monthly for the number of years selected which may be from
5 to 30 years.
The Tables in the Certificate provide for guaranteed dollar amounts of
monthly payments for each $1,000 applied under the five Annuity Options. Under
the First, Second, or Third Options, the amount of each payment will depend upon
the age of the Annuitant at the time the first payment is due. Under the Fourth
Option, the amount of each payment will depend upon the age of both payees at
the time the first payment is due.
The Tables for the First, Second, Third and Fourth Options are based on the
1983a Individual Annuity Mortality Table with ages set back one year and a net
investment rate of 4% per annum. The table for the Fifth Option is based on a
net investment rate of 4% per annum. We may, from time to time, at our
discretion if mortality and interest rates justify, apply other tables which
will result in higher monthly payments for each $1,000 applied under one or more
of the five Annuity Options.
4. ANNUITY PAYMENT
The first payment under any Annuity Option will be made on the Annuity
Commencement Date. Subsequent payments will be made on the same day of each
month in accordance with the manner of payment selected.
The option elected must result in a payment of an amount at least equal to
the minimum payment amount according to Company rules then in effect. If at any
time payments are less than the minimum payment amount, the Company has the
right to change the frequency to an interval resulting in a payment at least
equal to the minimum. If any amount due is less than the minimum per year, the
Company may make other arrangements that are equitable to the Annuitant.
Once annuity payments have commenced, no surrender of the annuity benefit
(including benefits under the Fifth Option) can be made for the purpose of
receiving a lump sum settlement in lieu thereof.
5. DEATH OF ANNUITANT AFTER ANNUITY COMMENCEMENT DATE
In the event of the death of the Annuitant after the Annuity Commencement
Date, the present values on the date of death of the current dollar amount of
any remaining guaranteed payments will be paid in one sum to the Beneficiary
designated by you unless other provisions shall have been made and approved by
us. Calculations of such present value will be based on the interest rate that
is used by us to determine the amount of each certain payment.
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INVESTMENTS BY HARTFORD
Assets of Hartford must be invested in accordance with the requirements
established by applicable state laws regarding the nature and quality of
investments that may be made by life insurance companies and the percentage of
their assets that may be committed to any particular type of investment. In
general, these laws permit investments, within specified limits and subject to
certain qualifications, in federal, state, and municipal obligations, corporate
bonds, preferred and common stocks, real estate mortgages, real estate and
certain other investments. (See page 16 for percentage breakdown of investments
of Hartford.)
Proceeds from the Certificate will be deposited in Hartford's General
Account. All assets of Hartford would be available to meet the guarantees under
the Annuity.
Nonetheless, in establishing Guarantee Rates and Current Rates, Hartford
intends to take into account the yields available on the instruments in which it
intends to invest the proceeds from the Certificates. (See, "Establishment of
Guarantee Rates and Current Rates," page 7.) Hartford's investment strategy with
respect to the proceeds attributable to the Certificates will generally be to
invest in investment-grade debt instruments having durations tending to match
the applicable Guarantee Periods.
Investment-grade debt instruments in which Hartford intends to invest the
proceeds from the Certificates include:
Securities issued by the United States Government or its agencies or
instrumentalities, which issues may or may not be guaranteed by the United
States Government.
Debt securities which have an investment grade, at the time of purchase,
within the four highest grades assigned by Moody's Investors Services, Inc.
(Aaa, Aa, A or Baa), Standard & Poor's Corporation (AAA, AA, A or BBB) or any
other nationally recognized rating service.
<PAGE>
HARTFORD LIFE INSURANCE COMPANY 11
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Other debt instruments, including but not limited to, issues of or
guaranteed by banks or bank holding companies and corporations, which
obligations, although not rated by Moody's or Standard & Poor's are deemed by
Hartford's management to have an investment quality comparable to securities
which may be purchased as stated above.
While the foregoing generally describes our investment strategy with respect
to the proceeds attributable to the Certificates, we are not obligated to invest
the proceeds attributable to the Certificate according to any particular
strategy, except as may be required by Connecticut and other state insurance
laws.
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AMENDMENT OF CERTIFICATES
We reserve the right to amend the Certificates to meet the requirements of
applicable federal or state laws or regulations. We will notify you in writing
of any such amendments.
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ASSIGNMENT OF CERTIFICATES
Your rights as evidenced by a Certificate may be assigned as permitted by
applicable law. An assignment will not be binding upon us until we receive
notice from you in writing. We assume no responsibility for the validity or
effect of any assignment. You should consult your tax adviser regarding the tax
consequences of an assignment.
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DISTRIBUTION OF CERTIFICATES
Hartford Securities Distribution Company, Inc. ("HSD") serves as principal
underwriter for the Contracts. HSD is a wholly-owned subsidiary of Hartford. The
principal business address of HSD is the same as Hartford. HSD is registered
with the Commission under the Securities Exchange Act of 1934 as a Broker-Dealer
and is a member of the National Association of Securities Dealers, Inc.
("NASD").
The securities will be sold by salespersons of HSD who represent Hartford as
insurance and Variable Annuity agents and who are registered representatives of
Broker-Dealers who have entered into distribution agreements with HSD.
HSD is registered with the Commission under the Securities and Exchange Act
of 1934 as a Broker-Dealer and is a member of the NASD.
Hartford will pay a maximum commission of 0.5% for the sale of a
Certificate.
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FEDERAL TAX CONSIDERATIONS
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A. GENERAL
SINCE THE TAX LAW IS COMPLEX AND SINCE TAX CONSEQUENCES WILL VARY ACCORDING
TO THE ACTUAL STATUS OF THE PARTICIPANT INVOLVED, LEGAL AND TAX ADVICE MAY BE
NEEDED BY A PERSON, EMPLOYER OR OTHER ENTITY CONTEMPLATING THE PURCHASE OF A
CERTIFICATE DESCRIBED IN THIS PROSPECTUS.
It should be understood that any detailed description of the Federal income
tax consequences regarding the purchase of the Certificates cannot be made in
this Prospectus and that special tax rules may be applicable with respect to
certain purchase situations not discussed herein. In addition, no attempt is
made here to consider any applicable state or other tax laws. For detailed
information, a qualified tax adviser should always be consulted. This discussion
is based upon Hartford's understanding of existing federal income tax laws as
they are currently interpreted. No representation is made as to the likelihood
of continuation of the present federal income tax laws or of the current or
future interpretations of those laws by the Internal Revenue Service.
THE FOLLOWING DISCUSSION IS GENERAL AND IS NOT INTENDED AS LEGAL ADVICE
REGARDING THE TAX LAWS. Any person with questions about the tax consequences
regarding the Certificates should consult a competent tax adviser prior to
making any decisions.
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B. TAXATION OF HARTFORD
Hartford is taxed as a life insurance company under the Internal Revenue
Code of 1986, as amended (the "Code"). The assets underlying the Certificates
will be owned by Hartford. The income earned on such assets will be Hartford's
income.
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C. TAXATION OF ANNUITIES -- GENERAL
PROVISIONS AFFECTING PURCHASERS OTHER
THAN QUALIFIED RETIREMENT PLANS
Section 72 of the Code governs the taxation of annuities in general.
1. NON-NATURAL PERSONS, CORPORATIONS, ETC.
Section 72 contains provisions for Certificate owners which are non-natural
persons. Non-natural persons include corporations, trusts, and partnerships. The
annual net increase in the value of the Certificate is currently
includable in the gross income of a non-natural person unless the non-natural
person holds the Certificate as an
<PAGE>
12 HARTFORD LIFE INSURANCE COMPANY
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agent for a natural person. There is an exception from current inclusion for
certain annuities held by structured settlement companies, certain annuities
held by an employer with respect to a terminated qualified retirement plan and
certain immediate annuities. A non-natural person which is a tax-exempt entity
for federal tax purposes will not be subject to income tax as a result of this
provision.
If the Certificate owner is not an individual, Section 72 requires that the
primary Annuitant shall be treated as the Certificate owner for purposes of
making the required distributions. If the Certificate owner is not an
individual, then a change in the primary Annuitant will be treated as the death
of the Certificate owner for purposes of required distributions where the
Certificate owner dies before the entire interest in the Certificate is
distributed.
2. OTHER CERTIFICATE OWNERS (NATURAL PERSONS).
In general, and with certain exceptions, interest or earnings credited under
the Certificate are not included in the Certificate owner's income for tax
purposes until actually distributed from the Certificate.
The provisions of Section 72 of the Code concerning distributions are
summarized briefly below. Also summarized are special rules affecting
distributions from Certificates obtained in a tax-free exchange for other
annuity contracts or life insurance contracts which were purchased prior to
August 14, 1982.
A. DISTRIBUTIONS PRIOR TO THE ANNUITY
COMMENCEMENT DATE.
i. Total premium payments less amounts received which were not includable in
gross income equal the "investment in the contract" under Section 72 of the
Code.
ii. To the extent that the value of the Certificate (ignoring any surrender
charges except on a full surrender) exceeds the "investment in the
contract," such excess constitutes the "income on the contract."
iii. Any amount received or deemed received prior to the Annuity Commencement
Date (e.g., upon a partial surrender) is deemed to come first from any such
"income on the contract" and then from "investment in the contract," and for
these purposes such "income on the contract" shall be computed by reference
to any
aggregation rule in subparagraph 2.c. below. As a result, any such amount
received or deemed received (1) shall be includable in gross income to the
extent that such amount does not exceed any such "income on the contract,"
and (2) shall not be includable in gross income to the extent that such
amount does exceed any such "income on the contract." If at the time that
any amount is received or deemed received there is no "income on the
contract" (e.g., because the gross value of the Certificate does not exceed
the "investment in the contract" and no aggregation rule applies), then such
amount received or deemed received will not be includable in gross income,
and will simply reduce the "investment in the contract."
iv. The receipt of any amount as a loan under the Certificate or the assignment
or pledge of any portion of the value of the Certificate shall be treated as
an amount received for purposes of this subparagraph a. and the next
subparagraph b.
v. In general, the transfer of the Certificate, without full and adequate
consideration, will be treated as an amount received for purposes of this
subparagraph a. and the next subparagraph b. This transfer rule does not
apply, however, to certain transfers of property between spouses or incident
to divorce.
B. DISTRIBUTIONS AFTER ANNUITY COMMENCEMENT DATE.
Annuity payments made periodically after the Annuity Commencement Date are
excluded from gross income to the extent that part of the amount of the payment
bears the same ratio to the payment as the "investment in the contract" bears to
the expected return under the Certificate (the "exclusion ratio").
i. When the total of amounts excluded from income by application of the
exclusion ratio is equal to the investment in the contract as of the Annuity
Commencement Date, any additional payments (including surrenders) will be
entirely includable in gross income.
ii. If the annuity payments cease by reason of the death of the Annuitant and,
as of the date of death, the amount of annuity payments excluded from gross
income by the exclusion ratio does not exceed the investment in the contract
as of the Annuity Commencement Date, then the remaining portion of
unrecovered investment shall be allowed as a deduction for the last taxable
year of the Annuitant.
iii. Generally, nonperiodic amounts received or deemed received after the
Annuity Commencement Date are not entitled to any exclusion ratio and shall
be fully includable in gross income. However, upon a full surrender after
the Annuity Commencement Date, only the excess of the amount received (after
any surrender charge) over the remaining "investment in the contract" shall
be includable in gross income (except to the extent that the aggregation
rule referred to in the next subparagraph c. may apply).
iv. For annuity payments made under a qualified plan, the portion of each
annuity payment that represents nontaxable return of basis is generally
equal to the total investment in the Certificate as of the Annuity
Commencement Date, divided by the number of anticipated payments, which is
determined by reference to the age of the Annuitant under a table in Section
72(d) of the Code.
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HARTFORD LIFE INSURANCE COMPANY 13
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C. AGGREGATION OF TWO OR MORE ANNUITY CERTIFICATES.
Certificates issued after October 21, 1988 by the same insurer (or
affiliated insurer) to the same Certificate owner within the same calendar year
(other than certain contracts held in connection with a tax-qualified retirement
arrangement) will be treated as one annuity Certificate for the purpose of
determining the taxation of distributions prior to the Annuity Commencement
Date. An annuity contract received in a tax-free exchange for another annuity
contract or life insurance contract may be treated as a new Certificate for this
purpose. HL believes that for any annuity subject to such aggregation, the
values under the Certificates and the investment in the contracts will be added
together to determine the taxation under subparagraph 2.a., above, of amounts
received or deemed received prior to the Annuity Commencement Date. Withdrawals
will first be treated as withdrawals of income until all of the income from all
such Certificates is withdrawn. As of the date of this Prospectus, there are no
regulations interpreting this provision.
D. 10% PENALTY TAX -- APPLICABLE TO CERTAIN
WITHDRAWALS AND ANNUITY PAYMENTS.
i. If any amount is received or deemed received on the Certificate (before or
after the Annuity Commencement Date), the Code applies a penalty tax equal
to ten percent of the portion of the amount includable in gross income,
unless an exception applies.
ii. In general, the 10% penalty tax will not apply to the following
distributions (exceptions vary based upon the precise plan involved):
1. Distributions made on or after the date the recipient has attained the
age of 59 1/2.
2. Distributions made on or after the death of the holder or where the
holder is not an individual, the death of the primary annuitant.
3. Distributions attributable to a recipient's becoming disabled.
4. A distribution that is part of a scheduled series of substantially equal
periodic payments for the life (or life expectancy) of the recipient (or
the joint lives or life expectancies of the recipient and the
recipient's Beneficiary).
5. Distributions of amounts which are allocable to the "investment in the
contract" prior to August 14, 1982 (see next subparagraph e.).
E. SPECIAL PROVISIONS AFFECTING CERTIFICATES OBTAINED
THROUGH A TAX-FREE EXCHANGE OF OTHER ANNUITY OR
LIFE INSURANCE CONTRACTS PURCHASED PRIOR TO
AUGUST 14, 1982.
If the Certificate was obtained by a tax-free exchange of a life insurance
or annuity Certificate purchased prior to August 14, 1982, then any amount
received or deemed received prior to the Annuity Commencement Date shall be
deemed to come (1) first from the amount of the "investment in the contract"
prior to August 14, 1982 ("pre-8/14/82 investment") carried over from the prior
Certificate, (2) then from the portion of the "income on the contract" (carried
over to, as well as accumulating in, the successor Certificate) that is
attributable to such pre-8/14/82 investment, (3) then from the remaining "income
on the contract" and (4) last from the remaining "investment in the contract."
As a result, to the extent that such amount received or deemed received does not
exceed such pre-8/14/82 investment, such amount is not includable in gross
income., In addition, to the extent that such amount received or deemed received
does not exceed the sum of (a) such pre-8/14/82 investment and (b) the "income
on the contract" attributable thereto, such amount is not subject to the 10%
penalty tax. In all other respects, amounts received or deemed received from
such post-exchange Certificates are generally subject to the rules described in
this subparagraph 3.
F. REQUIRED DISTRIBUTIONS
i. Death of Certificate owner or Primary Annuitant
Subject to the alternative election or spouse beneficiary provisions in ii.
or iii. below:
1. If any Certificate owner dies on or after the Annuity Commencement Date
and before the entire interest in the Certificate has been distributed,
the remaining portion of such interest shall be distributed at least as
rapidly as under the method of distribution being used as of the date of
such death;
2. If any Certificate owner dies before the Annuity Commencement Date, the
entire interest in the Certificate will be distributed within 5 years
after such death; and
3. If the Certificate owner is not an individual, then for purposes of 1.
or 2. above, the primary annuitant under the Certificate shall be
treated as the Certificate owner, and any change in the primary
annuitant shall be treated as the death of the Certificate owner. The
primary annuitant is the individual, the events in the life of whom are
of primary importance in affecting the timing or amount of the payout
under the Certificate.
ii. Alternative Election to Satisfy Distribution Requirements
If any portion of the interest of a Certificate owner described in i. above
is payable to or for the benefit of a designated beneficiary, such
beneficiary may elect to have the portion distributed over a period that
does not extend beyond the life or life expectancy of the beneficiary. The
election and payments must begin within a year of the death.
<PAGE>
14 HARTFORD LIFE INSURANCE COMPANY
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iii. Spouse Beneficiary
If any portion of the interest of a Certificate owner is payable to or for
the benefit of his or her spouse, and the Annuitant or Contingent Annuitant
is living, such spouse shall be treated as the Certificate owner of such
portion for purposes of section i. above.
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D. INFORMATION REGARDING IRAS AND
DEFERRED COMPENSATION PLANS
The Certificates may be used as Individual Retirement Annuities ("IRAs") or
in connection with Deferred Compensation Plans established and maintained by
state or local governments or tax-exempt organizations. Important differences
exist between the tax rules which are applicable to IRAs and Deferred
Compensation Plans. These rules are complex and may vary depending on individual
circumstances. Adverse tax consequences may result from contributions in excess
of applicable limits, distributions prior to age 59 1/2 (subject to certain
exceptions); distributions that do not conform to applicable commencement and
minimum distribution rules; aggregate distributions in excess of a specified
annual amount; and in other circumstances. Therefore, no attempt is made to
provide more than general information about the use of the Certificates as IRAs
or when owned by eligible employers in connection with Deferred Compensation
Plans. Owners, Annuitants, and Beneficiaries are cautioned that the rights of
any person to any benefits under a Deferred Compensation Plan may be subject to
the terms and conditions of the plan itself, regardless of the terms and
conditions of the Certificates, but that Hartford is not bound by the terms and
conditions of such plans to the extent such terms conflict with the
Certificates, unless Hartford specifically consents to be bound. A brief
description of some of the federal income tax rules which apply to IRAs and
Deferred Compensation Plans is set forth below. Hartford may amend the
Certificates as necessary to conform it to the requirements of applicable law.
1. DEFERRED COMPENSATION PLANS UNDER SECTION 457.
Employees and independent contractors performing services for such employers
may contribute on a before tax basis to the Deferred Compensation Plan of their
employer in accordance with the employer's plan and Section 457 of the Code.
Section 457 places limitations on contributions to Deferred Compensation Plans
maintained by a State ("State" means a State, a political sub-division of a
State, and an agency or instrumentality of a State or political sub-division of
a State) or other tax-exempt organization. Generally, the maximum amount that
may be deferred under a Section 457 plan is the lesser of $7,500 or 33 1/3% of
compensation. The $7,500 limit will be adjusted for increases in the cost of
living. The plan may also provide for additional "catch-up" deferrals during the
three taxable years ending before a Participant attains normal retirement age.
Amounts deferred under a Section 457 plan must be held in a trust (or
custodial account or annuity contract) for the exclusive benefit of plan
participants and their beneficiaries. Amounts deferred under plans currently in
existence, however, do not have to be placed in trust until January 1, 1999.
Therefore, until January 1, 1999, for plans already in existence, an employee
electing to participate in a Deferred Compensation Plan should understand that
his or her rights and benefits are governed strictly by the terms of the plan
and that the employer is the legal owner of any contract issued with respect to
the plan. The employer, as owner of the contract(s), retains all voting and
redemption rights which may accrue to the contract(s) issued with respect to the
plan. The participating employee should look to the terms of his or her plan for
any charges in regard to participating therein other than those disclosed in
this Prospectus. Participants should also be aware that effective August 20,
1996, the Small Business Job Protection Act of 1996 requires that all assets and
income of an eligible Deferred Compensation Plan established by a governmental
employer which is a State, a political subdivision of a State, or any agency or
instrumentality of a State or political subdivision of a State, must be held in
trust (or under certain specified annuity contracts or custodial accounts) for
the exclusive benefit of Participants and their Beneficiaries. Special
transition rules apply to such governmental Deferred Compensation Plans already
in existence on August 20, 1996, and provide that such plans need not establish
a trust before January 1, 1999. However, this requirement does not apply to
amounts under a Deferred Compensation Plan of a tax-exempt (non-governmental)
organization and such amounts will be subject to the claims of such tax-exempt
employer's general creditors.
In general, distributions from a Section 457 Deferred Compensation Plan are
prohibited unless made after the participating employee attains the age 70 1/2,
or retires, whichever is later, separates from service, dies, or suffers an
unforeseeable financial emergency. Present federal tax law does not allow
tax-free transfers or rollovers for amounts accumulated in a Section 457 plan
except for transfers to other Section 457 plans in limited cases.
