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HARTFORD
LIFE INSURANCE COMPANY
THE GENERAL ACCOUNT OPTION
Under Group Annuity Contracts Issued By
Hartford Life Insurance Company
P.O. Box 2999
Hartford, CT 06104-2999
[LOGO]
This Prospectus describes the General Account Option available under group
variable annuity contracts (hereinafter the "contract" or "contracts") which
are issued by Hartford Life Insurance Company ("Hartford Life" or the
"Company") with respect to DC Variable Account I or Separate Account Two
(DC-II) (individually, the "Separate Account"). This Prospectus must be
accompanied by and read in conjunction with the prospectus for the applicable
group variable annuity contract and the Separate Account options thereunder.
During the Accumulation Period under the contracts, net contributions to the
contract and/or Participants' Individual Account Values under the contract may
be allocated, in whole or in part, to the General Account Option or to one or
more of the Separate Account options. Contract values allocated to the General
Account Option are credited with interest at a rate at least equal to the
Guaranteed Interest Rate stated in the Contract. Rates of interest in excess
of the applicable Guaranteed Interest may be declared by Hartford Life from
time to time (See, "Guaranteed Interest Rates and Declared Interest Rates,"
Page 6).
While the Mortality and Expense Risk Charges applicable to the values held
in Separate Account options do not apply to the General Account Option, all
other charges, including the Annual Policy Fee, Contingent Deferred Sales
Charges, Transfer Charges and Premium Taxes described in the contract
prospectus accompanying this Prospectus apply equally to values held in the
General Account Option.
Distributions and transfers from the General Account Option are generally
made within a reasonable period of time after a request is received and
reflect the full value of Participants' Individual Accounts allocated to the
General Account less any applicable charges. However, under certain conditions
transfers may be limited or deferred (See, "Transfers from the General Account
Option," Page 6) and distributions may be deferred or subject to a market
value adjustment. (See, "Surrenders," Page 8.)
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PLEASE READ THIS PROSPECTUS AND KEEP IT FOR FUTURE REFERENCE. IT IS
ACCOMPANIED BY CURRENT PROSPECTUS FOR THE RELATED GROUP VARIABLE ANNUITY
CONTRACT AND THE SEPARATE ACCOUNT OPTIONS THEREUNDER.
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THESE SECURITIES MAY BE SUBJECT TO A CONTINGENT DEFERRED SALES CHARGE AND
MARKET VALUE ADJUSTMENT WHICH COULD RESULT IN YOUR RECEIPT OF LESS THAN THE
TOTAL OF YOUR PURCHASE PAYMENT(S). SEE "SURRENDERS," PAGE 8.
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THE COMPANY CANNOT PREDICT OR GUARANTEE FUTURE GUARANTEED INTEREST RATES OR
DECLARED INTEREST RATES.
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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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Prospectus Dated: May 1, 1997
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AVAILABLE INFORMATION
Hartford is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "1934 Act"), as amended, 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 regarding Hartford, which files such documents
electronically with the Commission at the following address:
http://www.sec.gov.
The Company has filed registration statements (the "Registration
Statements") with the Commission under the Securities Act of 1933 relating to
the Contracts offered by this Prospectus. This Prospectus has been filed as a
part of the Registration Statements and does not contain all of the
information set forth in the Registration Statements and exhibits thereto, and
reference is hereby made to such Registration Statements and exhibits for
further information relating to the Company and the contracts. The
Registration Statements 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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TABLE OF CONTENTS
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PAGE
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SUMMARY................................................................. 4
SPECIAL TERMS........................................................... 5
INTRODUCTION............................................................ 6
THE GENERAL ACCOUNT OPTION.............................................. 6
A. The Accumulation Period............................................ 6
1. Contributions.................................................... 6
2. Guaranteed Interest Rates and Declared Interest Rates............ 6
3. Participants' Individual Account Values.......................... 7
4. Transfers from the General Account Option........................ 7
5. Transfers to the General Account Option.......................... 8
6. Surrenders....................................................... 8
(a) General....................................................... 8
(b) Payment of Full or Partial Surrenders......................... 8
(c) Contract Termination.......................................... 8
B. Annuity Period..................................................... 9
INVESTMENTS BY HARTFORD LIFE............................................ 9
DISTRIBUTION OF CONTRACTS............................................... 10
FEDERAL TAX CONSIDERATIONS.............................................. 10
A. Taxation of Hartford Life.......................................... 10
B. Information Regarding Deferred Compensation Plans for State and
Local Governments.................................................... 10
THE COMPANY............................................................. 11
A. Business........................................................... 11
B. Selected Financial Data............................................ 12
C. Management's Discussion and Analysis of Financial Condition and
Results of Operation................................................. 13
1. Consolidated Results............................................. 13
2. Business Segment Information..................................... 16
D. Reinsurance........................................................ 16
E. Reserves........................................................... 16
F. Investments........................................................ 16
G. Competition........................................................ 21
H. Employees.......................................................... 21
I. Properties......................................................... 21
J. Regulation......................................................... 21
EXECUTIVE OFFICERS AND DIRECTORS........................................ 23
EXECUTIVE COMPENSATION.................................................. 25
LEGAL OPINIONS.......................................................... 27
LEGAL PROCEEDINGS....................................................... 27
EXPERTS................................................................. 27
APPENDIX A (MARKET VALUE ADJUSTMENT).................................... 28
FINANCIAL STATEMENTS.................................................... F-1
</TABLE>
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SUMMARY
This Prospectus describes the General Account Option under group variable
annuity contracts designed for use in conjunction with deferred compensation
plans of tax-exempt and governmental employers under Internal Revenue Code
Section457 ("Deferred Compensation Plans"). The contracts are issued by Hartford
Life Insurance Company ("Hartford Life" or the "Company") with respect to DC
Variable Account-I or Separate Account Two (DC-II) (individually the "Separate
Account") and contributions to the General Account Option become a part of the
General Account of Hartford Life. Contributions to the contracts may also be
allocated to one or more Separate Account options. The contracts and the
Separate Account options are described in a separate prospectus. The prospectus
for the applicable contract will always accompany this Prospectus. Please read
it and this Prospectus carefully.