2. INDIVIDUAL RETIREMENT ANNUITIES UNDER SECTION 408.
Section 408 of the Code permits eligible individuals to establish individual
retirement programs through the purchase of Individual Retirement Annuities
("IRAs"). IRAs are subject to limitations on the amount that may be contributed,
the contributions that may be deducted from taxable income, the persons who may
be eligible and the time when distributions may commerce. Also, distributions
from certain qualified plans may be "rolled-over" on a tax-deferred basis into
an IRA.
<PAGE>
HARTFORD LIFE INSURANCE COMPANY 15
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3. TAX PENALTIES.
Distributions are generally taxed under Section 72 of the Code. Under these
rules, a portion of each distribution may be excludable from income. The
excludable amount is the portion of the distribution which bears the same ratio
as the after-tax contributions bear to the expected return.
A. PREMATURE DISTRIBUTIONS.
Distributions from a qualified plan before the Participant attains age
59 1/2 are generally subject to an additional tax equal to 10% of the taxable
portion of the distribution. The 10% penalty does not apply to distribution made
after the employee's death, on account of disability, for eligible expenses and
distributions in the form of a life annuity and, except in the case of an IRA,
certain distributions after separation from service at or after age 55. A life
annuity is defined as a scheduled series of substantially equal periodic
payments for the life or life expectancy of the Participant (or the joint lives
or life expectancies of the Participant and Beneficiary).
B. MINIMUM DISTRIBUTION TAX.
If the amount distributed is less than the minimum required distribution for
the year, the Participant is subject to a 50% tax on the amount that was not
properly distributed.
An individual's interest in a retirement plan must generally be distributed
or begin to be distributed by April 1 of the calendar year following the year in
which the individual attains age 70 1/2 or the year in which the individual
retires, whichever is later. However, the required beginning date for an
individual who is a five (5) percent owner (as defined in the Code), or who is
the owner of an IRA, is April 1 of the calendar year following the calendar year
in which the individual attains age 70 1/2. The entire interest of the
Participant must be distributed beginning no later than this required beginning
date over a period which may not extend beyond a maximum of the life expectancy
of the Participant and a designated Beneficiary. Each annual distribution must
equal or exceed a "minimum distribution amount" which is determined by dividing
the account balance by the applicable life expectancy. This account balance is
generally based upon the account value as of the close of business on the last
day of the previous calendar year. In addition, minimum distribution incidental
benefit rules may require a larger annual distribution.
If an individual dies before reaching his or her required beginning date,
the individual's entire interest must generally be distributed within five years
of the individual's death. However, this rule will be deemed satisfied, if
distributions begin before the close of the calendar year following the
individual's death to a designed Beneficiary (or over a period not extending
beyond the life expectancy of the beneficiary). If the Beneficiary is the
individual's surviving spouse, distributions may be delayed until the individual
would have attained age 70 1/2.
If an individual dies after reaching his or her required beginning date or
after distributions have commenced, the individual's interest must generally be
distributed at least as rapidly as under the method of distribution in effect at
the time of the individual's death.
C. EXCESS DISTRIBUTION TAX.
If the aggregate distributions from all IRAs and certain other qualified
plans in a calendar year exceed the greater of (i) $150,000, or (ii) $112,500 as
indexed for inflation, a penalty tax of 15% is generally imposed on the excess
portion of the distribution.
- ---------------------------------------------------
E. FEDERAL INCOME TAX WITHHOLDING
The portion of a distribution from a Certificate that is taxable income to
the recipient is generally subject to withholding for the recipient's federal
income tax liability at rates that vary according to the type of distribution
and the recipient's tax status. Section 3405 of the Code governs withholding and
is summarized below:
1. NON-PERIODIC DISTRIBUTIONS.
The portion of a non-periodic distribution which constitutes taxable income
will be subject to federal income tax withholding unless the recipient elects
not to have taxes withheld. If an election not to have taxes withheld is not
provided, 10% of the taxable distribution will be withheld as federal income
tax. Election forms will be provided at the time distributions are requested. If
the necessary election forms are not submitted to Hartford, Hartford will
automatically withhold 10% of the taxable distribution.
2. PERIODIC DISTRIBUTIONS.
The portion of a periodic distribution which constitutes taxable income will
be subject to federal income tax withholding as if the recipient were married
claiming three exemptions. A recipient may elect not to have income taxes
withheld or have income taxes withheld at a different rate by providing a
completed election form. Election forms will be provided at the time
distributions are requested.
3. DEFERRED COMPENSATION PLANS.
Distributions from a non-qualified deferred compensation plan meeting the
requirements of Section 457 of the Code are generally subject to regular wage
withholding rules.
Certain states also require withholding of state income tax whenever federal
income tax is withheld.
<PAGE>
16 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
- ---------------------------------------------------
THE COMPANY
- ---------------------------------------------------
A. BUSINESS OF HARTFORD LIFE
INSURANCE COMPANY
ORGANIZATION
Hartford Life Insurance Company (the "Company") was organized in 1902 and is
incorporated under the laws of the State of Connecticut. The Company is a direct
subsidiary of Hartford Life and Accident Insurance Company ("HLA"), a
wholly-owned subsidiary of Hartford Life, Inc. ("Hartford Life"). Hartford Life,
an indirect subsidiary of The Hartford Financial Services Group, Inc. ("The
Hartford") (formerly ITT Hartford Group, Inc. a wholly-owned subsidiary of ITT
Corporation), is a holding company which owns substantially all of the life
insurance operations of The Hartford. The Company is the parent of ITT Hartford
Life and Annuity Insurance Company ("ILA"), formerly ITT Life Insurance
Corporation, and ITT Hartford International Life Reassurance Corporation
("HLRe"), formerly American Skandia Life Reinsurance Corporation, which was
acquired in 1993. On December 19, 1995, ITT Corporation distributed all of the
outstanding shares of the common stock of The Hartford to ITT Corporation
shareholders of record in an action known herein as the "Distribution". As a
result of the Distribution, The Hartford became an independent, publicly traded
company. On February 10, 1997, The Hartford announced its intention to sell up
to 20% of the common stock of Hartford Life during the second quarter of 1997.
On May 22, 1997, Hartford Life became a publicly traded company with The
Hartford retaining 81.4% of its stock.
The Company provides for the insurance and retirement needs of millions of
individuals and has been among the fastest growing major life insurance
companies in the United States for the past several years, as measured by
assets. At December 31, 1996, the Company's total assets of $78 billion included
18% of fixed maturities and 64% of separate accounts with the remainder
representing equity securities, cash, mortgage loans, policy loans, reinsurance
recoverable, deferred policy acquisition costs and other assets.
The reportable segments of the Company and its subsidiaries are:
Investment Products
Individual Life Insurance
Employee Benefits
Corporate operations
Runoff operations
Revenue, income before income tax expense and assets by reportable segment
are set forth in Note 7 in Notes to Consolidated Financial Statements.
BRIEF DESCRIPTION OF REPORTABLE SEGMENTS
The Company operates in three principal market segments: Investment
Products, Individual Life Insurance and Employee Benefits. During the past two
years, each segment has grown significantly in revenues and net income. In
addition, the Company maintains a Corporate operation in which it reports net
investment income on assets representing surplus not assigned to any of its
business segments and certain other revenues and expenses not specifically
allocable to any of its business segments. The Company also classifies certain
of its business as Runoff operations.
INVESTMENT PRODUCTS
The Investment Products segment focuses on the savings and retirement needs
of the growing number of individuals who are preparing for retirement or have
already retired. The Investment Products segment offers fixed market value
adjusted ("MVA") and variable annuities, deferred compensation plan services for
municipal governments and corporations, structured settlement contracts and
other special purpose annuity contracts, mutual funds, investment management
contracts and certain other financial products. Investment Products accounted
for $150 million of the total segment earnings of the Company for the year ended
December 31, 1996. Growth in the Company's assets has been driven by its sale of
variable annuities. For the year ended December 31, 1996, the Company was the
largest writer of both individual annuities and individual variable annuities.
New sales of individual annuities were approximately $9.8 billion in 1996,
bringing total individual annuity account value to $41.7 billion as of December
31, 1996. Of the total annuity account value, $32.4 billion relates to variable
annuities and $9.0 billion relates to fixed MVA annuities held in guaranteed
separate accounts. Of the Company's $32.4 billion in variable annuities in
force, $29.9 billion, or 92%, are held in non-guaranteed separate accounts, as
of December 31, 1996. In contrast, the next nine largest writers in the United
States of variable annuities held an average of 68% of their variable annuities
in force in non-guaranteed separate accounts, as of December 31, 1996, based on
the Company's analysis of information compiled by Variable Annuity and Research
Data Service ("VARDS").
The Company has distribution arrangements to sell its individual annuity
products with approximately 1,350 national and regional broker-dealers and 200
banks. Management believes that it has established a strong distribution
franchise through its long-standing relationships with the members of its bank
and broker-dealer network and is committed both to expanding sales through these
established channels of distribution and promoting new distributors for all its
products and services.
<PAGE>
HARTFORD LIFE INSURANCE COMPANY 17
- --------------------------------------------------------------------------------
INDIVIDUAL LIFE INSURANCE
The Individual Life Insurance segment focuses on individuals' needs
regarding the transfer of wealth between generations, as well as the protection
of individuals and their families against lost earnings resulting from death.
The chief products sold in this market include both variable and fixed universal
life-type contracts (including interest-sensitive whole life), as well as single
premium variable life and term life products. Individual life insurance in force
has increased from $45.2 billion in 1994 to $52.1 billion in 1996, of which $4.4
billion was derived from acquisitions. The Company's growth in insurance in
force, together with favorable mortality results and a declining expense ratio,
has resulted in increased segment earnings from $25 million in 1994 to $44
million in 1996.
The Individual Life Insurance segment distributes its products through
insurance agents, broker-dealers and financial institutions, typically assisted
by a dedicated group of Company employees. The Company has distribution
arrangements to sell its individual life products in the United States with
approximately 137,000 licensed life insurance agents.
EMPLOYEE BENEFITS
The Employee Benefits segment focuses on the needs of employers and
associations to purchase group insurance products. The group life, long-term and
short-term disability, stop-loss and supplementary medical coverages sold in
this segment are reinsured to HLA. This segment also contains specialty
businesses such as corporate owned life insurance ("COLI") and life/health
reinsurance. Together with HLA, the Company is the largest writer of group
short-term disability benefit plans and the second largest writer of group
long-term disability insurance, as well as the fourth largest writer of group
life insurance based on full-year 1995 new premium and premium equivalents,
according to information compiled by the Employee Benefits Plan Review ("EBPR").
Management believes that, as a result of The Hartford's name recognition, the
value-added nature of the Company's managed disability products and its
effective claims administration, it is one of the leading sellers in the "large
case" group market (companies with over 1,000 employees) and that further growth
opportunities exist in the "small case" and "medium case" group markets. Sales
of COLI have resulted in an increase in segment earnings from $18 million in
1994 to $29 million in 1996.
The Employee Benefits segment uses an experienced group of Company employees
to distribute its products through a variety of distribution outlets, including
insurance agents, brokers, associations and third-party administrators.
- ---------------------------------------------------
B. SELECTED FINANCIAL DATA
The following selected financial data for Hartford, its subsidiaries and
affiliated companies should be read in conjunction with the consolidated
financial statements and notes thereto included in this Prospectus beginning on
page 30.
- --------------------------------------------------------------------------------
HARTFORD LIFE INSURANCE COMPANY STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994 1993
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES
Premiums and other considerations.................................................. $ 1,705 $ 1,487 $ 1,100 $ 747
Net investment income.............................................................. 1,397 1,328 1,292 1,051
Net realized (losses) gains........................................................ (213) (11) 7 16
--------- --------- --------- ---------
Total Revenues................................................................... 2,889 2,804 2,399 1,814
--------- --------- --------- ---------
--------- --------- --------- ---------
BENEFITS, CLAIMS AND EXPENSES
Benefits, claims and claim adjustment expenses..................................... 1,535 1,422 1,405 1,046
Amortization of deferred policy acquisition costs.................................. 234 199 145 113
Dividends to policyholders......................................................... 635 675 419 227
Other insurance expenses........................................................... 427 317 227 210
--------- --------- --------- ---------
Total Benefits, Claims and Expenses.............................................. 2,831 2,613 2,196 1,596
--------- --------- --------- ---------
--------- --------- --------- ---------
Income before income tax expense................................................... 58 191 203 218
Income tax expense................................................................. 20 62 65 75
Income before cumulative effect of changes in accounting principles................ 38 129 138 143
Cumulative effect of changes in accounting principles net of
tax benefits of $7................................................................ -- -- -- --
--------- --------- --------- ---------
NET INCOME........................................................................... $ 38 $ 129 $ 138 $ 143
--------- --------- --------- ---------
--------- --------- --------- ---------
<CAPTION>
1992
---------
<S> <C>
REVENUES
Premiums and other considerations.................................................. $ 259
Net investment income.............................................................. 907
Net realized (losses) gains........................................................ 5
---------
Total Revenues................................................................... 1,171
---------
---------
BENEFITS, CLAIMS AND EXPENSES
Benefits, claims and claim adjustment expenses..................................... 797
Amortization of deferred policy acquisition costs.................................. 55
Dividends to policyholders......................................................... 47
Other insurance expenses........................................................... 138
---------
Total Benefits, Claims and Expenses.............................................. 1,037
---------
---------
Income before income tax expense................................................... 134
Income tax expense................................................................. 45
Income before cumulative effect of changes in accounting principles................ 89
Cumulative effect of changes in accounting principles net of
tax benefits of $7................................................................ (13)
---------
NET INCOME........................................................................... $ 76
---------
---------
</TABLE>
<PAGE>
18 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
- ---------------------------------------------------
C. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATION (DOLLAR AMOUNTS IN MILLIONS)
1. CONSOLIDATED RESULTS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Revenues..................................... $ 2,889 $ 2,804
Expenses..................................... 2,851 2,675
--------- ---------
Net income................................... $ 38 $ 129
--------- ---------
--------- ---------
</TABLE>
Revenues increased $85 million, or 3%, to $2.9 billion in 1996 from $2.8
billion in 1995. This increase in revenues was primarily a result of increased
maintenance and expense fees, in the Investment Products segment, from a larger
block of separate account assets, which resulted from strong annuity sales and
market appreciation partially offset by a decrease in net investment income and
net realized capital gains (losses) of $133 mainly due to losses associated with
sales and an other than temporary impairment of Closed Book GRC, see "--
Runoff". Expenses increased $176 million, or 7%, to $2.9 billion in 1996 from
$2.7 billion in 1995. This increase in expenses is primarily a result of
increased interest credited, amortization of deferred acquisition costs and
other insurance expenses due to increased sales and higher account values of
individual annuity and individual life contracts which were partially offset by
a decrease in benefits, claims and claim adjustment expenses of Closed Book GRC
and a decrease in policyholder dividends as a result of the elimination of sales
of leveraged COLI as a result of the enactment of the HIPA Act of 1996.
INVESTMENT PRODUCTS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Revenues..................................... $ 1,013 $ 759
Expenses..................................... 863 643
--------- ---------
Net income................................... $ 150 $ 116
--------- ---------
--------- ---------
</TABLE>
Revenues increased $254 million, or 33%, to $1 billion in 1996 from $759
million in 1995. This increase in revenues was principally the result of a $217
million increase in premiums and other considerations which reflects a
substantial increase in aggregate fees earned due to the Company's growing block
of separate account assets. The average separate account assets in this segment
increased to $37.5 billion in 1996 from $26.3 billion in 1995 primarily due to
sales of individual annuities of $9.8 billion in 1996 and $7 billion in 1995, as
well as strong market appreciation in both 1996 and 1995. In addition, the
average general account assets of this segment increased to approximately $7.7
billion in 1996 from $6.5 billion in 1995 largely as a result of growth in the
general account portion of the individual variable annuity products of the
Company. The growth in this segment is also reflected in an increase in total
expenses of $220 million, primarily as a result of an increase in benefits,
claims and claim adjustment expenses of $102 million, or 29%, to $451 million in
1996 from $349 million in 1995. The 38% growth in average account value in 1996,
coupled with an overall reduction in individual annuity expenses as a percentage
of total individual annuity account value to 28 basis points in 1996 from 31
basis points in 1995, has contributed to the growth in earnings of $34 million,
or 29%, to $150 million in 1996 from $116 million in 1995.
INDIVIDUAL LIFE INSURANCE
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Revenues..................................... $ 440 $ 383
Expenses..................................... 396 347
--------- ---------
Net income................................... $ 44 $ 36
--------- ---------
--------- ---------
</TABLE>
Revenues increased $57 million, or 15%, to $440 million in 1996 from $383
million in 1995. This increase in revenues was chiefly due to a $41 million
increase in premiums and other considerations, reflecting the cost of insurance
charges and variable life fees applied to a larger block of business, as
insurance in force increased to $52.1 billion in 1996 from $48.3 billion in
1995. Total expenses increased by $49 million, primarily as a result of an
increase in benefits, claims and claim adjustment expenses of $43 million, or
21%, to $245 million in 1996 from $202 million in 1995. This increase in
expenses also reflects the increase in the block of individual life insurance
business offset partially by favorable mortality results. The combination of
business growth and favorable mortality experience resulted in an increase in
segment earnings of $8 million, or 22%, to $44 million in 1996 from $36 million
in 1995.
EMPLOYEE BENEFITS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Revenues..................................... $ 1,366 $ 1,273
Expenses..................................... 1,337 1,248
--------- ---------
Net income................................... $ 29 $ 25
--------- ---------
--------- ---------
</TABLE>
Revenues increased $93 million, or 7%, to $1.4 billion in 1996 from $1.3
billion in 1995. This increase in revenues was largely a result of a $134
million increase in net investment income primarily due to an increase in the
Company's COLI account values, partially offset by a decline in leveraged COLI
premiums primarily in response to the enactment of the HIPA Act of 1996. Total
expenses increased $89 million, primarily due to an increase in benefits, claims
and claim adjustment expenses of $122 million,
<PAGE>
HARTFORD LIFE INSURANCE COMPANY 19
- --------------------------------------------------------------------------------
or 29%, to $545 million in 1996 from $423 million in 1995 partially offset by a
decrease in policyholder dividends of $40 million due to the elimination of the
sales of leveraged COLI. This increase in total expenses generally reflected an
increase in the COLI block of business. These factors resulted in an increase in
segment earnings of $4 million, or 16%, to $29 million in 1996 from $25 million
in 1995.
RUNOFF OPERATIONS
Runoff consists of the Company's closed book of guaranteed rate contracts
("Closed Book GRC") (and the related realized gains and losses) and are products
that would be reported as a component of the Investment Products segment if they
were part of ongoing operations. The Company also includes in Runoff operations
the effects of an insurance guaranty fund adjustment of $10 million in 1995 made
to reflect lower than expected insolvencies in the insurance industry.
Substantially all of the products included in Closed Book GRC are contracts with
guaranteed fixed or indexed rates for a specific period, constituting all GRC
written by the Company prior to 1995. The Company continues to write GRC
Products only as an accommodation to existing customers or to customers who are
purchasing a range of services. Closed Book GRC results have been negatively
affected by lower investment rates and earnings in the related investment
portfolio (principally composed of mortgage backed securities and collateralized
mortgage obligations) due to prepayments experienced in excess of assumed levels
in years prior to 1995. Closed Book GRC was also affected by an interest rate
rise in 1994 which caused the duration of the Company's assets to lengthen
relative to that of its liabilities. Due to the reduced investment earnings and
the duration mismatch, the portfolio had insufficient assets to fully fund its
liability commitments. During the third quarter of 1996, the Company transferred
assets in the amount of $200 million to adequately fund the Closed Book GRC so
that future cash infusions would be minimal.
Although the Closed Book GRC asset portfolio as a whole is duration matched
with its liabilities, certain investments continue to have a longer maturity
than their corresponding liabilities and will need to be liquidated prior to
maturity in order to meet the specific liability commitments. To protect the
existing value of these investments, the Company entered into various interest
rate swap, cap and floor transactions in late September 1996 with the objective
of offsetting the market price sensitivity of hedged assets to changes in
interest rates. As a result of the hedge, the Company substantially eliminated
further fluctuation in the fair value of these investments due to interest rate
changes, thereby substantially reducing the likelihood of any further loss on
the assets due to such changes.
The Company's accounting policy for impairment recognition of investments
requires recognition of an other than temporary impairment charge on a security
if it is determined that the Company is unable to recover all amounts due under
the contractual obligations of the security. In addition, the Company has
established specific criteria to be used in the impairment evaluation of an
individual portfolio of assets. Specifically, if the asset portfolio supports a
runoff operation and is expected to be liquidated prior to maturity to meet
liability commitments and has a fair value below amortized cost which will not
materially fluctuate as a result of future interest rate changes, then an other
than temporary impairment condition has been determined to have occurred. Each
individual security within this portfolio is evaluated to determine whether or
not it is impaired. Once an impairment charge has been recorded, the Company
then continues to review the impaired securities for appropriate valuation on an
ongoing basis.
The following table sets forth the after-tax losses incurred by the Company
in respect of Closed Book GRC for the two years ended December 31, 1996.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Runoff losses................................... $ (51) $ (68)
Other than temporary impairment charges......... (88) --
Net realized capital losses..................... (55) --
Other charges................................... (32) --
--------- ---------
Net loss........................................ $ (226) $ (68)
--------- ---------
--------- ---------
</TABLE>
During 1996, Closed Book GRC incurred a $51 million after-tax loss from
operations as a result of negative interest spread, as compared with an
after-tax loss from operations of $68 million in 1995. With the initiation of
the hedge transactions discussed above, which eliminated the possibility that
the fair value of Closed Book GRC investments would recover to their current
amortized cost, an other than temporary impairment loss of $82 million,
after-tax, was determined to have occurred and was recorded in September 1996.
An additional other than temporary impairment loss of $6 million, after-tax,
occurred in the fourth quarter of 1996, bringing the total impairment to $88
million. Also, during the third quarter of 1996, Closed Book GRC had asset sales
resulting in proceeds of approximately $500 million and a realized loss of $55
million, after-tax. The asset sales were undertaken as a result of liquidity
needs and favorable market conditions for certain securities. Other charges of
$32 million, after-tax, were also incurred in the third quarter of 1996.
In response to the losses associated with Closed Book GRC, the Company
instituted an improved risk management process. Management expects that the net
income (loss) from Closed Book GRC in the years subsequent to 1996 will be
immaterial based on the Company's current projections for the performance of the
assets and liabilities associated with Closed Book GRC, the Company's
expectations regarding future sales of assets from the Closed Book
<PAGE>
20 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
GRC portfolio from time to time in order to make the necessary payment on
maturing Closed Book GRC liabilities and the stabilizing effect of the hedge
transactions. In determining the projected Closed Book GRC net income in years
subsequent to 1996, the Company assumed that yield spreads implicit in market
values would be consistent with historic trends. In addition, the Company
assumed that there would be no material credit losses in respect of assets
supporting Closed Book GRC. However, no assurance can be given that, under
certain unanticipated economic circumstances, which result in the Company's
assumptions proving inaccurate, further losses in respect of Closed Book GRC
will not occur in the future. To date, such asset sales have been consistent
with the Company's expectations.
As of December 31, 1996, Closed Book GRC had general account assets of $3.6
billion and general account liabilities of $3.6 billion. Closed Book GRC assets
consisted of $2.7 billion of fixed maturity securities (including $21 million of
MBSs and $1.03 billion of CMOs), a $471 million market-neutral portfolio based
on London interbank offered quotations for U.S. dollar deposits and $432 million
of cash or short-term instruments. Of the $3.6 billion in Closed Book GRC
liabilities remaining as of December 31, 1996, the scheduled maturity of such
guaranteed rate contracts are as follows: $1.2 billion or 33% in 1997, $1.1
billion or 31% in 1998, $0.8 billion or 22% in 1999 and $0.5 billion or 14%
thereafter.
2. BUSINESS SEGMENT INFORMATION
For business segment information, see Note 7 to Notes to Consolidated
Financial Statements
- ---------------------------------------------------
D. REINSURANCE
Hartford cedes insurance to non-affiliated insurers in order to limit its
maximum loss. Such transfer does not relieve Hartford of its primary liability.
Hartford also assumes insurance from other insurers. Group life and health
insurance is substantially reinsured to affiliated companies.
- ---------------------------------------------------
E. RESERVES
In accordance with applicable insurance regulations, Hartford establishes
and carries as liabilities actuarially determined reserves which are calculated
to meet its future obligations. The reserves are based on actuarially recognized
methods using prescribed morbidity and mortality tables in general use in the
United States, which are modified to reflect Hartford's actual experience when
appropriate. These reserves are computed at amounts that, with additions from
premiums to be received and with interest on such reserves compounded annually
at certain assumed rates, are expected to be sufficient to meet Hartford's
policy obligations at their maturities or in the event of an insured's death.
Reserves include unearned premiums, premium deposits, claims reported but not
yet paid, claims incurred but not reported and claims in the process of
settlement. Hartford's reserves for assumed reinsurance are computed on bases
essentially comparable to direct insurance reserves.
- ---------------------------------------------------
F. INVESTMENTS
INVESTMENT OPERATIONS
The Company's investment operations are managed by its investment strategy
group which reports directly to senior management of the Company and consists of
a risk management unit and portfolio management unit. The risk management unit
is responsible for monitoring and managing the Company's asset/liability profile
and establishing investment objectives and guidelines; and, the portfolio
management unit is responsible for determining, within specified risk tolerances
and investment guidelines, the general asset allocation, duration and convexity
and other characteristics of the Company's general account and guaranteed
separate account investment portfolios. The investment staff of the Company
executes the strategic investment decisions of the portfolio management unit,
including the identification and purchase of securities that fulfill the
objectives of the investment strategy group.
The primary investment objective of the Company for its general account and
guaranteed separate accounts is to maximize after-tax returns consistent with
acceptable risk parameters (including the management of interest rate
sensitivity of invested assets to that of policyholder obligations). The Company
is exposed to two primary sources of investment risk: credit risk, relating to
the uncertainty associated with the continued ability of a given obligor to make
timely payments of principal and interest, and interest rate risk, relating to
the market price and/or cash flow variability associated with changes in market
yield curves. The Company manages credit risk through industry and issuer
diversification and asset allocation. The Company manages interest rate risk as
part of its asset/liability management strategies, including the use of certain
hedging techniques (which may include the use of certain financial derivatives),
product design, such as the use of MVA features and surrender charges, and
proactive monitoring and management of certain non-guaranteed elements of the
Company's products (such as resetting of credited interest rates for policies
that permit such adjustments).
INVESTED ASSET CHARACTERISTICS AND DERIVATIVE STRATEGIES
Invested assets totaled approximately $17.6 billion at December 31, 1996 and
were comprised of asset-backed securities, including government agency
collateralized mortgage obligations ("CMOs") and mortgage backed securities
("MBSs") of $5.2 billion, bonds and notes and short-term investments of $8
billion, inverse floating securities of $352 million, and other investments
(primarily policy loans) of $4 billion. Policy loans of $3.8 billion, which
carry a
<PAGE>
HARTFORD LIFE INSURANCE COMPANY 21
- --------------------------------------------------------------------------------
weighted average interest rate of 11.9%, are secured by the cash value of the
life insurance policy. These loans do not mature in a conventional sense but
expire in conjunction with the related policy liabilities. The estimated
maturities of these fixed and variable rate investments, along with the
respective yields at December 31, 1996, are reflected below. Asset-backed
securities (including Government Agency, CMOs and MBSs) are distributed to
maturity year based on the Company's estimate of the rate of future prepayments
of principal over the remaining life of the securities. These estimates are
developed using broker consensus prepayment speeds. Expected maturities differ
from contractual maturities due to call or prepayment provisions.
- --------------------------------------------------------------------------------
FIXED MATURITY INVESTMENTS MATURITY SCHEDULE
(IN MILLIONS)
<TABLE>
<CAPTION>
ESTIMATED MATURITY
-----------------------------------------------------------------------------
1997 1998 1999 2000 2001 THEREAFTER
----------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
ABS, MBS, CMOS (1)
Variable Rate (2)
Amortized Cost $ 156 $ 100 $ 68 $ 198 $ 142 $ 791
Market Value 154 120 159 192 134 754
Pre-tax yield (3) 5.76% 6.69% 6.32% 6.51% 6.56% 7.23%
FIXED RATE
Amortized Cost $ 787 $ 575 $ 688 $ 649 $ 430 $ 985
Market Value 787 570 678 646 425 977
Pre-tax yield (3) 6.24% 6.58% 6.33% 6.55% 6.52% 6.84%
BONDS AND NOTES
Variable Rate (2)
Amortized Cost $ 171 $ 72 $ 113 $ 90 $ 7 $ 209
Market Value 169 76 90 94 8 211
Pre-tax yield (3) 3.20% 5.74% 3.03% 5.97% 6.10% 6.48%
FIXED RATE
Amortized Cost $ 1,518 $ 636 $ 798 $ 663 $ 642 $ 3,091
Market Value 1,532 632 797 667 640 3,112
Pre-tax yield (3) 6.37% 6.47% 6.42% 6.72% 6.85% 7.16%
TOTAL FIXED MATURITIES
Amortized Cost $ 2,632 $ 1,383 $ 1,667 $ 1,600 $ 1,221 $ 5,076
Market Value 2,642 1,398 1,724 1,599 1,207 5,054
Pre-tax yield (3) 6.09% 6.49% 6.15% 6.58% 6.70% 7.08%
<CAPTION>
TOTAL
-----------
<S> <C>
ABS, MBS, CMOS (1)
Variable Rate (2)
Amortized Cost $ 1,455
Market Value 1,513
Pre-tax yield (3) 7.08%
FIXED RATE
Amortized Cost $ 4,114
Market Value 4,083
Pre-tax yield (3) 6.52%
BONDS AND NOTES
Variable Rate (2)
Amortized Cost $ 662
Market Value 648
Pre-tax yield (3) 5.34%
FIXED RATE
Amortized Cost $ 7,348
Market Value 7,380
Pre-tax yield (3) 6.79%
TOTAL FIXED MATURITIES
Amortized Cost $ 13,579
Market Value 13,624
Pre-tax yield (3) 6.67%
</TABLE>
- ------------------------
(1) With respect to the ABS, MBS and CMO portfolio of the Company, a 100 basis
point increase in interest rates would decrease the duration of such
portfolio from 3.6 to 3.4; a 100 basis point decrease in interest rates
would increase the duration of such portfolio from 3.6 to 3.7. The
maturities noted in this table would be significantly impacted if interest
rates were to decrease by 100 basis points or increase by 300 basis points
from December 31, 1996 levels.
(2) Variable rate securities are instruments for which the coupon rates move
directly with or based upon an index rate. Includes interest-only securities
and inverse floaters, which represent less than 1% and 2.5%, respectively,
of the Company's invested assets. Interest-only securities, for which cost
approximates market, have an average life of 5.1 years and earn an average
yield of 13.9%. Inverse floaters, for which cost approximates market, have
an average life of 4.8 years and earn an average yield of 6.48%. Average
yields are based upon estimated cash flows using prepayment speeds reported
in broker consensus data.
(3) Pre-tax yield does not reflect yields on derivative instruments although
derivative adjustments are included in fixed maturity amortized cost and
market value.
ASSET-LIABILITY MANAGEMENT STRATEGIES
Derivatives play an important role in facilitating the management of
interest rate risk, creating opportunities to fund product obligations
efficiently, hedge against risks that affect the value of certain liabilities
and adjusting broad investment risk characteristics as a result of any
significant changes in market risks. As an end user of derivatives, the Company
uses a variety of derivatives, including swaps, caps, floors, forwards, and
exchange-traded financial futures and options, in order to hedge exposure to
price, foreign currency and/or interest rate risk on anticipated investment
purchases or existing assets and liabilities. The notional
<PAGE>
22 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
amounts of derivatives contracts represent the basis upon which pay and receive
amounts are calculated and are not reflective of credit risk for derivatives
contracts. Credit risk for derivatives contracts is limited to the amounts
calculated to be due to the Company on such contracts. The Company believes it
maintains prudent policies regarding the financial stability and credit standing
of its major counterparties and typically requires credit enhancement provisions
to further limit its credit risk. Many of these derivatives contracts are
bilateral agreements that are not assignable without the consent of the relevant
counterparty. Notional amounts pertaining to derivatives financial instruments
of the Company totaled $9.9 billion at December 31, 1996 ($7.4 billion of which
related to life insurance investments and $2.5 billion of which related to life
insurance liabilities). Management believes that the use of derivatives allows
the Company to sell more innovative products, capitalize on market opportunities
and execute a more flexible investment strategy for its general account
portfolio. The strategies described below are used by the Company to manage the
aforementioned risks associated with its obligations.
ANTICIPATORY HEDGING
For certain liabilities, the Company commits to the price of the product
prior to receipt of the associated premium or deposit. The Company routinely
executes anticipatory hedges to offset the impact of any changes in asset prices
arising from interest rate changes pending the receipt of the premium or deposit
payment and the resulting purchase of an asset. These hedges involve taking a
long position in interest rate futures or entering into an interest rate swap
with duration characteristics equivalent to the associated liabilities and
anticipated investments. The notional amount of derivatives used for
anticipatory hedges totaled $132 million and $238 million at December 31, 1996
and 1995, respectively.
LIABILITY HEDGING
Several products obligate the Company to credit a return to the contract
holder which is indexed to a market rate. In order to hedge risks associated
with these products, the Company typically enters into interest rate swaps to
convert the contract rate into a rate that trades in a more liquid and efficient
market. This hedging strategy enables the Company to customize contract terms
and conditions to customer objectives and satisfies the Company's asset/
liability matching policy. Additionally, interest rate swaps are used to convert
certain fixed contract rates into floating rates, thereby allowing them to be
appropriately matched against floating rate assets. The notional amount of
derivatives used for liability hedging totaled $2.5 billion and $1.7 billion at
December 31, 1996 and 1995, respectively.
ASSET HEDGING
To meet the various policyholder obligations and to provide prudent
investment risk diversification, the Company may combine two or more derivative
financial instruments to achieve the investment characteristics that match the
associated liability. The use of derivatives in this regard effectively
transfers unwanted investment risks or attributes to others. The selection of
the appropriate derivatives depends on the investment risk, the liquidity and
efficiency of the market and the asset and liability characteristics. The
notional amount of asset hedges totaled $2.1 billion and $3.0 billion at
December 31, 1996 and 1995, respectively.
PORTFOLIO HEDGING
The Company periodically compares the duration and convexity of its
portfolios of assets to their corresponding liabilities and enters into
portfolio hedges to reduce certain differences to acceptable levels. Portfolio
hedges reduce the mismatch between assets and liabilities and offset the
potential cash flow impact caused by interest rate changes. The notional amount
of portfolio hedges totaled $5.2 billion and $3.9 billion at December 31, 1996
and 1995, respectively.
The Company is committed to maintaining effective risk management
discipline. Derivatives used by the Company must support at least one of the
following objectives: to manage the risk arising from price, interest rate or
foreign currency volatility, to manage liquidity or to control transaction
costs. The Company has established credit limits, diversification standards and
review procedures for all credit risk, whether borrower, issuer, or
counterparty.
For a discussion of (i) the investments of the Company segregated by major
category, (ii) the types of derivatives related to the type of investment and
their respective notional amounts and (iii) the accounting policies utilized by
the Company for derivative financial instruments, see Notes to Consolidated
Financial Statements.
INSURANCE LIABILITY CHARACTERISTICS
Insurance liabilities, other than non-guaranteed separate accounts, totaled
$28.5 billion (net of ceded reinsurance) at December 31, 1996, and were backed
by $38 billion in total assets (including investments of $27.8 billion).
Matching of the duration of the investments with respective policyholder
obligations is an explicit objective of the Company's management strategy. The
Company's insurance policy liabilities, along with estimated duration periods
based upon internal actuarial assumptions, can be summarized based on investment
needs in the five categories described below at December 31, 1996.
<PAGE>
HARTFORD LIFE INSURANCE COMPANY 23
- --------------------------------------------------------------------------------
ESTIMATED DURATION YEARS (1)
(IN BILLIONS)
<TABLE>
<CAPTION>
BALANCE AT
DECEMBER 31, LESS THAN 1 OVER 10
DESCRIPTION 1996 YEAR 1-5 YEARS 6-10 YEARS YEARS
- ------------------- --------------- ----------- --------- ----- -----------
<S> <C> <C> <C> <C> <C>
Fixed rate asset
accumulation
vehicles.......... $ 13.8 $ 1.9 $ 8.2 $ 3.7 $ --
Indexed asset
accumulation
vehicles.......... .2 .2 -- -- --
Interest credited
asset accumulation
vehicles.......... 13.6 4.2 5.1 3.7 .6
Long-term payout
liabilities....... .9 -- .1 .1 .7
Short-term payout
liabilities....... -- -- -- -- --
----- --- --------- --- ---
Total.............. $ 28.5 $ 6.3 $ 13.4 $ 7.5 $ 1.3
----- --- --------- --- ---
----- --- --------- --- ---
</TABLE>
- ------------------------------
(1) The duration of liabilities reflects management's assessment of the market
price sensitivity of the liabilities to changes in market interest rates,
and is not necessarily reflective of the projected liabilities' cash flows
under any specific scenario.
FIXED RATE ASSET ACCUMULATION VEHICLES
Products in this category require the Company to pay a fixed rate for a
certain period of time. The cash flows are not interest rate sensitive because
the products are written with an MVA feature and the liabilities have protection
against the early withdrawal of funds through surrender charges. The primary
risk associated with these products is that the spread between investment return
and credited rate may not be sufficient to earn the Company's targeted return.
Product examples include fixed rate annuities with an MVA feature and 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 was 6.71% at
December 31, 1996.
INDEXED ASSET ACCUMULATION VEHICLES
Products in this category are similar to the fixed rate asset accumulation
vehicles, but require the Company to pay a rate that is determined by an
external index. The amount and/or timing of cash flows will therefore vary based
on the level of the particular index. The primary risks inherent in these
products are similar to the fixed rate asset accumulation vehicles, with an
additional risk that changes in the index may adversely affect profitability.
Product examples include indexed-guaranteed investment contracts with an
estimated duration of up to two years. The weighted average credited rate for
these contracts was 5.78% at December 31, 1996.
INTEREST CREDITED ASSET ACCUMULATION VEHICLES
Products in this category credit interest to policyholders, subject to
market conditions and minimum guarantees. Policyholders may surrender at book
value but are subject to surrender charges for an initial period. The primary
risks vary depending on the degree of insurance element contained in the
product. Product examples include universal life contracts and the general
account portion of the Company's variable annuity products. Liability duration
is short to intermediate-term and is reflected in the table above. The average
credited rate for these liabilities was 5.52% at December 31, 1996, excluding
policy loans.
LONG-TERM PAYOUT LIABILITIES
Products in this category are long-term in nature and may contain
significant actuarial (including mortality and morbidity) pricing risks. The
cash flows are not interest sensitive, but do vary based on the timing and
amount of benefit payments. The primary risks associated with these products are
that the benefits will exceed expected actuarial pricing and/or the investment
return will be lower than assumed in pricing. Product examples include
structured settlement contracts, on-benefit annuities (i.e., the annuitant is
currently receiving benefits thereon) and long-term disability contracts.
Contract duration is generally six to ten years but, at times, exceeds thirty
years. Policy liabilities under these contracts are not interest rate sensitive.
SHORT-TERM PAYOUT LIABILITIES
These liabilities are short-term in nature with a duration of less than one
year. The primary risks associated with these products are determined by the
non-investment contingencies such as mortality or morbidity. Liquidity is of
greater concern than for the long-term payout liabilities. Products include
individual and group term life insurance contracts.