During the Accumulation Period under the contracts, the General Account
Option provides for specified Guaranteed Interest Rates for the first five (5)
Calendar Years on Contributions received during the Calendar Year in which the
contract was issued. Prior to each Calendar Year thereafter, Hartford Life will
establish Guaranteed Interest Rates (for five (5) Calendar Years) for
contributions received in the following year. At the end of each five year
guarantee period for a particular year's contribution, one year Guaranteed
Interest Rates are established annually by Hartford Life. Declared Interest
Rates in excess of any Guaranteed Interest Rates may be established periodically
by Hartford Life. These rates may apply to some or all of the values under the
General Account Option for periods of time determined by Hartford Life. The
rates of interest credited will affect Participants' Individual Account values
(See, "Participants' Individual Account Values," Page 7) and are used to
determine amounts payable upon termination of the contracts. (See, "Surrenders
- -- Contract Termination," Page 8).
Generally, Hartford Life intends to invest the General Account assets
attributable to the contracts in investment grade securities. Hartford Life has
no specific formula for determining the rates of interest that it will establish
as Declared Interest Rates or Guaranteed Interest Rates in the future. However,
their determination will generally be reflective of interest rates available on
the types of debt instruments in which Hartford Life intends to invest the
proceeds attributable to the General Account Option. (See, "Investments by
Hartford Life," Page 9.) In addition, Hartford Life's management may also
consider various other factors in determining Declared and Guaranteed Interest
Rates for a given period, including, regulatory and tax requirements; sales
commission and administrative expenses borne by Hartford Life; general economic
trends; and competitive factors. (See, "Investments by Hartford Life," Page 9.)
The Contract Owner may, during the Accumulation Period, allocate all or a
portion of a Participant's Individual Account value held under the General
Account Option to one or more of the investment options of the Separate Account.
No Contingent Deferred Sales Charges will be deducted on such transfers.
However, there are restrictions which may limit the amount that may be so
allocated and transfers may be deferred in certain cases. (See, "Transfers from
the General Account Option," Page 8.) Distributions from the General Account
Option are generally made within a reasonable period of time after a request is
received and reflect the full value of Participants' Individual Account values
less certain charges, if applicable, described in the contract prospectus.
However, under certain conditions, distributions may be deferred or subject to a
market value adjustment. (See, "Surrenders," Page 9.)
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SPECIAL TERMS
ACCUMULATION PERIOD: The period before the commencement of annuity payments.
ACTIVE LIFE FUND: A term used to describe the sum of all Participants'
Individual Account value(s) under a contract during the Accumulation Period.
ANNUITANT: A Participant on whose behalf Annuity payments are to be made under a
contract.
ANNUITY: A series of payments for life, or for life with a minimum number of
payments or a determinable sum guaranteed, or for a joint lifetime and
thereafter during the lifetime of the survivor, or for payments for a designated
period.
ANNUITY COMMENCEMENT DATE: The date on which Annuity payments are to commence.
ANNUITY PERIOD: The period following the commencement of Annuity payments.
CALENDAR YEAR: The period of time from January 1 to December 31 of each year.
CONTRACT OWNER: The Employer or entity owning the contract.
CONTRACT YEAR: A period of 12 months commencing with the effective date of the
contract or with any anniversary thereof.
CONTRIBUTION(S): The amount(s) paid or transferred to Hartford Life on behalf of
Participants pursuant to the terms of the contracts.
DECLARED INTEREST RATE(S): One or more rates of interest which may be declared
by Hartford Life. Such rates will never be less than the applicable Guaranteed
Interest Rates and may apply to some or all of the values under the General
Account option Fund for periods of time determined by Hartford Life.
GENERAL ACCOUNT: The General Account of Hartford Life.
GUARANTEED INTEREST RATE(S): The minimum rate(s) of interest to be credited on
the General Account portion of the Active Life Fund as set forth in the
contract.
HARTFORD LIFE: Hartford Life Insurance Company (sometimes referred to as the
"Company").
IN WRITING: A written form satisfactory to us and received at our offices at
P.O. Box 2999, Hartford, Connecticut 06104-2999.
MARKET VALUE LUMP SUM OPTION: At contract termination a lump sum payment which
includes the market value of the underlying assets as described on page 9.
PARTICIPANT: A term used to describe, for recordkeeping purposes only, any
Employee electing to participate in the Deferred Compensation Plan of the
Employer/Contract Owner.
PARTICIPANT'S CONTRACT YEAR: A period of twelve (12) months commencing with the
Date of Coverage of a Participant and each successive 12 month period
thereafter.
PARTICIPANT'S INDIVIDUAL ACCOUNT: An account in which the Contributions of the
Contract Owner on behalf of a Participant under the contract are allocated
during the Accumulation Period.
PREMIUM TAX: A tax charged by a state or municipality on premiums, contributions
or contract values.
SEPARATE ACCOUNT: The Account entitled Hartford Life Insurance Company DC
Variable Account-I ("DC-I") and Hartford Life Insurance Company Separate Account
Two (DC-II).
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INTRODUCTION
This Prospectus has been designed to provide you with the necessary
information to make a decision on participating in the General Account Option
under contracts issued in conjunction with a Deferred Compensation Plan. This
Prospectus describes only the elements of the contracts pertaining to the
General Account Option. The contracts also contain various Separate Account
options. The contracts and the Separate Account options are described in a
separate prospectus which must accompany this Prospectus. Please read that
prospectus and its Glossary of Special Terms prior to reading this Prospectus to
familiarize yourself with the terms being used which, unless defined in the
Glossary of Special Terms to this Prospectus, have the same meaning as defined
in that prospectus.
THE GENERAL ACCOUNT OPTION
The General Account Option is available under contracts issued in
conjunction with a Deferred Compensation Plan of an Employer. The contracts
provide for both an Accumulation Period and an Annuity Period. During the
Accumulation Period, Contributions made by the Employer to the General Account
Option, and the values attributable thereto, are a part of Hartford Life's
General Account. During the Annuity Period Participants' Individual Account
values are used to purchase Fixed or Variable Annuities. The operation of the
contract during the Annuity Period is described in the contract prospectus
accompanying this Prospectus.
A. THE ACCUMULATION PERIOD
1. CONTRIBUTIONS
During the Accumulation Period under the contracts, Contributions (less any
Premium Taxes) made by the Employer under the contract, and Participants'
Individual Account values, may be allocated, in whole or in part, to the General
Account Option.
2. GUARANTEED INTEREST RATES AND DECLARED INTEREST RATES
The General Account Option provides for specified Guaranteed Interest Rates
for the first five (5) Calendar Years on Contributions received during the
Calendar Year in which the Contract is issued. Prior to each Calendar Year
thereafter, Hartford Life will establish Guaranteed Interest Rates (for each of
the next five (5) Calendar Years) for Contributions received in the following
year. The Guaranteed Interest Rate for each year during a five year guarantee
period may not be the same as for other years. At the end of each five year
guarantee period for a particular year's Contribution(s), one year Guaranteed
Interest Rates are established annually by Hartford Life. These one year
Guaranteed Interest Rates will automatically commence at the end of a five year
guarantee period and at the end of each subsequent one year guarantee period.
All Guaranteed Interest Rates and Declared Interest Rates are effective annual
rates after taking into account daily compounding of interest.
The following example is for illustrative purposes only. It contains
hypothetical rates of interest. Actual rates for any given time may be more or
less than those illustrated.
EXAMPLE: A contract is issued July 1, 1996. At issue the Guaranteed Interest
Rates for Calendar Years 1996 through 2000 are set as follows:
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GUARANTEED INTEREST RATE
CALENDAR YEAR (APPLICABLE TO 1996 CONTRIBUTIONS)
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1996 5.00%
1997 4.75%
1998 4.50%
1999 4.25%
2000 4.00%
</TABLE>
Assume that $1,000 in contributions are received during 1996 and $1,500 in
contributions are received during 1997. The 1996 contributions of $1,000 will be
credited at least 5.00% (i.e., the Guaranteed Interest Rate for 1996) for 1996.
During 1997 the 1996 contributions, with interest credited from 1996, will be
credited at least 4.75% per year. Similarly for Calendar Years 1998, 1999, and
2000 the 1996 contributions, with interest
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credited from prior years, will be credited at least 4.50%, 4.25% and 4.00% per
year respectively. At the end of 1999, a one year Guaranteed Interest Rate will
be set for 2001. This procedure of setting a one year Guaranteed Interest Rate
will be followed for each subsequent year.
At the end of 1996 the Guaranteed Interest Rates for Calendar Years 1997
through 2001 will be set for the contributions of $1,500 received in 1996. At
the end of 2001 and annually thereafter one year Guaranteed Interest Rates will
be set for the 1997 contributions of $1,500 and the interest which was credited
on the $1,500 in prior years.
For contributions received in 1998 and later the same procedure would be
followed. At the end of each Calendar Year, Guaranteed Interest Rates for each
of the next five Calendar Years will be set for the following year's
contributions. At the end of each five years guaranteed period for a particular
year's contributions, one year Guaranteed Interest Rates will be established
annually.
Declared Interest Rates in excess of any Guaranteed Interest Rates may be
established periodically by Hartford Life. These rates may apply to some or all
of the values under the General Account Option for periods of time determined by
Hartford Life. For example, Hartford Life could determine to declare an interest
rate in excess of the otherwise applicable Guaranteed Interest Rate(s) for a
nine month period and which applied only to Participants' individual account
values attributable to Contributions received in a particular time period. The
rates of interest credited will affect Participants' Individual Account Values
(See, "Participants' Individual Account Values," Page 7) and are used to
determine amounts payable upon termination of the contracts (See, "Surrenders --
Contract Termination," Page 8). Notification in writing of the Declared Interest
Rate, and the values to which it will apply, will be provided by Hartford Life.
Hartford Life has no specific formula for determining the rate of interest
that it will establish as Declared Interest Rates or Guaranteed Interest Rates
in the future. However, their determination will be reflective of interest rates
available on the types of debt instruments in which Hartford Life intends to
invest the proceeds attributable to the General Account Option (see,
"Investments by Hartford Life," Page 9). In addition, Hartford Life's management
may also consider various other factors in determining Declared and Guaranteed
Interest Rates for a given period, including, regulatory and tax requirements;
sales commission and administrative expenses borne by Hartford Life; general
economic trends; and competitive factors. HARTFORD LIFE'S MANAGEMENT WILL MAKE
THE FINAL DETERMINATION AS TO ANY DECLARED INTEREST RATES AND ANY GUARANTEED
INTEREST RATES IN EXCESS OF THE CONTRACTUALLY GUARANTEED RATE. WE CANNOT PREDICT
NOR CAN WE GUARANTEE THE RATES OF ANY FUTURE DECLARED INTEREST OR OF ANY
GUARANTEED INTEREST RATES IN EXCESS OF THE CONTRACTUALLY GUARANTEED RATE.
3. PARTICIPANTS' INDIVIDUAL ACCOUNT VALUES
Participants' Individual Account values held under the General Account
Option are credited with interest at rates at least equal to the applicable
Guaranteed Interest Rates. Contributions are credited to Participants'
Individual Accounts, and begin earning interest, the day Hartford Life receives
the Contribution at its Home Office. Interest is credited to Participants'
Individual Account values daily.
4. TRANSFERS FROM THE GENERAL ACCOUNT OPTION
The Contract Owner may make transfers of Participants' Individual Account
values held in the General Account Option to one or more of the Separate Account
options under the contract. The charges for transfers are described in the
contract prospectus which accompanies this Prospectus. No deduction is made for
Contingent Deferred Sales Charges when a transfer is made. All transfers will be
made on a last in, first out basis; that is, that portion of the Participant's
Individual Account attributable to older Contributions or transfers will be
transferred only after the portion attributable to the most recent Contribution
or transfer has been transferred.
This right to transfer values is subject to Hartford Life's right to limit
any such transfer in any Calendar Year, to one-sixth (1/6) of the Participant's
Individual Account value under the General Account Option under the contract as
of the end of the preceding Calendar Year. (See also "Surrenders," Page 8.)
Transfers of assets presently held in the General Account, or which were
held in the General Account at any time during the preceding three (3) month
period, to the Money Market Fund Account or to the U.S. Government Money Market
Fund Account are prohibited. Similarly, transfers of assets presently held in
the
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Money Market Fund Account or U.S. Government Money Market Fund Account, or which
were held in either of these two (2) Accounts or the General Account during the
preceding three (3) months, to the General Account are prohibited.