SEPARATE ACCOUNT PRODUCTS
The Company's separate accounts reflect two categories of risk assumption:
non-guaranteed separate accounts totaling $39.4 billion as of December 31, 1996,
wherein the policyholder assumes substantially all of the risk and reward, and
guaranteed separate accounts totaling $10.3 billion as of December 31, 1996,
wherein the Company contractually guarantees either a minimum return or account
value to the policyholder. The investment strategy followed varies by fund
choice, as outlined in the applicable fund prospectus or separate account plan
of operations. Non-guaranteed products include variable annuities and variable
life contracts. The funds underlying such contracts are managed by the
investment staff of The Hartford and a variety of independent money managers,
including Wellington Management Company, LLP, Putnam Financial Services, Inc.
and Dean Witter InterCapital, Inc. Guaranteed separate account products
primarily consist of modified guaranteed individual annuity and modified
guaranteed life insurance, and generally include MVA features to mitigate the
disintermediation risk upon surrenders. Virtually all of the assets in the
guaranteed separate accounts are fixed maturity securities and, as of December
31, 1996, $10.2 billion, or approximately 99%, of
<PAGE>
24 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
the fixed maturity securities portfolio within the guaranteed separate accounts
were investment grade or better. Additional investment risk is hedged using a
variety of derivatives which totaled $0.1 billion in carrying value and $2.4
billion in notional amounts at December 31, 1996.
- ---------------------------------------------------
G. COMPETITION
The Company is engaged in a business that is highly competitive due to 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.
According to A.M. Best, Hartford Life is the eighth largest consolidated life
insurance company in the United States based on statutory admitted assets as of
December 31, 1995. As of December 31, 1996, A.M. Best assigned Hartford Life its
second highest ranking classification, A+.
- ---------------------------------------------------
H. EMPLOYEES
As of January 27, 1997, the Company and HLA have a total of 3,669 direct
employees, 2,109 of whom are employed at the home office in Simsbury,
Connecticut, and 1,560 of whom are employed at various branch offices throughout
the United States, Canada and elsewhere.
- ---------------------------------------------------
I. PROPERTIES
The Company occupies office space leased from a third party by Hartford Fire
Insurance Company ("Hartford Fire"), an indirect subsidiary of The Hartford.
Expenses associated with these offices are allocated on a direct and indirect
basis to Hartford Life and its subsidiaries by Hartford Fire.
- ---------------------------------------------------
J. REGULATION
The insurance business of the Company is subject to comprehensive state and
federal regulation and supervision throughout the United States. The purpose of
such regulation is primarily to provide safeguards for policyholders rather than
to protect the interests of the stockholders. The laws of various state
jurisdictions establish supervisory agencies with broad administrative powers
with respect to, among other things, licensing to transact business, admittance
of assets, regulating premium rates, approving policy forms, regulating unfair
trade and claims practices, establishing reserve requirements and solvency
standards, fixing maximum interest rates on life insurance policy loans and
minimum rates for accumulation of surrender values, restricting certain
transactions between affiliates and regulating the type, amount and valuation of
investments permitted. State insurance regulators and the National Association
of Insurance Commissioners ("NAIC") continually re-examine existing laws and
regulations.
The NAIC has established solvency laws that relate an insurance company's
capital requirements to the risks inherent in its overall operations. These
rules are known as risk based capital ("RBC"). As of December 31, 1996, the
Company's RBC ratio was in excess of 200% of its RBC.
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. The Company prepares its statutory financial statements in
accordance with accounting practices prescribed or permitted by the State of
Connecticut Insurance Department. Prescribed statutory accounting practices
include publications of the NAIC, as well as state laws, regulations, and
general administrative rules. In accordance with the insurance laws and
regulations under which the Company 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 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 actual
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, are expected to be sufficient to meet the Company's
policy obligations at their maturities or in the event of an insured's death.
Reserves for universal life insurance and investment products represent policy
account balances before applicable surrender charges. In the accompanying
consolidated financial statements, these life insurance reserves are determined
in accordance with generally accepted accounting principles, which may vary from
statutory requirements.
The Health Insurance Portability and Accountability Act of 1996 ("the HIPA
Act of 1996") phases out the deductibility of interest on policy loans under
COLI by 1998, thus eliminating all future sales of leveraged COLI. The Company's
leveraged COLI product has been an important contributor to its profitability in
recent years and will continue to contribute to the profitability of the Company
(although such contribution will be reduced in the future due to the effects of
this legislation). As a result of the elimination of leveraged COLI sales, net
income contributed by COLI may be lower in the future (particularly 1999 and
later years).
- ---------------------------------------------------
LEGAL OPINION
The validity of the interests in the Certificates described in this
Prospectus will be passed upon for Hartford by Lynda Godkin, Senior Vice
President, General Counsel and Corporate Secretary of Hartford.
<PAGE>
HARTFORD LIFE INSURANCE COMPANY 25
- --------------------------------------------------------------------------------
- ---------------------------------------------------
EXPERTS
The audited consolidated financial statements and financial statement
schedules included in this Prospectus and elsewhere in the registration
statement have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in giving said
report. Reference is made to said report on the consolidated financial
statements of Hartford Life Insurance Company, which includes an explanatory
paragraph with respect to the change in method of accounting for debt and equity
securities as of January 1, 1994, as discussed in Note 2 of Notes to
Consolidated Financial Statements. The principal business address of Arthur
Andersen LLP is One Financial Plaza, Hartford, Connecticut 06103.
<PAGE>
26 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
APPENDIX A
MARKET VALUE ADJUSTMENT
The formula which will be used to determine the Market Value Adjustment is:
[(1 + I)/(1 + J)](N/12)
<TABLE>
<C> <C> <S>
I = The Guarantee Rate in effect for the Current Guarantee Period
(expressed as a decimal, e.g., 1% = .01)
J = The Current Rate plus 0.25% (expressed as a decimal, e.g., 1% = .01) in effect for
durations equal to the number of years remaining in the current Guarantee Period (years
are rounded to the next highest number of years). If not available, the Company will
utilize a rate equal to the most recent Moody's Corporate Bond Yield Average -- Monthly
Average Corporate for the applicable duration plus 0.25% as published by Moody's
Investors Service, Inc.
N = The number of complete months from the surrender date to the end of the current
Guarantee Period.
</TABLE>
- --------------------------------------------------------------------------------
EXAMPLE OF MARKET VALUE ADJUSTMENT
<TABLE>
<S> <C>
Beginning Account Value: $50,000
Guarantee Period: 5 Years
Guarantee Rate: 7.5% per annum
Full Surrender: Middle of Certificate Year 3
</TABLE>
EXAMPLE 1:
<TABLE>
<S> <C> <C>
Gross Surrender Value at middle
of
Certificate Year 3 = 50,000 (1.075)(2.5) = 59,908.86
Net Surrender Value at middle of
Certificate Year 3 = [59,908.86]
X Market Value Adjustment
Market Value Adjustment
</TABLE>
<TABLE>
<C> <C> <S>
I = .075
J = .08
N = 30
</TABLE>
<TABLE>
<S> <C> <C>
Market Value Adjustment = [(1 + I)/(1 + J)](N/12)
= (1.075/1.08)(30/12)
= 0.988466
Net Surrender Value at middle of
Certificate Year 3 = $59,908.86 X 0.988466
= $59,217.87
</TABLE>
<PAGE>
HARTFORD LIFE INSURANCE COMPANY 27
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
EXAMPLE OF MARKET VALUE ADJUSTMENT
<TABLE>
<S> <C>
Beginning Account Value: $50,000
Guarantee Period: 5 Years
Guarantee Rate: 7.5% per annum
Full Surrender: Middle of Certificate Year 3
</TABLE>
EXAMPLE 2:
<TABLE>
<S> <C> <C>
Gross Surrender Value at middle
of
Certificate Year 3 = 50,000 (1.075)(2.5) = 59,908.86
Net Surrender Value at middle of
Certificate Year 3 = [59,908.86]
X Market Value Adjustment
Market Value Adjustment
</TABLE>
<TABLE>
<C> <C> <S>
I = .075
J = .07
N = 30
</TABLE>
<TABLE>
<S> <C> <C>
Market Value Adjustment = [(1 + I)/(1 + J)](N/12)
= (1.075/1.07)(30/12)
= 1.011723
Net Surrender Value at middle of
Certificate Year 3 = $59,908.86 X 1.011723
= $60,611.18
</TABLE>
<PAGE>
28 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS, SCHEDULES
AND INTERIM FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Management.................................................... 29
Report of Independent Public Accountants................................ 30
Consolidated Statements of Income for the three years ended December 31,
1996................................................................... 31
Consolidated Balance Sheets as of December 31, 1996 and 1995............ 32
Consolidated Statements of Stockholder's Equity for the three years
ended December 31, 1996................................................ 33
Consolidated Statements of Cash Flows for the three years ended December
31, 1996............................................................... 34
Notes to Consolidated Financial Statements.............................. 35
Schedule I -- Summary of Investments -- Other than Investments in
Affiliates as of December 31, 1996..................................... 48
Schedule III -- Supplementary Insurance Information for the three years
ended December 31, 1996................................................ 49
Schedule IV -- Reinsurance for the three years ended December 31,
1996................................................................... 50
Interim Financial Statements............................................ 51
Management's Narrative Analysis of Results of Operations................ 54
Notes to Interim Financial Statements................................... 56
</TABLE>
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.
<PAGE>
HARTFORD LIFE INSURANCE COMPANY 29
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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. Management believes these statements present fairly the Company's
financial position and results of operations, and, that any other information
contained in the Annual Report is consistent with the financial statements.
Management has made available the Company's financial records and related
data to Arthur Andersen LLP, independent public accountants, in order for them
to perform an audit of the Company's consolidated financial statements. Their
report appears on page 30.
An essential element in meeting management's financial responsibilities is
the Company's system of internal controls. These controls, which include
accounting controls and the internal auditing program, are designed to provide
reasonable assurance that assets are safeguarded, and transactions are properly
authorized, executed and recorded. The controls, which are documented and
communicated to employees in the form of written codes of conduct and policies
and procedures, provide for the careful selection of personnel and for
appropriate division of responsibility. Management continually monitors for
compliance, while the Company's internal auditors independently assess the
effectiveness of the controls and make recommendations for improvement. Also,
Arthur Andersen LLP took into consideration the Company's system of internal
controls in determining the nature, timing and extent of its audit tests.
Another important element is management's recognition of its responsibility
for fostering a strong, ethical climate, thereby ensuring that the Company's
affairs are transacted according to the highest standards of personal and
professional conduct. The Company has a long-standing reputation of integrity in
business conduct and utilizes communication and education to create and fortify
a strong compliance culture.
The Audit Committee of the Board of Directors of The Hartford, composed of
non-employee directors, meets periodically with the external and internal
auditors to evaluate the effectiveness of the work performed by them in
discharging their respective responsibilities and to ensure their independence
and free access to the Committee.
<PAGE>
30 HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
- --------------------------------------------------------------------------------
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, 1996 and 1995, and the related consolidated statements of income,
stockholder's equity and cash flows for each of the three years in the period
ended December 31, 1996. These consolidated financial statements and the
schedules referred to below are the responsibility of Hartford Life Insurance
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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Hartford Life Insurance Company and subsidiaries as of December 31, 1996 and
1995, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
As discussed in Note 2 of Notes to Consolidated Financial Statements, Hartford
Life Insurance Company adopted a new accounting standard promulgated by the
Financial Accounting Standards Board, changing its method of accounting, as of
January 1, 1994, for debt and equity securities.
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
February 10, 1997
<PAGE>
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES 31
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
------------------------
1996 1995 1994
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Revenues
Premiums and other considerations............... $1,705 $1,487 $1,100
Net investment income........................... 1,397 1,328 1,292
Net realized capital (losses) gains............. (213) (11) 7
------ ------ ------
Total Revenues................................ 2,889 2,804 2,399
------ ------ ------
Benefits, Claims and Expenses
Benefits, claims and claim adjustment
expenses....................................... 1,535 1,422 1,405
Amortization of deferred policy acquisition
costs.......................................... 234 199 145
Dividends to policyholders...................... 635 675 419
Other insurance expenses........................ 427 317 227
------ ------ ------
Total Benefits, Claims and Expenses........... 2,831 2,613 2,196
------ ------ ------
Income before income tax expense................ 58 191 203
Income tax expense.............................. 20 62 65
------ ------ ------
Net income........................................ $ 38 $ 129 $ 138
------ ------ ------
------ ------ ------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of the above statements.
<PAGE>
32 HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER
31,
-----------------
1996 1995
------- -------
<S> <C> <C>
(IN MILLIONS
EXCEPT SHARE
DATA)
Assets
Investments
Fixed maturities, available for sale, at fair
value (amortized cost $13,579 and $14,440)..... $13,624 $14,400
Equity securities, available for sale, at fair
value.......................................... 119 63
Policy loans, at outstanding balance............ 3,836 3,381
Mortgage loans, at outstanding balance.......... 2 265
Other investments, at cost...................... 54 156
------- -------
Total investments............................. 17,635 18,265
Cash............................................ 43 46
Premiums and amounts receivable................. 137 165
Accrued investment income....................... 407 394
Reinsurance recoverable......................... 6,066 6,221
Deferred policy acquisition costs............... 2,760 2,188
Deferred income tax............................. 474 420
Other assets.................................... 357 234
Separate account assets......................... 49,690 36,264
------- -------
Total assets.................................. $77,569 $64,197
------- -------
------- -------
Liabilities
Future policy benefits.......................... $ 2,281 $ 2,373
Other policyholder funds........................ 22,134 22,598
Other liabilities............................... 1,572 1,233
Separate account liabilities.................... 49,690 36,264
------- -------
Total liabilities............................. 75,677 62,468
------- -------
Stockholder's Equity
Common stock, $5,690 par value, 1,000 shares
authorized, issued and outstanding............. 6 6
Capital surplus................................. 1,045 1,007
Net unrealized capital gain (loss) on
investments, net of tax........................ 30 (57)
Retained earnings............................... 811 773
------- -------
Total stockholder's equity.................... 1,892 1,729
------- -------
Total liabilities and stockholder's equity...... $77,569 $64,197
------- -------
------- -------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of the above statements.
<PAGE>
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES 33
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
NET UNREALIZED
CAPITAL GAIN
(LOSS) ON TOTAL
COMMON CAPITAL INVESTMENTS, RETAINED STOCKHOLDER'S
STOCK SURPLUS NET OF TAX EARNINGS EQUITY
------ -------------- -------------- -------- -------------
<S> <C> <C> <C> <C> <C>
(IN MILLIONS)
Balance, December 31, 1993.............. $6 $ 676 $ (5) $516 $1,193
Net income............................ -- -- -- 138 138
Dividends declared on common stock.... -- -- -- (10) (10)
Capital contribution.................. -- 150 -- -- 150
Change in net unrealized capital loss
on investments, net of tax(1)........ -- -- (649) -- (649)
--
------ ------ -------- ------
Balance, December 31, 1994.............. 6 826 (654) 644 822
Net income............................ -- -- -- 129 129
Capital contribution.................. -- 181 -- -- 181
Change in net unrealized capital gain
on investments, net of tax........... -- -- 597 -- 597
--
------ ------ -------- ------
Balance, December 31, 1995.............. 6 1,007 (57) 773 1,729
Net income............................ -- -- -- 38 38
Capital contribution.................. -- 38 -- -- 38
Change in net unrealized capital gain
on investments, net of tax........... -- -- 87 -- 87
--
------ ------ -------- ------
Balance, December 31, 1996.............. $6 $1,045 $ 30 $811 $1,892
--
--
------ ------ -------- ------
------ ------ -------- ------
</TABLE>
- ------------------------
(1) The 1994 change in net unrealized capital loss on investments, net of tax,
includes a gain of $91 due to the adoption of SFAS No. 115 as discussed in
Note 2(b) of Notes to Consolidated Financial Statements.
The accompanying notes to consolidated financial statements are an integral part
of the above statements.
<PAGE>
34 HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
(IN MILLIONS)
Operating Activities
Net income............................ $ 38 $ 129 $ 138
Adjustments to net income:
Net realized capital losses (gains) on
sale of investments.................. 213 11 (7)
Net amortization of premium on fixed
maturities........................... 14 21 41
Increase in deferred income taxes..... (102) (172) (128)
Increase in deferred policy
acquisition costs.................... (572) (379) (441)
Decrease (increase) in premiums and
amounts receivable................... 10 (81) 10
Increase in accrued investment
income............................... (13) (16) (106)
(Increase) decrease in other assets... (132) (177) 101
Decrease (increase) in reinsurance
recoverable.......................... 179 (35) 75
(Decrease) increase in liability for
future policy benefits............... (92) 483 224
Increase in other liabilities......... 477 281 191
-------- -------- --------
Cash provided by operating
activities......................... 20 65 98
-------- -------- --------
Investing Activities
Purchases of fixed maturity
investments.......................... (5,747) (6,228) (9,127)
Sales of fixed maturity investments... 3,459 4,845 5,713
Maturities and principal paydowns of
fixed maturity investments........... 2,693 1,741 1,931
Net purchase of other investments..... (107) (871) (1,338)
Net sales (purchases) of short-term
investments.......................... 84 (24) 135
-------- -------- --------
Cash provided by (used for)
investing activities............... 382 (537) (2,686)
-------- -------- --------
Financing Activities
Capital contribution.................. 38 -- 150
Dividends paid........................ -- -- (10)
Net (disbursements for) receipts from
investment and universal life-type
contracts (charged from) credited to
policyholder accounts................ (443) 498 2,467
-------- -------- --------
Cash (used for) provided by
financing activities............... (405) 498 2,607
-------- -------- --------
Net (decrease) increase in cash....... (3) 26 19
Cash--beginning of year............... 46 20 1
-------- -------- --------
Cash--end of year....................... $ 43 $ 46 $ 20
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of the above statements.
<PAGE>
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES 35
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN MILLIONS)
- ---------------------------------------------------
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
These consolidated financial statements include Hartford Life Insurance
Company and its wholly-owned subsidiaries (the "Company"), ITT Hartford Life and
Annuity Insurance Company ("ILA") and ITT Hartford International Life
Reassurance Corporation ("HLRe"), formerly American Skandia Life Reinsurance
Corporation. The Company is a wholly-owned subsidiary of Hartford Life and
Accident Insurance Company ("HLA"), a wholly-owned subsidiary of Hartford Life,
Inc. ("Hartford Life"), a direct subsidiary of Hartford Accident and Indemnity
Company, an indirect subsidiary of ITT Hartford Group, Inc. ("The Hartford").
Hartford Life was formed on December 13, 1996 and capitalized on December 16,
1996 with the contribution of all the outstanding common stock of HLA. On
February 10, 1997, The Hartford, the ultimate parent of Hartford Life, announced
its intention to sell up to 20% of Hartford Life during the second quarter of
1997. Management believes that this transaction will not have a material impact
on the operations of the Company (See Note 11).
On December 19, 1995, ITT Industries, Inc. (formerly ITT Corporation)("ITT")
distributed all the outstanding shares of capital stock of The Hartford to ITT
stockholders of record on such date (the transactions relating to such
distribution are referred to herein as the "ITT Spin-off"). As a result of the
ITT Spin-off, The Hartford became an independent, publicly traded company.
The Company is a leading insurance and financial services company which
provides: (a) investment products such as individual variable annuities and
fixed market value adjusted annuities, deferred compensation plan services and
mutual funds for savings and retirement needs; (b) life insurance for income
protection and estate planning; and (c) employee benefits products such as
corporate owned life insurance.
- ---------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES
(A) BASIS OF PRESENTATION
These financial statements present the financial position, results of
operations and cash flows of the Company, and all material intercompany
transactions and balances between Hartford Life Insurance Company and its
subsidiaries have been eliminated. The consolidated financial statements are
prepared on a basis of generally accepted accounting principles which differ
materially from the statutory accounting prescribed by various insurance
regulatory authorities.
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(B) CHANGES IN ACCOUNTING PRINCIPLES
On November 14, 1996, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 96-12, "Recognition of Interest Income and Balance Sheet
Classification of Structured Notes". This Issue requires companies to record
income on certain structured securities on a retrospective interest method. The
Company adopted EITF No. 96-12 for structured securities acquired after November
14, 1996. Adoption of EITF No. 96-12 did not have a material effect on the
Company's financial condition or results of operations.