5. TRANSFERS TO THE GENERAL ACCOUNT OPTION
Participants' Individual Account values in a Separate Account may be
transferred to the General Account Option at any time. The charges for transfers
are described in the contract prospectus which accompanies this Prospectus. No
deduction is made for Contingent Deferred Sales Charges when a transfer is made.
Such transfers will be treated like contributions to the General Account Option
on the date of such transfer.
6. SURRENDERS
(a) GENERAL
Subject to the termination provisions described below, the Contract Owner
may request a full or partial surrender of Participants' Individual Account
values at any time. However, if the sum of all surrenders and transfers from the
General Account Option in a Calendar Year, including the currently requested
surrender, exceeds one-sixth (1/6th) of the aggregate values held in the General
Account Option under the contract at the end of the preceding Calendar Year,
Hartford Life reserves the right to defer surrenders in excess of the limit to
the next Calendar Year. At such time, unless Hartford Life is directed in
writing otherwise, deferred surrenders will be made in the order originally
received up to the limit, if applicable. This method will be used until all
surrenders have been satisfied.
(b) PAYMENT OF FULL OR PARTIAL SURRENDERS (PARTICIPANT'S INDIVIDUAL ACCOUNT
ONLY)
In the event of a partial surrender of a Participant's Individual Account,
Hartford Life will pay the requested value less any applicable Contingent
Deferred Sales Charge. All partial surrenders of a Participant's Individual
Account will be made on a last in, first out basis; that is, that portion of the
Participant's Individual Account attributable to his most recent Contribution
(or transfer) will be surrendered first. In the event of a full surrender of a
Participant's Individual Account, Hartford Life will pay the account value less
any applicable Premium Tax not previously deducted, the Annual Policy Fee and
applicable Contingent Deferred Sales Charges.
The applicable Contingent Deferred Sales Charges, depending on which of the
three separate group variable annuity contracts involved, are as follows: (1) a
deduction for the Contingent Deferred Sales Charges is made if there is any
surrender of contract values during the first 15 Participant Contract Years.
During the first 8 years, a maximum deduction of 5% will be made against the
full amount of the surrender; during the next 7 years, a maximum deduction of 3%
will be made against the full amount of the surrender, (2) a deduction for the
Contingent Deferred Sales Charges is made if there is any surrender of contract
values during the first 12 Participant Contract Years. During the first 6 years,
a maximum deduction of 7% will be made against the full amount of the surrender;
during the next 6 years, a maximum deduction of 5% will be made against the full
amount of the surrender and (3) a deduction for Contingent Deferred Sales
Charges is made if there is any surrender of contract values during the first 12
Participant Contract Years. During the first 6 years, a maximum deduction of 5%
will be made against the full amount of any such surrender; during the next 2
years, a maximum deduction of 4% will be made against the full amount of any
such surrender; during the next 2 years, a maximum deduction of 3% will be made
against the full amount of any such surrender; during the next 2 years, a
maximum deduction of 2% will be made against the full amount of any such
surrender. Such charges will in no event exceed 8.5% where applied as a
percentage against the sum of all Contributions to a Participant's Individual
Account. Please consult the Prospectus for the related group variable annuity
contract and the Separate Account for applicable Contingent Deferred Sales
Charges.
(c) CONTRACT TERMINATION (CONTRACT OWNERS ONLY)
If the Contract Owner requests a full surrender of the contract or of all
contract values held in the General Account Option, the Contract Owner may
select one of the two optional methods of payment, as described below. The terms
utilized have the following meanings:
i = the rate of interest (expressed as a percent, e.g. 05 = 5%) to be
credited, subject to a minimum rate of 0% and a maximum rate of B%.
A = The weighted average interest rate (expressed as a decimal, e.g. 1% =
.01) being credited under the General Account Option as of the date of
termination.
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B = The average yield (expressed as decimal, e.g. 1% = .01) for the month
prior to the date of termination of the higher of the Salomon Brothers
weekly index of new Long Term Public Utilities rated Aa by Moody's
Investors Services and the Salomon Brothers weekly Index of Current
Coupon 30 year Federal National Mortgage Association Securities, or
their equivalents.
(i) BOOK VALUE SPREAD OPTION (PERIODIC PAYMENT NOT TO EXCEED FIVE (5)
YEARS):
Under this option, Hartford Life will pay an amount equal to the contract
values held in the General Account Option less applicable Premium Taxes, any
Annual Policy Fee and applicable Contingent Deferred Sales Charges. Hartford
Life reserves the right to make such payment in level annual installments
over a period not to exceed five (5) years from the date of the request, in
which event interest will be credited on the unpaid balance at a rate per
annum produced by the following formula:
i = (A - 2(B - A)) - .005
Example: If A = 6% and B = 7%, then interest on the unpaid balance would be
paid at a rate of
(.06 - 2(.07 - .06)) - .005 or 3.5 %
This formula may result in an interest rate which is less than the weighted
average interest rate being credited under the General Account Option as of
the date of termination.
(ii) MARKET VALUE LUMP SUM OPTION:
Under this option, Hartford Life will pay a lump sum amount equal to the
contract values held in the General Account Option, less any applicable
Contingent Deferred Sales Charges, Annual Policy Fee, and Premium Taxes
multiplied by the appropriate market value factor. The amount payable on
surrender may be adjusted down by application of the market value
adjustment. This market value factor is determined as follows:
(a) if B is greater than A, the market value factor equals 1 -(6 (B-A)) or,
(b) if A is greater than B, the market value factors equals 1.00
Example: If A = 7% and B = 9%, then the market value factor would be 1 - (6
(.09 - .07)) = .88.
Under this option, it is possible that the amount payable on surrender would
be more or less than your contribution(s).
Additional examples of both optional methods of payment are contained in
Appendix A, Page 28.
B. ANNUITY PERIOD
Annuity payments will normally be made within fifteen business days after
the receipt of claim for settlement or any other later specified date, and
subsequent payments will be made periodically on the anniversaries of the first
payment.
The prospectus for the contract and the Separate Account options describes
more fully the Annuity Period and annuity options under the contracts. It should
be noted, however, that once fixed Annuity payments have commenced, no surrender
of the annuity benefit can be made for the purpose of receiving a lump sum
settlement in lieu thereof.