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities".
This statement established criteria for determining whether transferred assets
should be accounted for as sales or secured borrowings. Subsequently, in
December 1996, the FASB issued SFAS No. 127, "Deferral of Effective Date of
Certain Provisions of FASB Statement No. 125", which defers the effective date
of certain provisions of SFAS No. 125 for one year. Adoption of SFAS No. 125 is
not expected to have a material effect on the Company's financial condition or
results of operations.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation", which is effective in 1996. As permitted by SFAS No. 123, the
Company continues to measure compensation costs of employee stock option plans
(relating to options on common stock of The Hartford) using the intrinsic value
method prescribed by Accounting Principles Board Opinion No. 25. As of February
10, 1997, the Company had not adopted an employee stock compensation plan.
Certain officers of the Company participate in The Hartford's stock option plan.
Compensation costs allocated by The Hartford to the Company, as well as pro
forma compensation costs as determined under SFAS No. 123, were immaterial to
the results of operations for 1996 and 1995.
<PAGE>
36 HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Effective January 1, 1994, the Company adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". The new standard requires,
among other things, that securities be classified as "held-to-maturity",
"available-for-sale" or "trading" based on the Company's intentions with respect
to the ultimate disposition of the security and its ability to effect those
intentions. The classification determines the appropriate accounting carrying
value (cost basis or fair value) and, in the case of fair value, whether the
fair value difference from cost, net of tax, impacts stockholder's equity
directly or is reflected in the Consolidated Statements of Income. Investments
in equity securities had previously been and continue to be recorded at fair
value with the corresponding after-tax impact included in stockholder's equity.
Under SFAS No. 115, the Company's fixed maturity investments are classified as
"available-for-sale" and, accordingly, these investments are reflected at fair
value with the corresponding impact included as a component of stockholder's
equity designated as "Net unrealized capital gain (loss) on investments, net of
tax." As with the underlying investment security, unrealized capital gains and
losses on derivative financial instruments are considered in determining the
fair value of the portfolios. The impact of adoption was an increase to
stockholder's equity of $91 million. The Company's cash flows were not impacted
by this change in accounting principle.
(C) REVENUE RECOGNITION
Revenues for universal life policies and investment products consist of
policy charges for the cost of insurance, policy administration and surrender
charges assessed to policy account balances and are recognized in the period in
which services are provided. Premiums for traditional life insurance policies
are recognized as revenues when they are due from policyholders.
(D) FUTURE POLICY BENEFITS AND OTHER POLICYHOLDER FUNDS
Liabilities for future policy benefits are computed by the net level premium
method using interest rate assumptions varying from 3% to 11% and withdrawal and
mortality assumptions appropriate at the time the policies were issued.
Liabilities for universal life-type and investment contracts are stated at
policyholder account values before surrender charges.
(E) DEFERRED POLICY ACQUISITION COSTS
Policy acquisition costs, including commissions and certain underwriting
expenses associated with acquiring business, are deferred and amortized over the
estimated lives of the contracts, generally 20 years. Generally, acquisition
costs are deferred and amortized using the retrospective deposit method. Under
the retrospective deposit method, acquisition costs are amortized in proportion
to the present value of expected gross profits from surrender charges,
investment, mortality and expense margins. Actual gross profits can vary from
management's estimates resulting in increases or decreases in the rate of
amortization. Management periodically updates these estimates, when appropriate,
and evaluates the recoverability of the deferred acquisition cost asset. When
appropriate, management revises its assumptions on the estimated gross profits
of these contracts and the cumulative amortization for the books of business are
reestimated and readjusted by a cumulative charge or credit to income.
(F) POLICYHOLDER REALIZED CAPITAL GAINS AND LOSSES
Realized capital gains and losses on security transactions associated with
the Company's immediate participation guaranteed contracts are excluded from
revenues and deferred, since under the terms of the contracts the realized gains
and losses will be credited to policyholders in future years as they are
entitled to receive them.
(G) FOREIGN CURRENCY TRANSLATION
Foreign currency translation gains and losses are reflected in stockholder's
equity. Balance sheet accounts are translated at the exchange rates in effect at
each year end and income statement accounts are translated at the average rates
of exchange prevailing during the year. The national currencies of international
operations are generally their functional currencies.
(H) INVESTMENTS
The Company's investments in fixed maturities include bonds, redeemable
preferred stock and commercial paper which are classified as
"available-for-sale" and accordingly are carried at fair value with the
after-tax difference from cost reflected as a component of stockholder's equity
designated as "Net unrealized capital gain (loss) on investments, net of tax".
Equity securities, which include common and non-redeemable preferred stocks, are
carried at fair value with the after-tax difference from cost reflected in
stockholder's equity. Policy and mortgage loans are each carried at their
outstanding balance which approximates fair value. Investments in partnerships
and trusts are carried at cost. Net realized capital gains (losses), after
deducting the policyholders' share, are reported as a component of revenue and
are determined on a specific identification basis.
The Company's accounting policy for impairment recognition requires
recognition of an other than temporary impairment charge on a security if it is
determined that the Company is unable to recover all amounts due under the
contractual obligations of the security. In addition, the Company has
established specific criteria to be used in the impairment evaluation of an
individual portfolio of assets. Specifically, if the asset portfolio is
supporting a runoff operation, is forced to be liquidated prior to maturity to
meet liability commitments, and has fair value below amortized cost, which will
not materially fluctuate as a result of future
<PAGE>
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES 37
- --------------------------------------------------------------------------------
interest rate changes, then an other than temporary impairment condition has
been determined to have occurred. Each individual security within that portfolio
is evaluated to determine whether or not it is impaired. Once an impairment
charge has been recorded, the Company then continues to review the individual
impaired securities for appropriate valuation on an ongoing basis.
During 1996, it was determined that certain individual securities within the
investment portfolio supporting the Company's closed block of guaranteed rate
contracts ("Closed Book GRC") were impaired. With the initiation of certain
hedge transactions, which eliminated the possibility that the fair value of the
Closed Book GRC investments would recover to their current amortized cost, an
other than temporary impairment loss of $88 after tax was determined to have
occurred and was recorded.
(I) DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses a variety of derivative financial instruments including
swaps, caps, floors, forwards and exchange traded financial futures and options
as part of an overall risk management strategy. These instruments are used as a
means of hedging exposure to price, foreign currency and/or interest rate risk
on anticipated investment purchases or existing assets and liabilities. The
Company does not hold or issue derivative financial instruments for trading
purposes. The Company's accounting for derivative financial instruments used to
manage risk is in accordance with the concepts established in SFAS No. 80,
"Accounting for Futures Contracts," SFAS No. 52, "Foreign Currency Translation",
American Institute of Certified Public Accountants Statement of Position 86-2,
"Accounting for Options", and various EITF pronouncements. Written options are,
in all cases, used in conjunction with other assets and derivatives as part of
the Company's asset/liability management strategies. Derivative instruments are
carried at values consistent with the asset or liability being hedged.
Derivatives used to hedge fixed maturities or equities are carried at fair value
with the after-tax difference from cost reflected in stockholder's equity.
Derivatives used to hedge other invested assets or liabilities are carried at
cost.
Derivatives must be designated at inception as a hedge and measured for
effectiveness both at inception and on an ongoing basis. The Company's minimum
correlation threshold for hedge designation is 80%. If correlation, which is
assessed monthly and measured based on a rolling three month average, falls
below 80%, hedge accounting will be terminated. Derivatives used to create a
synthetic asset must meet synthetic accounting criteria including designation at
inception and consistency of terms between the synthetic and the instrument
being replicated. Interest rate swaps are the primary type of derivatives used
to convert London interbank offered quotations for U.S. dollar deposits
("LIBOR") based variable rate instruments to fixed rate instruments. Synthetic
instrument accounting, consistent with industry practice, provides that the
synthetic asset is accounted for like the financial instrument it is intended to
replicate. Derivatives which fail to meet risk management criteria are marked to
market with the impact reflected in the Consolidated Statements of Income.
Gains or losses on financial futures contracts entered into in anticipation
of the future receipt of product cash flows are deferred and, at the time of the
ultimate purchase, reflected as an adjustment to the cost basis of the purchased
asset. Gains or losses on futures used in invested asset risk management are
deferred and adjusted into the cost basis of the hedged asset when the futures
contracts are closed, except for futures used in duration hedging which are
deferred and are adjusted into the cost basis on a quarterly basis. The
adjustments to the cost basis are amortized into investment income over the
remaining asset life.
Open forward commitment contracts are marked to market through stockholder's
equity. Such contracts are recorded at settlement by recording the purchase of
the specified securities at the previously committed price. Gains or losses
resulting from the termination of the forward commitment contracts before the
delivery of the securities are recognized immediately in the Consolidated
Statements of Income as a component of net investment income.
The cost of purchased options and/or premiums received on covered written
options, entered into as part of an asset/liability management strategy, is/are
adjusted into the cost basis of the underlying asset or liability and amortized
over the remaining life of the hedge. Gains or losses on expiration or
termination of the hedge are adjusted into the basis of the underlying asset or
liability and amortized over the remaining asset life. The Company had no
written options as of December 31, 1996 and 1995.
Interest rate swaps involve the periodic exchange of payments without the
exchange of underlying principal or notional amounts. Net receipts or payments
are accrued and recognized over the life of the swap agreement as an adjustment
to income. Should the swap be terminated, the gain or loss is adjusted into the
basis of the asset or liability and amortized over the remaining life. Should
the hedged asset be sold or liability terminated without terminating the swap
position, any swap gains or losses are immediately recognized in earnings.
Interest rate swaps purchased in anticipation of an asset purchase (an
"anticipatory transaction") are recognized consistent with the underlying asset
components such that the settlement component is recognized in the Consolidated
Statements of Income while the change in market value is recognized as an
unrealized gain or loss.
Premiums paid on purchased floor or cap agreements and the premium received
on issued floor or cap agreements (used for risk management) are adjusted into
the
<PAGE>
38 HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
- --------------------------------------------------------------------------------
basis of the applicable asset and amortized over the asset life. Gains or losses
on termination of such positions are adjusted into the basis of the asset or
liability and amortized over the remaining asset life. Net payments are
recognized as an adjustment to income or basis adjusted and amortized depending
on the specific hedge strategy.
Forward exchange contracts and foreign currency swaps are accounted for in
accordance with SFAS No. 52.
(J) RELATED PARTY TRANSACTIONS
Transactions of the Company with HLA and its affiliates relate principally
to tax settlements, reinsurance, insurance coverage, rental and service fees and
payment of dividends and capital contributions. In addition, certain affiliated
insurance companies purchased group annuity contracts from the Company to fund
pension costs and claim annuities to settle casualty claims. Substantially all
general insurance expenses related to the Company, including rent and employee
benefit plan expenses, are initially paid by Hartford Fire Insurance Company, an
indirect subsidiary of The Hartford ("Hartford Fire"). Direct expenses are
allocated to the Company using specific identification, and indirect expenses
are allocated using other applicable methods. Indirect expenses include those
for corporate areas which, depending on the type, are allocated based on either
a percentage of direct expenses or on utilization. Indirect expenses allocated
to the Company by Hartford Fire were $40, $45 and $41 in 1996, 1995 and 1994,
respectively. Management of the Company believes that the methods used are
reasonable. In addition, the Company was charged its share of costs allocated to
The Hartford by ITT prior to the ITT Spin-off, which were immaterial in 1995 and
1994. The Company had a receivable from The Hartford of $1 and a payable to The
Hartford of $2 at December 31, 1996 and 1995, respectively.
In 1996, the Company ceded approximately $33.3 billion of group life
insurance in force and $318 million of disability premium to HLA and assumed
$8.5 billion of individual life insurance in force from HLA.
On June 30, 1995, the ownership of ITT Lyndon Insurance Company was
transferred to the Company via a capital contribution of $181 million,
representing the net assets of the company. Also, in 1996, the Company received
a capital contribution of $37.5 million from its parent HLA.
(K) DIVIDENDS TO POLICYHOLDERS
Certain life insurance policies contain dividend payment provisions that
enable the policyholder to participate in the earnings of the life insurance
subsidiaries of the Company. The participating insurance in force accounted for
44%, 41%, and 43% in 1996, 1995, and 1994, respectively, of total life insurance
in force.
- ---------------------------------------------------
3. INVESTMENTS
(A) COMPONENTS OF NET INVESTMENT INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Interest income................ $ 1,452 $ 1,338 $ 1,247
(Losses) income from other
investments................... (42) 1 54
--------- --------- ---------
Gross investment income........ 1,410 1,339 1,301
Less: Investment expenses...... 13 11 9
--------- --------- ---------
Net investment income.......... $ 1,397 $ 1,328 $ 1,292
--------- --------- ---------
--------- --------- ---------
</TABLE>
(B) COMPONENTS OF NET REALIZED CAPITAL GAINS (LOSSES)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Fixed maturities............... $ (201) $ 23 $ (34)
Equity securities.............. 2 (6) (11)
Real estate and other.......... (4) (25) 47
Less: (Increase) decrease in
liability to policyholders for
realized capital gains
(losses)...................... (10) (3) 5
--------- --------- ---------
Net realized capital (losses)
gains......................... $ (213) $ (11) $ 7
--------- --------- ---------
--------- --------- ---------
</TABLE>
(C) NET UNREALIZED CAPITAL GAINS (LOSSES) ON EQUITY SECURITIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
----- ----- ---------
<S> <C> <C> <C>
Gross unrealized gains........... $ 13 $ 4 $ 2
Gross unrealized losses.......... (1) (2) (11)
--- --- ---------
Net unrealized capital gains
(losses)........................ 12 2 (9)
Deferred income tax liability
(asset)......................... 4 1 (3)
--- --- ---------
Net unrealized capital gains
(losses), after tax............. 8 1 (6)
Balance beginning of year........ 1 (6) (5)
--- --- ---------
Change in net unrealized capital
gains (losses) on investments... $ 7 $ 7 $ (1)
--- --- ---------
--- --- ---------
</TABLE>
<PAGE>
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES 39
- --------------------------------------------------------------------------------
(D) NET UNREALIZED CAPITAL GAINS (LOSSES) ON FIXED MATURITIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Gross unrealized gains..................................................................................... $ 386 $ 529
Gross unrealized losses.................................................................................... (341) (569)
Unrealized (gains) losses credited to policyholders........................................................ (11) (52)
--------- ---------
Net unrealized capital gains (losses)...................................................................... 34 (92)
Deferred income tax liability (asset)...................................................................... 12 (34)
--------- ---------
Net unrealized capital gains (losses), after tax........................................................... 22 (58)
Balance beginning of year.................................................................................. (58) (648)
--------- ---------
Change in net unrealized capital gains (losses) on investments............................................. $ 80 $ 590
--------- ---------
--------- ---------
<CAPTION>
1994
---------
<S> <C>
Gross unrealized gains..................................................................................... $ 150
Gross unrealized losses.................................................................................... (1,185)
Unrealized (gains) losses credited to policyholders........................................................ 37
---------
Net unrealized capital gains (losses)...................................................................... (998)
Deferred income tax liability (asset)...................................................................... (350)
---------
Net unrealized capital gains (losses), after tax........................................................... (648)
Balance beginning of year.................................................................................. 161
---------
Change in net unrealized capital gains (losses) on investments............................................. $ (809)
---------
---------
</TABLE>
(E) COMPONENTS OF FIXED MATURITIES INVESTMENTS
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
---------------------------------
GROSS UNREALIZED
AMORTIZED --------------------
COST GAINS LOSSES
----------- --------- ---------
<S> <C> <C> <C>
U.S. government and government agencies and authorities (guaranteed and sponsored)............ $ 166 $ 12 $ (3)
U.S. government and government agencies and authorities (guaranteed and
sponsored)--asset-backed..................................................................... 1,970 161 (128)
States, municipalities and political subdivisions............................................. 373 6 (11)
International governments..................................................................... 281 12 (4)
Public utilities.............................................................................. 877 12 (8)
All other corporate including international................................................... 4,656 120 (107)
All other corporate--asset-backed............................................................. 3,601 49 (59)
Short-term investments........................................................................ 1,655 14 (21)
----------- --------- ---------
Total fixed maturities.................................................................... $ 13,579 $ 386 $ (341)
----------- --------- ---------
----------- --------- ---------
<CAPTION>
AS OF DECEMBER 31, 1995
---------------------------------
GROSS UNREALIZED
AMORTIZED --------------------
COST GAINS LOSSES
----------- --------- ---------
<S> <C> <C> <C>
U.S. government and government agencies and authorities (guaranteed and sponsored)............ $ 502 $ 4 $ (9)
U.S. government and government agencies and authorities (guaranteed and
sponsored)--asset-backed..................................................................... 3,568 210 (387)
States, municipalities and political subdivisions............................................. 201 4 (3)
International governments..................................................................... 291 19 (4)
Public utilities.............................................................................. 949 29 (2)
All other corporate including international................................................... 3,065 76 (55)
All other corporate--asset-backed............................................................. 5,056 187 (109)
Short-term investments........................................................................ 808 -- --
----------- --------- ---------
Total fixed maturities.................................................................... $ 14,440 $ 529 $ (569)
----------- --------- ---------
----------- --------- ---------
<CAPTION>
FAIR
VALUE
---------
<S> <C>
U.S. government and government agencies and authorities (guaranteed and sponsored)............ $ 175
U.S. government and government agencies and authorities (guaranteed and
sponsored)--asset-backed..................................................................... 2,003
States, municipalities and political subdivisions............................................. 368
International governments..................................................................... 289
Public utilities.............................................................................. 881
All other corporate including international................................................... 4,669
All other corporate--asset-backed............................................................. 3,591
Short-term investments........................................................................ 1,648
---------
Total fixed maturities.................................................................... $ 13,624
---------
---------
FAIR
VALUE
---------
<S> <C>
U.S. government and government agencies and authorities (guaranteed and sponsored)............ $ 497
U.S. government and government agencies and authorities (guaranteed and
sponsored)--asset-backed..................................................................... 3,391
States, municipalities and political subdivisions............................................. 202
International governments..................................................................... 306
Public utilities.............................................................................. 976
All other corporate including international................................................... 3,086
All other corporate--asset-backed............................................................. 5,134
Short-term investments........................................................................ 808
---------
Total fixed maturities.................................................................... $ 14,400
---------
---------
</TABLE>
<PAGE>
40 HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
- --------------------------------------------------------------------------------
The amortized cost and fair value of fixed maturities at December 31, 1996,
by maturity, are shown below. Asset-backed securities, including mortgage-backed
securities and collateralized mortgage obligations, are distributed to maturity
year based on the Company's estimates of the rate of future prepayments of
principal over the remaining lives of such securities. These estimates are
developed using prepayment speeds reported in broker consensus data and can be
expected to vary from actual experience. Expected maturities differ from
contractual maturities due to call or prepayment provisions.
<TABLE>
<CAPTION>
MATURITY AMORTIZED COST FAIR VALUE
- -------------------------- -------------- -----------
<S> <C> <C>
One year or less.......... $ 2,632 $ 2,642
Over one year through five
years.................... 5,871 5,928
Over five years through
ten years................ 3,320 3,311
Over ten years............ 1,756 1,743
------- -----------
Total................. $ 13,579 $ 13,624
------- -----------
------- -----------
</TABLE>
Sales of fixed maturities excluding short-term fixed maturities for the
years ended December 31, 1996, 1995 and 1994 resulted in proceeds of $3,459,
$4,848 and $5,708, respectively, resulting in gross realized capital gains of
$87, $91 and $71, respectively, and gross realized capital losses (including
investment writedowns) of $298, $72 and $100, respectively, not including
policyholder gains and losses. Sales of equity securities for the years ended
December 31, 1996, 1995 and 1994 resulted in proceeds of $74, $64 and $159,
respectively, resulting in gross realized capital gains of $2, $28 and $3,
respectively, and gross realized capital losses of $0, $59 and $14,
respectively, not including policyholder gains and losses.
(F) CONCENTRATION OF CREDIT RISK
As of December 31, 1996, the Company had a reinsurance recoverable of $3.8
billion from Mutual Benefit Life Assurance Corporation ("Mutual Benefit"),
supported by assets in a security trust of $3.8 billion (including policy loans
of $3.3 billion). The risk of Mutual Benefit becoming insolvent is mitigated by
the reinsurance agreement's requirement that the assets be kept in a security
trust with the Company as sole beneficiary. Excluding investments in U.S.
government and agencies, the Company has no other significant concentrations of
credit risk in fixed maturities.
(G) DERIVATIVE INVESTMENTS
Derivatives play an important role in facilitating the management of
interest rate risk, creating opportunities to fund product obligations hedging
against indexation risks that affect the value of certain liabilities and
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,
forwards and exchange traded financial futures and options in order to hedge
exposure to price, foreign currency and/or interest rate risk on anticipated
investment purchases or existing assets and liabilities. The notional amounts of
derivative contracts represent the basis upon which pay and receive amounts are
calculated and are not reflective of credit risk for derivative contracts.
Credit risk for derivative contracts is limited to the amounts calculated to be
due to the Company on such contracts. The Company believes it maintains prudent
policies regarding the financial stability and credit standing of its major
counterparties and typically requires credit enhancement provisions to further
limit its credit risk. Many of these derivative contracts are bilateral
agreements that are not assignable without the consent of the relevant
counterparty. Notional amounts pertaining to derivative financial instruments
totaled $9.9 billion and $8.8 billion at December 31, 1996 and 1995,
respectively ($7.4 billion and $7.1 billion related to life insurance
investments and $2.5 billion and $1.7 billion related to life insurance
liabilities at December 31, 1996 and 1995, respectively).
<PAGE>
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES 41
- --------------------------------------------------------------------------------
The following table summarizes the Company's derivatives, segregated by
major categories, as of December 31, 1996 and 1995:
<TABLE>
<CAPTION>
AMOUNTS HEDGED (NOTIONAL AMOUNTS) (EXCLUDING
LIABILITY HEDGES)
--------------------------------------------------
PURCHASED
TOTAL ISSUED CAPS OPTIONS,
CARRYING & CAPS &
1996 VALUE FLOORS(C) FLOORS(D) FUTURES(E)
- ------------------------------------------------------------------------ --------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Asset-backed securities (excluding inverse floaters and anticipatory)... $ 5,242 $ 500 $ 2,454 $ --
Inverse floaters(a)..................................................... 352 98 856 --
Anticipatory(g)......................................................... -- -- -- 132
Other bonds and notes................................................... 7,369 425 440 5
Short-term investments.................................................. 661 -- -- --
--------- ----------- ----------- -----
Total fixed maturities.............................................. 13,624 1,023 3,750 137
Equity securities, policy loans and other investments................... 4,011 -- -- --
--------- ----------- ----------- -----
Total investments................................................... $ 17,635 $ 1,023 $ 3,750 $ 137
--------- ----------- ----------- -----
--------- ----------- ----------- -----
Total derivatives-fair value(b)..................................... $ (10) $ 35 $ --
----------- ----------- -----
----------- ----------- -----
<CAPTION>
AMOUNTS HEDGED (NOTIONAL AMOUNTS) (EXCLUDING
LIABILITY HEDGES)
--------------------------------------------------
PURCHASED
TOTAL ISSUED CAPS OPTIONS,
CARRYING & CAPS &
1995 VALUE FLOORS(C) FLOORS(D) FUTURES(E)
- ------------------------------------------------------------------------ --------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Asset-backed securities (excluding inverse floaters and anticipatory)... $ 5,764 $ 118 $ 3,133 $ 322
Inverse floaters(a)..................................................... 711 560 354 6
Anticipatory(g)......................................................... -- -- -- 213
Other bonds and notes................................................... 7,118 33 66 322
Short-term investments.................................................. 807 -- -- --
--------- ----------- ----------- -----
Total fixed maturities.............................................. 14,400 711 3,553 863
Equity securities, policy loans and other investments................... 3,865 -- -- --
--------- ----------- ----------- -----
Total investments................................................... $ 18,265 $ 711 $ 3,553 $ 863
--------- ----------- ----------- -----
--------- ----------- ----------- -----
Total derivatives-fair value(b)..................................... $ (32) $ 46 $ --
----------- ----------- -----
----------- ----------- -----
<CAPTION>
INTEREST FOREIGN TOTAL
RATE CURRENCY NOTIONAL
1996 SWAPS(H) SWAPS(F) AMOUNT
- ------------------------------------------------------------------------ ----------- ----------- -----------
<S> <C> <C> <C>
Asset-backed securities (excluding inverse floaters and anticipatory)... $ 941 $ -- $ 3,895
Inverse floaters(a)..................................................... 346 -- 1,300
Anticipatory(g)......................................................... -- -- 132
Other bonds and notes................................................... 1,079 125 2,074
Short-term investments.................................................. -- -- --
----------- ----- -----------
Total fixed maturities.............................................. 2,366 125 7,401
Equity securities, policy loans and other investments................... 19 -- 19
----------- ----- -----------
Total investments................................................... $ 2,385 $ 125 $ 7,420
----------- ----- -----------
----------- ----- -----------
Total derivatives-fair value(b)..................................... $ (25) $ (9) $ (9)
----------- ----- -----------
----------- ----- -----------
INTEREST FOREIGN TOTAL
RATE CURRENCY NOTIONAL
1995 SWAPS(H) SWAPS(F) AMOUNT
- ------------------------------------------------------------------------ ----------- ----------- -----------
<S> <C> <C> <C>
Asset-backed securities (excluding inverse floaters and anticipatory)... $ 290 $ -- $ 3,863
Inverse floaters(a)..................................................... 681 -- 1,601
Anticipatory(g)......................................................... 25 -- 238
Other bonds and notes................................................... 757 187 1,365
Short-term investments.................................................. -- -- --
----------- ----- -----------
Total fixed maturities.............................................. 1,753 187 7,067
Equity securities, policy loans and other investments................... 18 -- 18
----------- ----- -----------
Total investments................................................... $ 1,771 $ 187 $ 7,085
----------- ----- -----------
----------- ----- -----------
Total derivatives-fair value(b)..................................... $ (108) $ (24) $ (118)
----------- ----- -----------
----------- ----- -----------
</TABLE>
- ------------------------
(a) Inverse floaters are variations of collateralized mortgage obligations
("CMOs") for which the coupon rates move inversely with an index rate such
as LIBOR. The risk to principal is considered negligible as the underlying
collateral for the securities is guaranteed or sponsored by government
agencies. To address the volatility risk created by the coupon variability,
the Company uses a variety of derivative instruments, primarily interest
rate swaps and purchased caps and floors.
(b) The fair value of derivative instruments including swaps, caps, floors,
futures, options and forward commitments, was determined using a pricing
model which is validated through quarterly comparison to dealer quoted
market prices, for 1996 and dealer quoted prices for 1995.
(c) The 1996 data includes issued caps of $433 with a weighted average strike
rate of 8.21% (ranging from 7.0% to 9.5%) and over 93% maturing in 2000
through 2005. In addition, issued floors totaled $590, had a weighted
average strike rate of 5.17% (ranging from 5.00% to 7.85%) with all of them
maturing by the end of 2005. The 1995 data includes issued caps of $475 with
a weighted average strike rate of 8.5% (ranging from 7.0% to 10.4%) and over
85% maturing in 2000 through 2004. In addition, issued floors totaled $236,
had a weighted average strike rate of 8.1% (ranging from 5.3% to 10.9%) and
mature through 2007, with 76% maturing by 2004.
(d) The 1996 data includes purchased floors of $2.4 billion and purchased caps
of $1.3 billion. The floors had a weighted average strike rate of 5.84%
(ranging from 3.70% to 7.85%) and over 87% mature in 1997 through 1999. The
options mature in 1997. The caps had a weighted average strike rate of 7.59%
(ranging from 4.40% to 10.125%) and over 76% mature in 1997 through 2001.
The 1995 data includes purchased floors of $1.8 billion and purchased caps
of $1.7 billion. The floors had a weighted average strike price of 5.8%
(ranging from 3.7% to 6.8%) and over 85% mature in 1997 through 1999. The
caps had a weighted average strike price of 7.5% (ranging from 4.5% and
10.1%) and over 82% mature in 1997 through 1999.
<PAGE>
42 HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
- --------------------------------------------------------------------------------
(e) As of December 31, 1996 and 1995, over 39% and 95%, respectively, of the
notional futures contracts, expire within one year.
(f) As of December 31, 1996 and 1995, over 42% and 25%, respectively, of the
Company's foreign currency swaps, expire within one year; the balance mature
over the succeeding 4 to 5 years.
(g) Deferred gains and losses on anticipatory transactions are included in the
carrying value of bond investments in the Consolidated Balance Sheets. At
the time of the ultimate purchase, they are reflected as a basis adjustment
to the purchased asset. At December 31, 1996, the Company had $1 million in
net deferred gains for futures, interest rate swaps and purchased options.
The Company expects to basis adjust $1 million of the deferred gains in
1997. At December 31, 1995, the Company had $5.3 million in net deferred
gains for futures, interest rate swaps and purchased options.
(h) The following table summarizes the maturities by notional value of interest
rate swaps outstanding at December 31, 1996 and 1995, and the related
weighted average interest pay rate or receive rate. The variable rates
represent spot rates (primarily 90 day LIBOR), as of December 31, 1996 and
1995. Such variable rates have been calculated assuming that the spot rates
remain unchanged throughout the life of the interest rate swaps.
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000 2001
- ------------------------------------------------------------ ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
PAY FIXED/RECEIVE VARIABLE
Notional Value $-- $50 $125 $35 $125
Weighted Average Pay Rate -- 5.7 % 5.9 % 5.5 % 5.5%
Weighted Average Receive Rate -- 3.2 % -- 6.5 % 6.4%
PAY VARIABLE/RECEIVE FIXED
Notional Value $86 $25 $486 $74 $582
Weighted Average Pay Rate 7.5 % -- 6.4 % 6.7 % 7.0%
Weighted Average Receive Rate 5.6 % -- 5.6 % 5.7 % 6.2%
PAY VARIABLE/RECEIVE DIFFERENT VARIABLE
Notional Value $19 $15 $-- $200 $--
Weighted Average Pay Rate 5.9 % 5.7 % -- 6.4 % --
Weighted Average Receive Rate 3.7 % 5.5 % -- 5.0 % --
Total Interest Rate Swaps $105 $90 $611 $309 $707
Total Weighted Average Pay Rate 7.2 % 5.7 % 6.3 % 6.4 % 6.7%
Total Weighted Average Receive Rate 5.2 % 3.8 % 4.3 % 5.4 % 6.3%
<CAPTION>
1995 1996 1997 1998 1999 2000
- ------------------------------------------------------------ ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
PAY FIXED/RECEIVE VARIABLE
Notional Value $15 $50 $-- $453 $31
Weighted Average Pay Rate 5.0 % 7.2 % -- 8.1 % 7.1%
Weighted Average Receive Rate 5.8 % 5.9 % -- 5.8 % 5.7%
PAY VARIABLE/RECEIVE FIXED
Notional Value $100 $68 $25 $25 $35
Weighted Average Pay Rate 5.9 % 8.6 % 5.9 % -- 5.9%
Weighted Average Receive Rate 2.4 % 7.9 % 4.0 % -- 6.5%
PAY VARIABLE/RECEIVE DIFFERENT VARIABLE
Notional Value $50 $18 $36 $12 $200
Weighted Average Pay Rate 5.8 % -- 3.7 % 3.5 % 4.5%
Weighted Average Receive Rate 5.4 % -- 5.6 % 5.2 % 6.8%
Total Interest Rate Swaps $165 $136 $61 $490 $266
Total Weighted Average Pay Rate 5.8 % 7.8 % 4.6 % 7.6 % 5.0%
Total Weighted Average Receive Rate 3.6 % 7.2 % 4.9 % 5.4 % 6.6%
<CAPTION>
LATEST
1996 THEREAFTER TOTAL MATURITY
- ------------------------------------------------------------ ------------- ----------- -----------
<S> <C> <C> <C>
PAY FIXED/RECEIVE VARIABLE
Notional Value $170 $505 2003
Weighted Average Pay Rate 5.7 % 5.7 %
Weighted Average Receive Rate 6.9 % 4.7 %
PAY VARIABLE/RECEIVE FIXED
Notional Value $349 $1,602 2007
Weighted Average Pay Rate 6.9 % 6.8 %
Weighted Average Receive Rate 5.9 % 5.9 %
PAY VARIABLE/RECEIVE DIFFERENT VARIABLE
Notional Value $44 $278 2003
Weighted Average Pay Rate 12.9 % 7.4 %
Weighted Average Receive Rate 6.4 % 5.2 %
Total Interest Rate Swaps $563 $2,385 2007
Total Weighted Average Pay Rate 7.0 % 6.6 %
Total Weighted Average Receive Rate 6.3 % 5.5 %
LATEST
1995 THEREAFTER TOTAL MATURITY
- ------------------------------------------------------------ ------------- ----------- -----------
<S> <C> <C> <C>
PAY FIXED/RECEIVE VARIABLE
Notional Value $229 $778 2004
Weighted Average Pay Rate 7.8 % 7.8 %
Weighted Average Receive Rate 5.9 % 5.9 %
PAY VARIABLE/RECEIVE FIXED
Notional Value $190 $443 2007
Weighted Average Pay Rate 5.4 % 5.4 %
Weighted Average Receive Rate 6.9 % 6.9 %
PAY VARIABLE/RECEIVE DIFFERENT VARIABLE
Notional Value $234 $550 2004
Weighted Average Pay Rate 16.3 % 5.7 %
Weighted Average Receive Rate 5.9 % 6.4 %
Total Interest Rate Swaps $653 $1,771 2007
Total Weighted Average Pay Rate 7.3 % 6.9 %
Total Weighted Average Receive Rate 6.3 % 5.8 %
</TABLE>
In addition, interest rate sensitivity related to certain Company insurance
liabilities was altered primarily through interest rate swap agreements. The
notional amount of the liability agreements in which the Company generally pays
one variable rate in exchange for another was $2.4 billion and $1.7 billion at
December 31, 1996 and 1995, respectively. As of December 31, 1996, the weighted
average pay rate was 5.6% and the weighted average receive rate was 6.5%. These
agreements mature at various times through 2001.
<PAGE>
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES 43
- --------------------------------------------------------------------------------
A reconciliation between notional amounts at December 31, 1995 and 1996 by
derivative type and strategy is as follows:
<TABLE>
<CAPTION>
BY DERIVATIVE TYPE
---------------------------------------------
12/31/95 MATURITIES/
NOTIONAL AMOUNT ADDITIONS TERMINATIONS
----------------- ----------- -------------
<S> <C> <C> <C>
Caps..................................................................... $ 2,184 $ 1,286 $ 1,715
Floors................................................................... 2,180 2,053 1,065
Options.................................................................. -- 10 --
Swaps/Forwards........................................................... 3,566 3,989 2,694
Futures.................................................................. 863 2,092 2,818
------ ----------- ------
Total................................................................ $ 8,793 $ 9,430 $ 8,292
------ ----------- ------
------ ----------- ------
<CAPTION>
BY STRATEGY
---------------------------------------------
12/31/95 MATURITIES/
NOTIONAL AMOUNT ADDITIONS TERMINATIONS
----------------- ----------- -------------
<S> <C> <C> <C>
Liability................................................................ $ 1,708 $ 1,940 $ 1,137
Anticipatory............................................................. 238 516 622
Asset.................................................................... 2,984 1,265 2,137
Portfolio................................................................ 3,863 5,709 4,396
------ ----------- ------
Total................................................................ $ 8,793 $ 9,430 $ 8,292
------ ----------- ------
------ ----------- ------
<CAPTION>
12/31/96
NOTIONAL AMOUNT
-----------------
<S> <C>
Caps..................................................................... $ 1,755
Floors................................................................... 3,168
Options.................................................................. 10
Swaps/Forwards........................................................... 4,861
Futures.................................................................. 137
------
Total................................................................ $ 9,931
------
------
12/31/96
NOTIONAL AMOUNT
-----------------
<S> <C>
Liability................................................................ $ 2,511
Anticipatory............................................................. 132
Asset.................................................................... 2,112
Portfolio................................................................ 5,176
------
Total................................................................ $ 9,931
------
------
</TABLE>
(H) FAIR VALUE OF FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF DECEMBER 31,
1996 1995
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
ASSETS
Fixed maturities............................................................. $ 13,624 $ 13,624 $ 14,400 $ 14,400
Equity securities............................................................ 119 119 63 63
Policy loans................................................................. 3,836 3,836 3,381 3,381
Mortgage loans............................................................... 2 2 265 265
Investments in partnerships and trust........................................ 48 48 94 97
Other........................................................................ 6 56 62 62
LIABILITIES
Other policy benefits........................................................ $ 11,707 $ 11,469 $ 12,727 $ 12,767
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument: fair value for fixed maturities and
equity securities approximate those quotations published by applicable stock
exchanges or received from other reliable sources; policy and mortgage loan
carrying amounts approximate fair value; investments in partnerships and trusts
are based on external market valuations from partnership and trust managements;
fair value of derivative instruments, including swaps, caps, floors, futures,
and forward commitments, is determined by using a pricing model which is
validated through quarterly comparison to dealer quoted market prices; and other
policy benefits payable for investment type contracts are determined by
estimating future cash flows discounted at the year end market rate.
- ---------------------------------------------------
4. INCOME TAX
Hartford Life and The Hartford have entered into a tax sharing agreement
under which each member, including the Company, in the consolidated U.S. federal
income tax return will make payments between them such that, with respect to any
period, the amount of taxes to be paid by Hartford Life for the Company, subject
to certain adjustments, generally will be determined as though the Company were
to file separate federal, state and local income tax returns.
As long as The Hartford continues to beneficially own, directly or
indirectly, at least 80% of the combined voting power and 80% of the value of
the outstanding capital stock of Hartford Life, the Company will be included for
federal income tax purposes in the consolidated group of which The Hartford is
the common parent. It is the current intention of The Hartford and its
subsidiaries to continue to file a consolidated federal income tax return. The
Company will continue to remit to (receive from) The Hartford a current income
tax provision (benefit) computed in accordance with such tax sharing agreement.
The Company's effective tax rate was 35%, 32% and 32% in 1996, 1995 and 1994,
respectively.
<PAGE>
44 HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Income tax expense was as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Current............................. $ 122 $ 211 $ 185
Deferred........................... (102) (149) (120)
--------- --------- ---------
Total............................ $ 20 $ 62 $ 65
--------- --------- ---------
--------- --------- ---------
</TABLE>
A reconciliation of the tax provision at the U.S. federal statutory rate to
the provision for income taxes was as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Tax provision at U.S. statutory
rate............................... $ 20 $ 67 $ 71
Tax-exempt income.................. -- (3) (3)
Foreign tax credit................. -- (4) (1)
Other.............................. -- 2 (2)
--------- --------- ---------
Total............................ $ 20 $ 62 $ 65
--------- --------- ---------
--------- --------- ---------
</TABLE>
Income taxes paid were $189, $162 and $244 in 1996, 1995 and 1994,
respectively. The current tax refund due from The Hartford to the Company was
$72 and $8 as of December 31, 1996 and 1995, respectively.
Deferred tax assets (liabilities) included the following:
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Tax return deferred acquisition costs......... $ 514 $ 410
Financial statement deferred acquisition costs
and reserves................................. (242) 138
Employee benefits............................. 8 8
Unrealized (gain) loss on investments......... (16) 32
Investments and other......................... 210 (168)
--------- ---------
Total..................................... $ 474 $ 420
--------- ---------
--------- ---------
</TABLE>
Prior to the Tax Reform Act of 1984, the Life Insurance Company Income Tax
Act of 1959 permitted the deferral from taxation of a portion of statutory
income under certain circumstances. In such circumstances, the deferred income
was accumulated in a "Policyholders' Surplus Account" and will be taxable in the
future only under conditions which management considers to be remote; therefore,
no Federal income taxes have been provided on this deferred income. The balance
for tax return purposes of the Policyholders' Surplus Account as of December 31,
1996 was $37.