INVESTMENTS BY HARTFORD LIFE
General Account assets of Hartford Life 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 F-11 for
percentage breakdown of recent investments of Hartford Life.) All General
Account assets of Hartford Life would be available to meet Hartford Life's
guarantee under the General Account Option. The proceeds from the General
Account Option will become part of Hartford Life's general assets and are
available to fund the claims of all classes of customers of Hartford Life.
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In establishing Guaranteed and Declared Interest Rates, Hartford Life
intends to take into account the yields available on the instruments in which it
intends to invest the assets attributable to the contracts. (See, "Guaranteed
Interest Rates and Declared Interest Rates," Page 6.) Hartford Life's investment
strategy with respect to the assets attributable to the General Account Option
under the contracts will generally be to invest in investment-grade debt
instruments including:
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 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.
Other debt instruments, including but not limited to, issues of or
guaranteed by banks or bank holding companies and of corporations, which
obligations, although not rated by Moody's or Standard & Poor's, are deemed by
Hartford Life'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, WE ARE NOT
OBLIGATED TO INVEST THE ASSETS ATTRIBUTABLE TO THE CONTRACTS ACCORDING TO ANY
PARTICULAR STRATEGY, EXCEPT AS MAY BE REQUIRED BY CONNECTICUT AND OTHER STATE
INSURANCE LAWS AND WE HAVE THE RIGHT TO ALTER THIS EXPECTED STRATEGY, CONSISTENT
WITH APPLICABLE LAW.
DISTRIBUTION OF CONTRACTS
Hartford Securities Distribution Company, Inc. ("HSD") serves as Principal
Underwriter for the securities issued with respect to the General Account
Option. HSD is a wholly-owned subsidiary of Hartford Life. The principal
business address of HSD is the same as Hartford Life Insurance Company.
The securities will be sold by salespersons of HSD, who represent Hartford
Life as insurance and Variable Annuity agents and who are registered
representatives or 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 National Association of
Securities Dealers, Inc.
FEDERAL INCOME TAX CONSIDERATIONS
A. 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 General Account
Option under the contracts will be owned by Hartford. The income earned on such
assets will be Hartford's income.
B. INFORMATION REGARDING DEFERRED COMPENSATION PLANS FOR STATE AND LOCAL
GOVERNMENTS
The tax treatment of contributions and distributions is briefly described in
the accompanying prospectus for the contract.
10
<PAGE>
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 ITT Hartford Group, Inc. ("The Hartford") (formerly 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.
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
11
<PAGE>
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.
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 F-1.
12
<PAGE>
HARTFORD LIFE INSURANCE COMPANY
STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
REVENUES
Premiums and other considerations................................. $ 1,705 $ 1,487 $ 1,100 $ 747 $ 259
Net investment income............................................. 1,397 1,328 1,292 1,051 907
Net realized (losses) gains....................................... (213) (11) 7 16 5
--------- --------- --------- --------- ---------
Total Revenues.................................................. 2,889 2,804 2,399 1,814 1,171
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
BENEFITS, CLAIMS AND EXPENSES
Benefits, claims and claim adjustment expenses.................... 1,535 1,422 1,405 1,046 797
Amortization of deferred policy acquisition costs................. 234 199 145 113 55
Dividends to policyholders........................................ 635 675 419 227 47
Other insurance expenses.......................................... 427 317 227 210 138
--------- --------- --------- --------- ---------
Total Benefits, Claims and Expenses............................. 2,831 2,613 2,196 1,596 1,037
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
INCOME BEFORE INCOME TAX EXPENSE.................................... 58 191 203 218 134
Income tax expense................................................ 20 62 65 75 45
--------- --------- --------- --------- ---------
Income before cumulative effect of changes in accounting
principles....................................................... 38 129 138 143 89
Cumulative effect of changes in accounting principles net of tax
benefits of $7................................................... 0 0 0 0 (13)
--------- --------- --------- --------- ---------
NET INCOME.......................................................... $ 38 $ 129 $ 138 $ 143 $ 76
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
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.
13
<PAGE>
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, 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
14
<PAGE>
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
15
<PAGE>
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 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, the Company establishes
and carries as liabilities actuarially determined reserves which are calculated
to meet the Company's future obligations. The reserves are based on actuarially
recognized methods using prescribed morbidity and mortality tables in general
use in the United States, which are modified to reflect the Company's actual
experience when appropriate. These reserves are computed at amounts that, with
additions from premiums to be received and with interest on such reserves
compounded annually at certain assumed rates, are expected to be sufficient to
meet the Company's policy obligations at their maturities or in the event of an
insured's death. Reserves include unearned premiums, premium deposits, claims
reported but not yet paid, claims incurred but not reported and claims in the
process of settlement. The Company's reserves for assumed reinsurance are
computed on bases essentially comparable to direct insurance reserves.
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
16
<PAGE>
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 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.
17
<PAGE>
FIXED MATURITY INVESTMENTS MATURITY SCHEDULE
(IN MILLIONS)
<TABLE>
<CAPTION>
ESTIMATED MATURITY
-----------------------------------------------------------------------
1997 1998 1999 2000 2001 THEREAFTER TOTAL
------- ------- ------- ------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
ABS, MBS, CMOS (1)
Variable Rate (2)
Amortized Cost........................... $ 156 $ 100 $ 68 $ 198 $ 142 $ 791 $ 1,455
Market Value............................. 154 120 159 192 134 754 1,513
Pre-tax yield (3)........................ 5.76% 6.69% 6.32% 6.51% 6.56% 7.23% 7.08%
Fixed Rate
Amortized Cost........................... $ 787 $ 575 $ 688 $ 649 $ 430 $ 985 $ 4,114
Market Value............................. 787 570 678 646 425 977 4,083
Pre-tax yield (3)........................ 6.24% 6.58% 6.33% 6.55% 6.52% 6.84% 6.52%
BONDS AND NOTES
Variable Rate (2)
Amortized Cost........................... $ 171 $ 72 $ 113 $ 90 $ 7 $ 209 $ 662
Market Value............................. 169 76 90 94 8 211 648
Pre-tax yield (3)........................ 3.20% 5.74% 3.03% 5.97% 6.10% 6.48% 5.34%
Fixed Rate
Amortized Cost........................... $ 1,518 $ 636 $ 798 $ 663 $ 642 $3,091 $ 7,348
Market Value............................. 1,532 632 797 667 640 3,112 7,380
Pre-tax yield (3)........................ 6.37% 6.47% 6.42% 6.72% 6.85% 7.16% 6.79%
TOTAL FIXED MATURITIES
Amortized Cost........................... $ 2,632 $ 1,383 $ 1,667 $ 1,600 $ 1,221 $5,076 $ 13,579
Market Value............................. 2,642 1,398 1,724 1,599 1,207 5,054 13,624
Pre-tax yield (3)........................ 6.09% 6.49% 6.15% 6.58% 6.70% 7.08% 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 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
18
<PAGE>
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
19
<PAGE>
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.
<TABLE>
<CAPTION>
ESTIMATED DURATION YEARS (1)
(IN BILLIONS)
BALANCE AT
DECEMBER 31, OVER
DESCRIPTION 1996 LESS THAN 1 YEAR 1-5 YEARS 6-10 YEARS 10 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.
20
<PAGE>
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 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.
21
<PAGE>
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).
22
<PAGE>
EXECUTIVE OFFICERS AND DIRECTORS
<TABLE>
<CAPTION>
POSITION WITH OTHER BUSINESS PROFESSION,
HARTFORD, VOCATION OR EMPLOYMENT FOR
NAME, AGE YEAR OF ELECTION PAST 5 YEARS; OTHER DIRECTORSHIPS
- ------------------------------- ------------------------------------ ---------------------------------------------
<S> <C> <C>
Wendell J. Bossen 63 Vice President, 1992** President (1992-Present), International
Corporate Marketing Group, Inc.; Executive
Vice President (1984-1992), Mutual Benefit.
Gregory A. Boyko 45 Vice President, 1995 Vice President & Controller (1995-Present),
Hartford; Chief Financial Officer
(1994-1995), IMG American Life; Senior Vice
President (1992-1994), Connecticut Mutual
Life Insurance Company.
Peter W. Cummins 60 Vice President, 1989 Vice President, Individual Annuity Operations
(1989-Present), Hartford.
Ann M. deRaismes 46 Vice President, 1994 Vice President (1994-Present); Assistant Vice
President (1992-1994); Director of Human
Resources (1991-1997), Hartford.
Timothy M. Fitch 44 Vice President, 1995 Actuary (1997-Present); Vice President
Actuary, 1997 (1995-Present); Assistant Vice President
(1993-1995); Director (1991-1993), Hartford.
Bruce D. Gardner 46 Vice President, 1996 Vice President (1996-Present); General
Director, 1994* Counsel and Corporate Secretary (1991-1995),
Hartford.
Joseph H. Gareau 50 Executive Vice President & Senior Vice President & Chief Investment
Chief Investment Officer, 1993 Officer (1992-1993), Hartford; Senior Vice
Director, 1993* President and Chief Investment Officer
(1992), Hartford Insurance Group.
J. Richard Garrett 52 Vice President, 1993 Treasurer (1994-Present), Hartford; Treasurer
Treasurer, 1977 (1977), Hartford Insurance Group.
John P. Ginnetti 51 Executive Vice President & Senior Vice President, (1988-1994), Hartford.
Director, Asset Management
Services, 1994
Director, 1988
Lynda Godkin 43 General Counsel, 1996 Associate General Counsel and Corporate
Corporate Secretary, 1995 Secretary (1995-1996); Assistant General
Counsel and Secretary (1994-1995); Counsel
(1990-1994), Hartford.
Lois W. Grady 52 Vice President, 1993 Assistant Vice President (1988-1993),
Hartford.
David A. Hall 43 Senior Vice President & Senior Vice President & Actuary
Actuary, 1992 (1992-Present), Hartford.
Robert A. Kerzner 45 Vice President, 1994 Vice President (1994-Present); Regional Vice
President (1991-1994), Hartford.
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH OTHER BUSINESS PROFESSION,
HARTFORD, VOCATION OR EMPLOYMENT FOR
NAME, AGE YEAR OF ELECTION PAST 5 YEARS; OTHER DIRECTORSHIPS
- ------------------------------- ------------------------------------ ---------------------------------------------
Andrew W. Kohnke 48 Vice President, 1992 Vice President (1992-Present); Assistant Vice
President (1989-1992), Hartford.
<S> <C> <C>
Steven M. Maher 42 Vice President & Actuary, 1993 Vice President & Actuary (1993-Present);
Assistant Vice President (1987), Hartford.
William B. Malchodi, Jr. 46 Vice President, 1994 Vice President (1994-Present); Director of
Director of Taxes, 1992 Taxes (1992-1997), Hartford Insurance Group.
Thomas M. Marra 38 Executive Vice President & Senior Vice President & Director, Individual
Director, Individual Life and Life and Annuity Division (1993-1996);
Annuity Division, 1996 Director of Individual Annuities
Director, 1994* (1991-1993), Hartford.
Robert F. Nolan 42 Vice President, 1995 Assistant Vice President (1992-1995),
Hartford; Manager Public Relations (1986),
Aetna Life and Casualty Insurance Company.
Joseph J. Noto 45 Vice President, 1989 President, and Director (1994-Present),
American Maturity Life Insurance Company.
Leonard E. Odell, Jr. 52 Senior Vice President, 1994 Senior Vice President (1994-Present); Vice
Director, 1994* President and Chief Actuary (1982-1994),
Hartford.
Craig D. Raymond 36 Vice President, 1993 Assistant Vice President (1992-1993); Actuary
Chief Actuary, 1994 (1989-1994), Hartford.
Lowndes A. Smith 57 President & Chief Operating President & Chief Operating Officer
Officer, 1989 (1989-Present), Hartford.
Director, 1981*
Edward J. Sweeney 40 Vice President, 1993 Chicago Regional Manager (1985-1993),
Hartford.
Raymond P. Welnicki 48 Senior Vice President & Senior Vice President & Director, Employee
Director, Employee Benefit Division, (1994-Present); Vice
Benefit Division, 1994 President (1993-1994), Hartford; Board of
Director, 1994* Directors, Ethix Corp.
Walter C. Welsh 50 Vice President, 1995 Assistant Vice President (1993-1995),
Hartford.