- ---------------------------------------------------
5. 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.
Life insurance net retained premiums were comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Gross premiums..................... $ 1,834 $ 1,545 $ 1,316
Insurance assumed.................. 173 591 299
Insurance ceded.................... (302) (649) (515)
--------- --------- ---------
Total.......................... $ 1,705 $ 1,487 $ 1,100
--------- --------- ---------
--------- --------- ---------
</TABLE>
Life reinsurance recoveries, which reduced death and other benefits, for the
years ended December 31, 1996, 1995 and 1994 approximated $140, $220 and $164,
respectively.
In December 1994, the Company ceded to a third party $1.0 billion in
individual fixed and variable annuities on a modified coinsurance basis. In
December 1995, the Company ceded approximately $1.2 billion in individual
variable annuities on a modified coinsurance basis to a third party. These
transactions did not have a material impact on consolidated net income.
In May 1994, the Company assumed the life insurance policies and the
individual annuities of Pacific Standard with reserves and account values of
approximately $434 million. The Company received cash and investment grade
assets to support the life insurance and individual annuity contract obligations
assumed.
- ---------------------------------------------------
6. PENSION PLANS AND OTHER POSTRETIREMENT
BENEFITS
The Company's employees are included in Hartford Fire's noncontributory
defined benefit pension plans. These plans provide pension benefits that are
based on years of service and the employee's compensation during the last ten
years of employment. The Company's funding policy is to contribute annually an
amount between the minimum funding requirements set forth in the Employee
Retirement Income Security Act of 1974, as amended, and the maximum amount that
can be deducted for Federal income tax purposes. Generally, pension costs are
funded through the purchase of the Company's group pension contracts. The cost
to the Company was approximately $5, $2 and $2 in 1996, 1995 and 1994,
respectively.
The Company also provides, through Hartford Fire, certain health care and
life insurance benefits for eligible retired employees. A substantial portion of
the Company's employees may become eligible for these benefits upon retirement.
The Company's contribution for health care benefits will depend on the retiree's
date of retirement and years of service. In addition, the plan has a defined
dollar cap which limits average Company contributions. The Company has prefunded
a portion of the health care and life insurance obligations through trust funds
where such prefunding can be accomplished on a tax effective basis.
<PAGE>
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES 45
- --------------------------------------------------------------------------------
Postretirement health care and life insurance benefits expense, allocated by The
Hartford, was immaterial for 1996, 1995 and 1994, respectively.
The assumed rate of future increases in the per capita cost of health care
(the health care trend rate) was 9.3% for 1996, decreasing ratably to 6.0% in
the year 2001. Increasing the health care trend rates by one percent per year
would have an immaterial impact on the accumulated postretirement benefit
obligation and the annual expense. To the extent that the actual experience
differs from the inherent assumptions, the effect will be amortized over the
average future service of the covered employees.
- ---------------------------------------------------
7. BUSINESS SEGMENT INFORMATION
The Company sells financial products such as fixed and variable annuities,
retirement plan services, and life insurance on both an individual and a group
basis. The Company divides its core businesses into three segments: Investment
Products, Individual Life Insurance and Employee Benefits. In addition, the
Company also maintains a corporate operation and also classifies certain of its
business as Runoff operations. The Investment Products segment offers individual
variable annuities and fixed market value adjusted annuities, deferred
compensation and retirement plan services, mutual funds, investment management
services and other financial products. The Individual Life Insurance segment
sells a variety of individual life insurance products, including variable life,
universal life, and interest-sensitive whole life policies. The Employee
Benefits segment sells corporate owned life insurance. Through its corporate
operation, the Company reports net investment income on assets representing
surplus not assigned to any of its business segments and certain other revenues
and expenses not specifically allocable to any of its business segments. The
Company's Runoff operations are comprised of Closed Book GRC. With the exception
of Closed Book GRC, net realized capital gains and losses are recognized in the
period of realization but are allocated to the segments utilizing durations of
the segment portfolios.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
REVENUES
Investment Products............... $ 1,013 $ 759 $ 594
Individual Life Insurance......... 440 383 375
Employee Benefits................. 1,366 1,273 919
Corporate Operations.............. 81 52 30
Runoff Operations................. (11) 337 481
--------- --------- ---------
Total Revenues.................. $ 2,889 $ 2,804 $ 2,399
--------- --------- ---------
--------- --------- ---------
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
INCOME BEFORE INCOME TAX EXPENSE
Investment Products............... $ 230 $ 172 $ 127
Individual Life Insurance......... 68 56 39
Employee Benefits................. 43 37 27
Corporate Operations.............. 65 16 8
Runoff Operations................. (348) (90) 2
--------- --------- ---------
Income Before Income Tax
Expense........................ $ 58 $ 191 $ 203
--------- --------- ---------
--------- --------- ---------
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
ASSETS
Investment Products............... $ 53,743 $ 40,624 $ 29,115
Individual Life Insurance......... 3,753 3,173 2,808
Employee Benefits................. 14,515 13,494 7,847
Corporate Operations.............. 1,891 1,729 822
Runoff Operations................. 3,667 5,177 7,257
--------- --------- ---------
Total Assets.................... $ 77,569 $ 64,197 $ 47,849
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ---------------------------------------------------
8. STATUTORY NET INCOME AND SURPLUS
A significant percentage of the consolidated statutory surplus is
permanently reinvested or is subject to various state regulatory restrictions
which limit the payment of dividends without prior approval. The total amount of
statutory dividends which may be paid by the insurance subsidiaries of the
Company in 1997, without prior approval, is estimated to be $121 million.
Statutory net income and surplus as of and for the years ended December 31 were:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Statutory net income...... $ 144 $ 112 $ 58
Statutory surplus......... $ 1,207 $ 1,125 $ 941
</TABLE>
The insurance subsidiaries of the Company prepare their statutory financial
statements in accordance with accounting practices prescribed by the State of
Connecticut Insurance Department. Prescribed statutory accounting practices
include publications of the National Association of Insurance Commissioners
("NAIC"), as well as state laws, regulations, and general administrative rules.
- ---------------------------------------------------
9. SEPARATE ACCOUNTS
The Company maintained separate account assets and liabilities totaling
$49.7 billion and $36.3 billion at December 31, 1996 and 1995, respectively,
which are reported at fair value. Separate account assets are segregated from
other investments, and investment income and gains and losses accrue directly to
the policyholder. Separate accounts reflect two categories of risk assumption:
non-guaranteed separate accounts totaling $39.4 billion and $25.9 billion at
December 31, 1996 and 1995, respectively, wherein the policyholder assumes the
investment risk, and
<PAGE>
46 HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
- --------------------------------------------------------------------------------
guaranteed separate account assets totaling $10.3 billion at December 31, 1996
and 1995, wherein the Company contractually guarantees either a minimum return
or account value to the policyholder. Included in the non-guaranteed category
are policy loans totaling $2.0 billion and $1.7 billion at December 31, 1996 and
1995, respectively. Investment income (including investment gains and losses)
and interest credited to policyholders on separate account assets are not
reflected in the Consolidated Statements of Income. Separate account management
fees, net of minimum guarantees, were $538, $387 and $256 in 1996, 1995 and
1994, respectively.
The guaranteed separate accounts include modified guaranteed individual
annuity and modified guaranteed life insurance. The average credited interest
rate on these contracts was 6.53% at December 31, 1996. The assets that support
these liabilities were comprised of $10.2 billion in fixed maturities at
December 31, 1996. The portfolios are segregated from other investments and are
managed so as to minimize liquidity and interest rate risk. 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 totaled $0.1 billion in carrying value and $2.4
billion in notional amounts at December 31, 1996.
- ---------------------------------------------------
10. COMMITMENTS AND CONTINGENCIES
Under insurance guaranty fund laws existing in each state, the District of
Columbia and Puerto Rico, insurers licensed to do business can be assessed by
state insurance guaranty associations for certain obligations of insolvent
insurance companies to policyholders and claimants. Recent regulatory actions
against certain large life insurers encountering financial difficulty have
prompted various state insurance guaranty associations to begin assessing life
insurance companies for the deemed losses. Most of these laws do provide,
however, that an assessment may be excused or deferred if it would threaten an
insurer's solvency and further provide annual limits on such assessments. A
large part of the assessments paid by the Company's insurance subsidiaries
pursuant to these laws may be used as credits for a portion of the Company's
insurance subsidiaries' premium taxes. The Company paid guaranty fund
assessments of approximately $11, $10 and $8 in 1996, 1995 and 1994,
respectively, of which $5, $6 and $4 were estimated to be creditable against
premium taxes.
The Company is a defendant in various lawsuits arising in the ordinary
course of business. In the opinion of management, the resolution of these
matters is not expected to have a material adverse effect on the Company's
business, financial position, or results of operations.
The rent paid to Hartford Fire for the space occupied by the Company was $3
in 1996, 1995, and 1994. The Company expects to pay annual rent of $7 in 1997,
1998, and 1999, respectively, $12 in 2000 and 2001, and $96 thereafter, over the
remaining term of the sublease, which expires on December 31, 2009. Rental
expense is recognized on a level basis over the term of the sublease and
amounted to approximately $8 in 1996, 1995 and 1994.
- ---------------------------------------------------
11. SUBSEQUENT EVENTS
On February 10, 1997, Hartford Life filed a registration statement with the
Securities and Exchange Commission relating to the U.S. and international
offerings of shares of Class A common stock (the "Equity Offerings")
representing up to 20% ownership of Hartford Life. After completion of the
Equity Offerings, The Hartford would own all of the shares of Class B Common
Stock (after reclassification of Hartford Life's common stock into Class B
Common Stock prior to March 31, 1997). Hartford Life intends to use the
estimated net proceeds of the Equity Offerings to make a capital contribution to
its insurance subsidiaries, to reduce its third-party indebtedness and for other
general corporate purposes.
The Hartford has advised the Company that its current intent is to continue
to beneficially own at least 80% of Hartford Life, but it is under no
contractual obligation to do so, except for a limited period. Provided that The
Hartford continues to beneficially own at least 80% of the combined voting power
or the value of the outstanding capital stock of Hartford Life, Hartford Life
will be included for federal income tax purposes in the controlled group of
which The Hartford is the common parent. Each member of a controlled group is
jointly and severally liable for pension funding and pension termination
liabilities of each other member of the controlled group, as well as certain
benefit plan taxes. Accordingly, the Company could be liable for pension
funding, pension termination liabilities and certain other pension related
excise taxes as well as other taxes of another member of The Hartford controlled
group in the event any such liability is incurred, and not discharged, by such
other member.
In connection with the proposed Equity Offerings, Hartford Life plans to
enter into formal agreements, including a master intercompany agreement,
investment management agreements and a new tax sharing agreement, with The
Hartford covering such matters as corporate services, approval of certain
corporate activities, registration rights, owned and leased space, allocation of
expenses, taxes and liabilities, investment advisory services, use of trademarks
and certain other corporate matters. As part of the master intercompany
agreement, Hartford Life would agree to remit to The Hartford 30% of any shared
liabilities for which The Hartford is responsible in respect of the ITT
Spin-off, 30% of any taxes which may be assessed to The
<PAGE>
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES 47
- --------------------------------------------------------------------------------
Hartford relating to the ITT Spin-off and will indemnify The Hartford for
certain other tax liabilities. As of December 31, 1996 there was no known
liability associated with the ITT Spin-off. Such agreements are meant to
maintain the relationship between Hartford Life and The Hartford in a manner
consistent in all material respects with past practice. As a result, management
believes these agreements should not have a material impact on the results of
operations of the Company.
In addition, under insurance company holding laws, agreements between
Hartford Life's insurance subsidiaries and The Hartford must be fair and
reasonable and may be subject to the approval of applicable insurance
commissioners. The agreements will be intended to maintain the relationship
between Hartford Life and The Hartford in a manner generally consistent with
past practices. However, none of these arrangements will result from
arm's-length negotiations and, therefore, the prices charged to Hartford Life
and its subsidiaries for services provided under these arrangements may be
higher or lower than prices that may be charged by third parties.
<PAGE>
48 HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE I -- SUMMARY OF INVESTMENTS (OTHER THAN INVESTMENTS IN AFFILIATES)
AS OF DECEMBER 31, 1996
(IN MILLIONS)
<TABLE>
<CAPTION>
ESTIMATED
FAIR
TYPE OF INVESTMENT COST VALUE
- ------------------------------------------------------------------------------------------------- --------- -----------
<S> <C> <C>
Fixed Maturities
Bonds and Notes
U.S. Government and government agencies and authorities
(guaranteed sponsored)........................................................................ $ 166 $ 175
U.S. Government and government agencies and authorities
(guaranteed sponsored)--asset-backed.......................................................... 1,970 2,003
States, municipalities and political subdivisions................................................ 373 368
International governments........................................................................ 281 289
Public utilities................................................................................. 877 881
All other corporate including international...................................................... 4,656 4,669
All other corporate--asset-backed................................................................ 3,601 3,591
Short-term investments........................................................................... 1,655 1,648
--------- -----------
Total Fixed Maturities........................................................................... $ 13,579 $ 13,624
Equity Securities
Common Stocks--industrial, miscellaneous, and all other.......................................... 110 119
Total Fixed Maturities and Equity Securities..................................................... $ 13,689 $ 13,743
Other Investments
Policy Loans..................................................................................... 3,836 3,836
Mortgage Loans................................................................................... 2 2
Investments in partnerships and trusts........................................................... 48 48
Futures, options, and miscellaneous.............................................................. 6 56
Total Other Investments.......................................................................... 3,892 3,942
--------- -----------
Total Investments................................................................................ $ 17,581 $ 17,685
--------- -----------
--------- -----------
<CAPTION>
AMOUNT AT
WHICH SHOWN
ON
TYPE OF INVESTMENT BALANCE SHEET
- ------------------------------------------------------------------------------------------------- -------------
<S> <C>
Fixed Maturities
Bonds and Notes
U.S. Government and government agencies and authorities
(guaranteed sponsored)........................................................................ $ 175
U.S. Government and government agencies and authorities
(guaranteed sponsored)--asset-backed.......................................................... 2,003
States, municipalities and political subdivisions................................................ 368
International governments........................................................................ 289
Public utilities................................................................................. 881
All other corporate including international...................................................... 4,669
All other corporate--asset-backed................................................................ 3,591
Short-term investments........................................................................... 1,648
-------------
Total Fixed Maturities........................................................................... $ 13,624
Equity Securities
Common Stocks--industrial, miscellaneous, and all other.......................................... 119
Total Fixed Maturities and Equity Securities..................................................... $ 13,743
Other Investments
Policy Loans..................................................................................... 3,836
Mortgage Loans................................................................................... 2
Investments in partnerships and trusts........................................................... 48
Futures, options, and miscellaneous.............................................................. 6
Total Other Investments.......................................................................... 3,892
-------------
Total Investments................................................................................ $ 17,635
-------------
-------------
</TABLE>
Note: The fair values for short-term investments approximate cost.