James J. Westervelt 50 Senior Vice President & Senior Vice President & Group Controller
Group Controller, 1994 (1994-Present); Vice President and Group
Controller (1989-1994), Hartford Insurance
Group.
Lizabeth H. Zlatkus 38 Vice President, 1994 Vice President (1994-Present); Assistant Vice
Director, 1994* President (1992-1994), Hartford.
</TABLE>
- ------------------------
* Denotes year of election to Board of Directors.
** ITT Hartford Affiliated Company
Unless otherwise indicated, the principal business address of each the above
individuals is P.O. Box 2999, Hartford, CT 06104-2999.
24
<PAGE>
EXECUTIVE COMPENSATION
Executive officers of Hartford Life Insurance Company also serve one or more
affiliated companies of Hartford Life Insurance Company. Allocations have been
made as to each individual's time devoted to his duties as an executive officer
of Hartford. The following tables provide information on executive compensation
paid to the Chief Operating Officer and the five most highly compensated
executive officers of Hartford whose allocated compensation exceeded $100,000 in
1996. Directors of Hartford receive no compensation in addition to their
compensation as employees of Hartford.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
ANNUAL COMPENSATION --------------------------------------------------------------
RESTRICTED SECURITIES ALL
NAME AND ----------------------- STOCK UNDERLYING LTIP OTHER
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) AWARD OPTIONS (#) PAYOUTS ($)(1) COMPENSATION ($)(2)
- -------------------------------- ---- ---------- ---------- --------- ----------- -------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
DONALD R. FRAHM 1996 42,000 30,000 -- 3,888 -- 2,337
CHAIRMAN, PRESIDENT & 1995 38,640 16,851 -- 5,959 -- 3,467
CHIEF EXEC. OFFICER -- 1994 36,213 17,280 -- 5,959 -- 1,381
ITT HARTFORD GROUP, INC.
LON A. SMITH 1996 313,950 185,380 -- 22,246 -- 12,713
PRESIDENT & CHIEF 1995 243,530 130,526 -- 35,733 170,400 21,978
OPERATING OFFICER 1994 189,333 113,600 -- 35,733 -- 7,638
JOHN P. GINNETTI 1996 246,000 219,760 39,619 7,544 11,022
EXECUTIVE VICE PRESIDENT 1995 245,250 223,178 -- 6,583 78,480 25,444
1994 158,050 147,150 -- 18,103 -- --
PETER W. CUMMINS 1996 145,928 -- -- 2,044 -- 227,070
VICE PRESIDENT 1995 182,698 -- -- 1,665 39,696 320,865
1994 118,654 -- -- 2,081 -- 217,708
THOMAS M. MARRA 1996 229,600 400,160 -- 10,693 -- 10,729
EXECUTIVE VICE PRESIDENT 1995 160,800 258,084 -- 8,093 27,336 17,739
1994 113,096 131,052 -- 20,140 -- --
</TABLE>
- ------------------------
(1) The plan was amended in 1995 to permit increased or decreased payments based
upon events that may have had a material impact on the Company's
performance.
(2) Amounts shown in this column include company contributions under the
Company's defined contribution plans. Under these plans, the Company makes a
matching contribution in an amount equal to 50% of an employee's
contribution, such matching contribution not to exceed three percent (3%) of
such employee's salary. The Company also makes a non-matching contribution
equal to one-half of one percent ( 1/2 of 1%) of an employee's salary. In
addition to ordinary company contributions in 1995, in connection with the
Spin-Off, each participant in the ITT Investment and Savings Plan, including
each Named Executive, received a one-time distribution to his or her
account. This distribution resulted from the termination of the Employee
Stock Ownership portion of the plan, the shares of preferred stock of which
were used to repay a loan and the excess distributed to the accounts of
participants.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED ANNUAL
NUMBER OF RATES OF STOCK
SECURITIES PRICE APPRECIATION
UNDERLYING OPTIONS FOR OPTION TERM
OPTIONS GRANTED ($) (4)
GRANTED TO EMPLOYEES EXERCISE PRICE EXPIRATION ------------------
NAME (#)(1) IN 1996 (2) ($/SHARE) (3) DATE 5% 10%
- ----------------------------- ----------- -------------- -------------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Donald R. Frahm 3,888 0.003 52.00 2/16/06 127,138 322,199
Lon A. Smith 22,246 0.016 52.00 2/16/06 727,431 1,843,493
John P. Ginnetti 7,544 0.005 52.00 2/16/06 246,689 625,171
Peter W. Cummins 3,250 0.002 52.00 2/16/06 106,275 269,328
Thomas M. Marra 10,693 0.007 52.00 2/16/06 349,655 886,112
</TABLE>
25
<PAGE>
(1) The options granted to Messrs. Frahm and Smith on February 14, 1996 became
fully exercisable on December 5, 1996, when the closing price of the Common
Stock on the NYSE was equal to or greater than $65.00 for ten consecutive
trading days. Messrs. Ginnetti, Cummins and Marra's options are exercisable
in three equal annual installments commencing on the first anniversary date
of the grant. The exercisability, payment or vesting of options and other
awards shown in the table may be accelerated upon the occurrence of a change
in control (as defined in the Incentive Stock Plan) of the Company.
(2) Percentages indicated are based on options to purchase a total of 1,431,217
shares of Common Stock granted to 764 employees of the Company during 1996.
(3) Options were granted at exercise prices that were 100% of the fair market
value of the Common Stock on the date of grant.
(4) At the end of the term of the options granted on February 14, 1996, the
projected price of a share of the Common Stock would be $84.70 and $134.87
at assumed annual appreciation rates of 5% and 10%, respectively.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
ACQUIRED OPTIONS AT FISCAL YEAR-END IN-THE- MONEY OPTIONS HELD
ON VALUE (#) AT FISCAL YEAR-END ($)(1)
EXERCISE REALIZED --------------------------- ---------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------- ----- ------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Donald R. Frahm -- -- 19,187 -- 527,056 --
Lon A. Smith -- -- 144,247 -- 4,306,383 --
John P. Ginnetti -- -- 20,322 17,999 674,898 432,109
Peter W. Cummins -- -- 2,860 3,416 93,349 70,188
Thomas M. Marra -- -- 23,342 25,512 729,553 589,327
</TABLE>
(1) Values are calculated for options "in-the-money" by subtracting the exercise
price per share of the options from the per share NYSE consolidated trading
closing price of $67.50 of the Common Stock on December 31, 1996.