<PAGE>
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES 49
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN MILLIONS)
<TABLE>
<CAPTION>
FUTURE POLICY
BENEFITS, UNPAID OTHER POLICY
CLAIMS AND CLAIMS AND
DEFERRED POLICY CLAIM ADJUSTMENT BENEFITS
SEGMENT ACQUISITION COSTS EXPENSES PAYABLE
- ---------------------------------------------------------------- ----------------- ------------------- ---------------
<S> <C> <C> <C>
1996
Investment Products............................................. $ 2,030 $ 1,554 $ 6,599
Individual Life Insurance....................................... 730 346 2,160
Employee Benefits............................................... -- 381 9,834
Corporate Operations............................................ -- -- --
Runoff Operations............................................... -- -- 3,541
------ ------ -------
Consolidated Operations......................................... $ 2,760 $ 2,281 $ 22,134
------ ------ -------
------ ------ -------
1995
Investment Products............................................. $ 1,561 $ 1,314 $ 6,204
Individual Life Insurance....................................... 615 706 1,932
Employee Benefits............................................... 12 325 9,285
Corporate Operations............................................ -- -- --
Runoff Operations............................................... -- 28 5,177
------ ------ -------
Consolidated Operations......................................... $ 2,188 $ 2,373 $ 22,598
------ ------ -------
------ ------ -------
1994
Investment Products............................................. $ 1,244 $ 895 $ 4,617
Individual Life Insurance....................................... 565 582 2,543
Employee Benefits............................................... -- 369 6,911
Corporate Operations............................................ -- -- --
Runoff Operations............................................... -- 44 7,257
------ ------ -------
Consolidated Operations......................................... $ 1,809 $ 1,890 $ 21,328
------ ------ -------
------ ------ -------
<CAPTION>
BENEFITS CLAIMS, AMORTIZATION OF
NET REALIZED AND CLAIM DEFERRED POLICY
CAPITAL (LOSSES) ADJUSTMENT ACQUISITION
SEGMENT GAINS EXPENSES COSTS
- ---------------------------------------------------------------- ----------------- ------------------- ---------------
<S> <C> <C> <C>
1996
Investment Products............................................. $ -- $ 451 $ 175
Individual Life Insurance....................................... -- 245 59
Employee Benefits............................................... -- 546 --
Corporate Operations............................................ 6 -- --
Runoff Operations............................................... (219) 293 --
------ ------ -------
Consolidated Operations......................................... $ (213) $ 1,535 $ 234
------ ------ -------
------ ------ -------
1995
Investment Products............................................. $ -- $ 349 $ 117
Individual Life Insurance....................................... -- 127 70
Employee Benefits............................................... -- 496 --
Corporate Operations............................................ (11) 33 --
Runoff Operations............................................... -- 417 12
------ ------ -------
Consolidated Operations......................................... $ (11) $ 1,422 $ 199
------ ------ -------
------ ------ -------
1994
Investment Products............................................. $ -- $ 383 $ 90
Individual Life Insurance....................................... -- 179 51
Employee Benefits............................................... -- 376 --
Corporate Operations............................................ 7 -- --
Runoff Operations............................................... -- 467 4
------ ------ -------
Consolidated Operations......................................... $ 7 $ 1,405 $ 145
------ ------ -------
------ ------ -------
<CAPTION>
PREMIUMS AND NET
OTHER INVESTMENT
SEGMENT CONSIDERATIONS INCOME
- ---------------------------------------------------------------- --------------- -----------
<S> <C> <C>
1996
Investment Products............................................. $ 536 $ 477
Individual Life Insurance....................................... 287 153
Employee Benefits............................................... 881 485
Corporate Operations............................................ -- 75
Runoff Operations............................................... 1 207
------ -----------
Consolidated Operations......................................... $ 1,705 $ 1,397
------ -----------
------ -----------
1995
Investment Products............................................. $ 319 $ 436
Individual Life Insurance....................................... 246 137
Employee Benefits............................................... 922 351
Corporate Operations............................................ -- 67
Runoff Operations............................................... -- 337
------ -----------
Consolidated Operations......................................... $ 1,487 $ 1,328
------ -----------
------ -----------
1994
Investment Products............................................. $ 263 $ 330
Individual Life Insurance....................................... 268 108
Employee Benefits............................................... 569 350
Corporate Operations............................................ -- 23
Runoff Operations............................................... -- 481
------ -----------
Consolidated Operations......................................... $ 1,100 $ 1,292
------ -----------
------ -----------
DIVIDENDS TO OTHER
SEGMENT POLICYHOLDERS EXPENSES
- ---------------------------------------------------------------- --------------- -----------
<S> <C> <C>
1996
Investment Products............................................. $ -- $ 156
Individual Life Insurance....................................... -- 68
Employee Benefits............................................... 635 143
Corporate Operations............................................ -- 16
Runoff Operations............................................... -- 44
------ -----------
Consolidated Operations......................................... $ 635 $ 427
------ -----------
------ -----------
1995
Investment Products............................................. $ -- $ 115
Individual Life Insurance....................................... -- 55
Employee Benefits............................................... 675 138
Corporate Operations............................................ -- 11
Runoff Operations............................................... -- (2)
------ -----------
Consolidated Operations......................................... $ 675 $ 317
------ -----------
------ -----------
1994
Investment Products............................................. $ -- $ (31)
Individual Life Insurance....................................... -- 107
Employee Benefits............................................... 419 100
Corporate Operations............................................ -- 43
Runoff Operations............................................... -- 8
------ -----------
Consolidated Operations......................................... $ 419 $ 227
------ -----------
------ -----------
</TABLE>
<PAGE>
50 HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE IV -- REINSURANCE
(IN MILLIONS)
<TABLE>
<CAPTION>
GROSS CEDED TO ASSUMED FROM NET
AMOUNT OTHER COMPANIES OTHER COMPANIES AMOUNT
---------- ---------------- ---------------- ----------
<S> <C> <C> <C> <C>
Year Ended December 31, 1996
Life Insurance in Force............................... $ 177,094 $ 106,146 $ 31,957 $ 102,905
---------- -------- ------- ----------
Insurance Revenues
Life Insurance and Annuities........................ $ 1,801 $ 298 $ 169 $ 1,672
Accident and Health Insurance....................... 33 4 4 33
---------- -------- ------- ----------
Total................................................. $ 1,834 $ 302 $ 173 $ 1,705
---------- -------- ------- ----------
---------- -------- ------- ----------
For the Year Ended December 31, 1995
Life Insurance in Force............................... $ 182,716 $ 112,774 $ 26,996 $ 96,938
---------- -------- ------- ----------
Insurance Revenues
Life Insurance and Annuities........................ $ 1,232 $ 325 $ 574 $ 1,481
Accident and Health Insurance....................... 313 324 17 6
---------- -------- ------- ----------
Total................................................. $ 1,545 $ 649 $ 591 $ 1,487
---------- -------- ------- ----------
---------- -------- ------- ----------
For the Year Ended December 31, 1994
Life Insurance in Force............................... $ 136,929 $ 87,553 $ 35,016 $ 84,392
---------- -------- ------- ----------
Insurance Revenues
Life Insurance and Annuities........................ $ 1,008 $ 211 $ 294 $ 1,091
Accident and Health Insurance....................... 308 304 5 9
---------- -------- ------- ----------
Total................................................. $ 1,316 $ 515 $ 299 $ 1,100
---------- -------- ------- ----------
---------- -------- ------- ----------
<CAPTION>
PERCENTAGE OF
AMOUNT ASSUMED
TO NET
-----------------
<S> <C>
Year Ended December 31, 1996
Life Insurance in Force............................... 31.1%
Insurance Revenues
Life Insurance and Annuities........................ 10.1%
Accident and Health Insurance....................... 12.1%
Total................................................. 10.1%
For the Year Ended December 31, 1995
Life Insurance in Force............................... 27.8%
Insurance Revenues
Life Insurance and Annuities........................ 38.8%
Accident and Health Insurance....................... 283.3%
Total................................................. 39.7%
For the Year Ended December 31, 1994
Life Insurance in Force............................... 41.5%
Insurance Revenues
Life Insurance and Annuities........................ 26.9%
Accident and Health Insurance....................... 55.6%
Total................................................. 27.2%
</TABLE>
<PAGE>
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES 51
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INTERIM FINANCIAL STATEMENTS
The following unaudited financial statements reflect, in the opinion of
management, all adjustments which are of normal recurring nature necessary to
present fairly the financial position, the results of operations and the cash
flows for the periods presented. Certain reclassifications of prior year results
were made to conform to current presentation. Interim results are not indicative
of the results which may be expected for any other interim period or the full
year. Certain of the statements contained herein (other than statements of
historical fact) are forward-looking statements. Forward looking statements are
made based upon management's expectations and belief concerning future
developments and their potential effect upon Hartford Life Insurance Company
("Hartford Life"). There can be no assurance that future developments will be in
accordance with management's expectation or that the effect of future
developments on Hartford Life will be those anticipated by management. Actual
results could differ materially from those expected by Hartford Life, depending
on the outcome of certain factors, including those described with the
forward-looking statements. For a description of accounting policies, see Note 1
to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS)
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED
MARCH 31,
---------
1997
---------
(UNAUDITED)
<S> <C>
Revenues
Premiums and other considerations.............................................................................. $ 319
Net investment income.......................................................................................... 337
Net realized capital gains..................................................................................... 4
---------
Total Revenues............................................................................................... 660
---------
Benefits, Claims and Expenses
Benefits, claims and claim adjustment expenses................................................................. 351
Amortization of deferred policy acquisition costs.............................................................. 81
Dividends to policyholders..................................................................................... 54
Other insurance expense........................................................................................ 73
---------
Total Benefits, Claims and Expenses.......................................................................... 559
---------
Income before income tax expense............................................................................... 101
Income tax expense............................................................................................. 38
---------
Net Income....................................................................................................... $ 63
---------
---------
<CAPTION>
<S> <C>
Revenues
Premiums and other considerations.............................................................................. $ 644
Net investment income.......................................................................................... 333
Net realized capital gains..................................................................................... --
---------
Total Revenues............................................................................................... 977
---------
Benefits, Claims and Expenses
Benefits, claims and claim adjustment expenses................................................................. 396
Amortization of deferred policy acquisition costs.............................................................. 66
Dividends to policyholders..................................................................................... 286
Other insurance expense........................................................................................ 164
---------
Total Benefits, Claims and Expenses.......................................................................... 912
---------
Income before income tax expense............................................................................... 65
Income tax expense............................................................................................. 22
---------
Net Income....................................................................................................... $ 43
---------
---------
</TABLE>
<PAGE>
52 HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH DECEMBER
31, 31,
1997 1996
------- -------
<S> <C> <C>
(UNAUDITED)
Assets
Investments
Fixed maturities, available for sale, at fair
value (amortized cost $13,599 and $13,579)..... $13,496 $13,624
Equity securities, available for sale, at fair
value.......................................... 107 119
Mortgage loans, at outstanding balance.......... -- 2
Policy loans, at outstanding balance............ 3,754 3,836
Other investments, at cost...................... 47 54
------- -------
Total investments............................. 17,404 17,635
Cash............................................ 73 43
Premiums and amounts receivable................. 101 137
Reinsurance recoverable......................... 6,200 6,259
Accrued investment income....................... 330 407
Deferred policy acquisition costs............... 2,888 2,760
Deferred income tax............................. 510 474
Other assets.................................... 332 357
Separate account assets......................... 51,312 49,690
------- -------
Total assets.................................. $79,170 $77,762
------- -------
------- -------
Liabilities and Stockholders' Equity
Future policy benefits.......................... $2,632 $2,474
Other policyholder funds........................ 21,498 22,134
Other liabilities............................... 1,860 1,572
Separate account liabilities.................... 51,312 49,690
------- -------
Total liabilities............................. 77,302 75,870
------- -------
Common stock -- authorized 1,000 shares, $5,690
par value, issued and outstanding, 1,000
shares......................................... 6 6
Additional paid-in capital...................... 1,045 1,045
Unrealized (loss) gain on investments, net of
tax............................................ (57 ) 30
Retained earnings............................... 874 811
------- -------
Total stockholders' equity.................... 1,868 1,892
------- -------
Total liabilities and stockholders' equity...... $79,170 $77,762
------- -------
------- -------
</TABLE>
<PAGE>
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES 53
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
(UNAUDITED)
Operating Activities
Net income............................ $ 63 $ 43
Adjustments to net income:
Realized losses on investments........ (4) --
Net increase in deferred policy
acquisition costs.................... (128) (95)
Net amortization of premium on fixed
maturities........................... 5 7
Increase (decrease) in deferred income
tax benefit.......................... 21 (40)
Decrease in premiums and amounts
receivable........................... 32 43
Decrease (increase) in other assets... 25 (12)
Increase in reinsurance recoverable... (112) (12)
Increase in liability for future
policy benefits...................... 158 (89)
Increase in other liabilities......... 349 262
Decrease in accrued investment
income............................... 57 60
-------- --------
Cash provided by operating
activities......................... 466 167
-------- --------
Investing Activities
Purchases of fixed maturities
investments.......................... (1,525) (1,382)
Proceeds from sales of fixed
maturities investments............... 985 701
Maturities and principal paydowns of
fixed maturities investments......... 664 640
Net sales (purchases) of other
investments.......................... 111 (238)
Net purchases of short-term
investments.......................... (224) (70)
-------- --------
Cash provided by (used for)
investing activities............... 11 (349)
-------- --------
Financing Activities
Net (disbursements for) receipts from
investment and universal life-type
contracts
(charged from) credited to
policyholder accounts................ (447) 188
-------- --------
Cash (used for) provided by
financing activities............... (447) 188
-------- --------
Net increase in cash.................. 30 6
Cash at beginning of period........... 43 46
-------- --------
Cash at end of period................... $ 73 $ 52
-------- --------
-------- --------
</TABLE>
<PAGE>
54 HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MANAGEMENT'S NARRATIVE ANALYSIS OF
RESULTS OF OPERATIONS
(IN MILLIONS)
- ---------------------------------------------------
SEGMENT RESULTS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
1997 1996
----- ---------
<S> <C> <C>
Annuity..................................... $ 43 $ 33
Individual Life Insurance................... 11 9
Employee Benefits........................... 6 8
Guaranteed Investment Contracts............. -- (15)
Corporate Operation......................... 3 8
--- ---------
Net Income.................................. $ 63 $ 43
--- ---------
--- ---------
</TABLE>
Net income increased $20 or 47% to $63 in the first quarter of 1997 from $43
in the first quarter of 1996. This increase is reflective of continued, solid
growth in both the Annuity and Individual Life Insurance reported segments. Net
income in the Annuity segment grew $10 or 30% over the same period last year.
Net income in the Individual Life Insurance segment grew $2 or 22% over the
first three months of 1996. Guaranteed Contracts reported no net income in the
first quarter of 1997, as compared with a $15 loss in the first quarter of 1996
consistent with management's expectations that net income subsequent to 1996
will be immaterial.
- ---------------------------------------------------
ANNUITY
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Revenues................................... $ 280 $ 234
Expenses................................... 237 201
--------- ---------
Net Income................................. $ 43 $ 33
--------- ---------
--------- ---------
</TABLE>
Revenues, which are primarily comprised of investment income and management
and maintenance fees, grew 20% to $280 in the first quarter of 1997 from $234 in
1996. This growth resulted from a 32% increase in the average account value to
$52 billion in 1997, as well as an increase in new sales of $495 or 21% over the
same period last year. Growth in the assets under management by this segment
also resulted in increased expenses of $36 or 18% to $237 in 1997 from $201 in
1996. Net income increased $10 or 30% to $43 in 1997 from $33 in 1996.
- ---------------------------------------------------
INDIVIDUAL LIFE INSURANCE
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Revenues................................... $ 111 $ 115
Expenses................................... 100 106
--------- ---------
Net Income................................. $ 11 $ 9
--------- ---------
--------- ---------
</TABLE>
Revenues decreased $4 or 4% to $111 in 1997 from $115 in 1996 due to the
assumption of traditional life premium from Investor's Equity Life of $9 into
segment operations in 1996. Sales increased $2 or 9% in the first quarter of
1997 over the first quarter of 1996 and insurance in-force increased $3.7
billion or 8% in the first quarter of 1997 as compared to the first quarter of
1996. Expenses in this segment declined 6% or $6 to $100 in 1997 from $106 in
1996 due to the one time assumption of Investor's Equity Life in 1996. Net
income increased $2 or 22% to $11 in 1997 from $9 in 1996.
- ---------------------------------------------------
EMPLOYEE BENEFITS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Revenues................................... $ 179 $ 544
Expenses................................... 173 536
--------- ---------
Net Income................................. $ 6 $ 8
--------- ---------
--------- ---------
</TABLE>
Revenues declined $365 or 67% to $179 in the first quarter of 1997 from $544
in the first quarter of 1996. This decline is mainly related to the passage of
the HIPA Act of 1996, which effectively eliminated all future sales of leveraged
COLI. Accordingly, expenses in this segment declined $363 or 68% for the same
time period. Net income decreased 25% or $2 to $6 in 1997 from $8 in 1996.
- ---------------------------------------------------
GUARANTEED INVESTMENT CONTRACTS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
1997 1996
----- ---------
<S> <C> <C>
Revenues.................................... $ 72 $ 73
Expenses.................................... 72 88
--- ---------
Net Income.................................. $ -- $ (15)
--- ---------
--- ---------
</TABLE>
<PAGE>
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES 55
- --------------------------------------------------------------------------------
This segment had no net income in the first quarter of 1997, as compared
with a $15 loss in the first quarter of 1996, consistent with management's
expectations that net income (loss) from Closed Book CRC in the years subsequent
to 1996 will be immaterial based on the Company's current projections for the
performance of the assets and liabilities associated with Closed Book GRC.
<PAGE>
56 HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS
- ---------------------------------------------------
HARTFORD LIFE INCORPORATED INITIAL
PUBLIC OFFERING
On February 10, 1997, Hartford Life Incorporated ("HLI") filed a
registration statement with the Securities and Exchange Commission relating to
an initial public offering of up to 20% of HLI common stock. HLI is the holding
company parent of The Hartford's significant life insurance and related
subsidiaries. Management intends to use the proceeds from the offering to reduce
certain debt outstanding, to fund growth initiatives, and for other general
corporate purposes. Management of The Hartford Financial Services Group, Inc.
believes the offering will strengthen Hartford Life Insurance Company's
financial position and flexibility. If and when the offering is completed, The
Hartford's current intent is to continue to beneficially own at least 80% of
HLI, but it is under no contractual obligation to do so. The offering is
expected to be completed in the second quarter of 1997.
- ---------------------------------------------------
HARTFORD LIFE INCORPORATED
DEBT OFFERING
On February 14, 1997, HLI filed a shelf registration statement for the
issuance and sale of up to $1.0 billion in the aggregate of senior debt
securities, subordinated debt securities and preferred stock of HLI. Management
intends to use the proceeds from any offering for the repayment of debt,
including outstanding commercial paper and other third party indebtedness and
the satisfaction of other obligations, for working capital, capital
expenditures, investments in or loans to subsidiaries and for other general
corporate purposes.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Not applicable.
Item 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article VIII, Section 1 of the By-laws of Hartford Life Insurance
Company provides for indemnification of Directors and Officers as
follows:
"Section 1. The Company shall indemnify and hold harmless each
Director and Officer now or hereafter serving the Company, whether
or not then in office, from and against any and all claims and
liabilities to which he may be or become subject by reason of his
being or having been a Director or Officer of the Company, or of
any other company which he serves as a Director or Officer at the
request of the Company, to the extent such is consistent with
statutory provisions pertaining to indemnification, and shall
provide such further indemnification for legal and/or all other
expenses reasonably incurred in connection with defending against
such claims and liabilities as is consistent with statutory
requirements."
Item 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<CAPTION>
Exhibit
NUMBER DESCRIPTION METHOD OF FILING
<S> <C> <C>
1 Underwriting Agreement Incorporated by reference to Amendment
No. 6, to the Registration Statement
File No. 33-35260, dated May 1, 1996.
4(a) Group Annuity Contract - Incorporated by reference to Amendment
Nonqualified and Qualified No. 5, to the Registration Statement
File No. 33-35260, dated April 28, 1995.
4(b) Individual Certificate - Incorporated by reference to Amendment
Group Annuity Certificate/ No. 5, to the Registration Statement File
Nonqualified and Qualified No. 33-35260, dated April 28, 1995.
5 Opinion of Lynda Godkin, Filed herewith.
General Counsel
23 Consents of Arthur Andersen Filed herewith.
LLP, Independent Public
Accountant
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
24 Power of Attorney Incorporated by reference
to the Initial Filing to the
Form S-2 Registration Statement
File No. 333-28023, filed on
May 29, 1997.
27 Financial Data Schedule Filed herewith.
</TABLE>
Item 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration
statement:
i. To include any prospectus required by section 10(a)(3)
of the Securities Act of 1933;
ii. To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate,
represent a fundamental change in the information set
forth in the registration statement;
iii. To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement, including
(but not limited to) any addition or deletion of a
managing underwriter;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which
remain unsold at the termination of the offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the registrant pursuant to the
foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Hartford, State of
Connecticut on this 18th day of June, 1997.
HARTFORD LIFE INSURANCE COMPANY
*By: /s/ John P. Ginnetti *By: /s/ Lynda Godkin
--------------------------------------------- ----------------------
John P. Ginnetti, Executive Vice President Lynda Godkin
Attorney-in-Fact
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on
this 18th day of June, 1997.
Bruce D. Gardner, Vice President,
Director *
Joseph H. Gareau, Executive Vice
President and Chief Investment
Officer, Director *
John P. Ginnetti, Executive Vice
President, Director *
Thomas M. Marra, Executive Vice *By: /S/ Lynda Godkin
President, Director * -----------------------
Leonard E. Odell, Jr., Senior Lynda Godkin
Vice President, Director * Attorney-In-Fact
Lowndes A. Smith, President,
Chief Executive Officer, Director *
Raymond P. Welnicki, Senior Vice
President, Director *
Lizabeth H. Zlatkus, Senior Vice
President, Director *
<PAGE>
EXHIBIT INDEX
5 Opinion and Consent of Lynda Godkin, General Counsel
23 Consent of Arthur Andersen LLP, Independent Public Accountants
24 Copy of Power of Attorney
27 Financial Data Schedule
<PAGE>
EXHIBIT 5
The [LOGO]
Hartford
June 18, 1997 LYNDA GODKIN
SENIOR VICE PRESIDENT,
GENERAL COUNSEL & SECRETARY
Law Department
Board of Directors
Hartford Life Insurance Company
200 Hopmeadow Street
Simsbury, CT 06089
RE: MODIFIED GUARANTEED ANNUITY CONTRACTS
HARTFORD LIFE INSURANCE COMPANY ("COMPANY")
FILE NO. 33-35260
Dear Sir/Madam:
This opinion is furnished in connection with the registration under the
Securities Act of 1933, as amended, of a certain group deferred annuity
contract (the "Contract") that will be offered and sold by Hartford Life
Insurance Company (the "Company") and certain units of interest to be issued in
connection with the Contract. I have examined such documents (including the
Form S-2 Registration Statement) and reviewed such questions of law as I
considered necessary and appropriate, and on the basis of such examination and
review, it is my opinion that:
1. The Separate Account is a separate account of the Company validly existing
pursuant to Connecticut law and the regulations issued thereunder.
2. The assets held in the Separate Account are not chargeable with liabilities
arising out of any other business the Company may conduct.
3. The Contract is legally issued and represents binding obligations of the
Company.
I hereby consent to the use of this opinion as an exhibit to the Form S-2
Registration Statement for the Contract and to the reference to my name under
the heading "Legal Opinions" in the prospectus included as a part of such Form
S-2 Registration Statement.
Sincerely,
/s/ Lynda Godkin
Lynda Godkin Hartford Life Insurance Company
200 Hopmeadow Street
Simsbury, CT 06089
860 547 5000
Mailing Address: P.O. Box 2999
Hartford, CT 06104-2999
<PAGE>
EXHIBIT 23
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included or made a part of this
registration statement for Hartford Life Insurance Company Modified
Guaranteed Annuity Contract on Form S-2.
/s/ Arthur Andersen LLP
Hartford, Connecticut
June 25, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<CIK> 0000045947
<NAME> HARTFORD LIFE INSURANCE COMPANY
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 13,496
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 107
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 17,404
<CASH> 73
<RECOVER-REINSURE> 6,200
<DEFERRED-ACQUISITION> 2,888
<TOTAL-ASSETS> 79,170
<POLICY-LOSSES> 2,632
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 21,498
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 6
<OTHER-SE> 1,045
<TOTAL-LIABILITY-AND-EQUITY> 79,170
319
<INVESTMENT-INCOME> 337
<INVESTMENT-GAINS> 4
<OTHER-INCOME> 0
<BENEFITS> 351
<UNDERWRITING-AMORTIZATION> 81
<UNDERWRITING-OTHER> 73
<INCOME-PRETAX> 101
<INCOME-TAX> 38
<INCOME-CONTINUING> 63
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 63
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