1996 LONG-TERM INCENTIVE PLAN AWARDS
The Named Executives were granted contingent awards of performance shares
which are based upon achieving certain performance objectives described below.
To the extent that the performance objectives are achieved, cash and shares of
Common Stock will be granted to each participant.
Under the terms of the awards, there are two equally weighted performance
objectives measured over the 1996-1998 three-year performance period: core
earnings per share of the Company ("Core Earnings") and total shareholder return
("TSR"). A target Core Earnings and a TSR to be achieved in connection with the
awards was established. If the target is achieved, a key employee will receive
100% of the performance shares awarded (payable one- third in cash and
two-thirds in Common Stock). Also established was a threshold (minimum) Core
Earnings and TSR to be achieved. If the threshold amounts are not achieved, the
participant will not receive any of the performance shares awarded. If the Core
Earnings and TSR achieved exceeds the thresholds but falls below the targets,
the participant will receive awards adjusted downward by interpolation to
reflect falling short of the targets. If the targets are exceeded, the
participant will receive awards adjusted upward by interpolation subject to an
established cap.
LONG-TERM INCENTIVE PLANS -- AWARDS IN FISCAL YEAR 1996
<TABLE>
<CAPTION>
AWARDS OF PERFORMANCE
SHARES SHARES RELATING TO
THE HARTFORD COMMON STOCK
IN LAST FISCAL YEAR ESTIMATED FUTURE PAYOUTS UNDER NON-STOCK
-------------------------- PRICE-BASED PLANS (#)(1)
PERIOD UNIT ---------------------------------------------
NAME # OF SHARES PAYOUT (1) THRESHOLD (#) TARGET (#) MAXIMUM (#)
- ------------------------------------------------ ------------- ----------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Donald R. Frahm 864 12/31/98 432 864 1,728
Lon A. Smith 4,934 12/31/98 2,467 4,934 9,867
John P. Ginnetti 1,673 12/31/98 836 1,673 3,346
Peter W. Cummins 447 12/31/98 223 447 893
Thomas M. Marra 2,362 12/31/98 1,181 2,362 4,723
</TABLE>
26
<PAGE>
(1) The threshold, target and maximum number of shares that may be awarded as
set forth in the table above are based on the Company equally achieving 75%,
100% and 150% or more, respectively, of each of the two Core Earnings and
TSR performance objectives described above.
LEGAL OPINIONS
The validity of the the Contract described in this Prospectus will be passed
upon for Hartford by Lynda Godkin, General Counsel and Secretary of Hartford.
LEGAL PROCEEDINGS
The Company is a defendant in various lawsuits arising in the ordinary
course of business. In the opinion of management, final outcome of these matters
will not materially affect the consolidated financial position, results of
operations or cash flows of the Company. In addition, companies in the life
insurance industry historically have been subject to substantial litigation
resulting from claims, disputes and other matters. Most recently, companies in
the life insurance industry have faced extensive claims, including class-action
lawsuits, alleging improper sales practices relating to sales of certain life
insurance products. Negotiated settlements of such class-action lawsuits have
had a material adverse effect on the business, financial condition and results
of operations of certain of these companies. The Company is not and has not been
a defendant in any such class-action lawsuits alleging improper sales practices.
No assurance can be given that such class-action lawsuits or other litigation
would not materially and adversely affect the Company's business, financial
position, results of operations or cash flows.
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
reports. 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.
27
<PAGE>
APPENDIX A
MARKET VALUE LUMP SUM OPTION
If A is greater than B, the Market Value Adjustment factor equals 1.
If B is greater than A, the Market Value Adjustment factor equals 1 -
(6(B-A))
WHERE:
A = The weighted average interest rate (expressed as a decimal, e.g., 1% =
.01) being credited under the General Account Option as of the date of
termination.
B = The average yield (expressed as a decimal, e.g. 1% = .01) for the
month prior to the date of termination of the higher of the Salomon
Brothers weekly index of new Long Term Public Utilities rated Aa by
Moody's Investors Service and the Salomon Brothers weekly Index of Current
Coupon 30 year Federal National Mortgage Association Securities, or their
equivalents.
BOOK VALUE SPREAD OPTION
Interest to be credited on unpaid balance ("i") equals (A - 2(B-A)) - .005,
where A and B are defined as above.
<TABLE>
<S> <C>
Examples of Contract Termination: (Assuming a 5% Contingent Deferred Sales
Charge, and no Policy Fees or Premium Taxes
are applicable)
</TABLE>
<TABLE>
<CAPTION>
INTEREST RATE CREDITED TO ACTIVE LIFE FUND ATTRIBUTABLE
CONTRIBUTIONS DEPOSITED TO CONTRIBUTIONS DEPOSITED IN
IN THE GIVEN YEAR THE GIVEN YEAR
--------------------------------- ------------------------------------
<S> <C> <C>
1992 6.00% $ 300,000
1993 6.50% 600,000
1994 7.00% 700,000
--- -----------
TOTAL 6.63%* $ 1,600,000
</TABLE>
*Total = the weighted average interest rate being credited on the date of
termination ("A"). It is calculated as follows:
<TABLE>
<S> <C>
300,000 x .06 + 600,000 x .065 + 700,000 x
.07
300,000 + 600,000 + 700,000 = .0663 = 6.63%
</TABLE>
At termination the book value of the General Account Option portion of the
Active Life Fund would be $1,600,000. This amount is reduced by Contingent Sales
Charges of 5%, or $80,000. The remaining $1,520,000 would be payable under
either Option 1 (Book Value Spread Option) or Option 2 (Market Value Lump Sum
Option.)
EXAMPLE 1
B = .09
If the Book Value Spread Option is selected, then the Book Value Spread rate
of interest would equal (.0663 - 2 (.09 - .0663)) - .005 = .0139 or 1.39% and
the Contract Owner would receive six (6) annual payments (beginning immediately)
of $262,153.80.
If the Market Value Lump Sum Option is selected, then the Market Value
Factor is 1 - (6(.09 - .0663)) = .8578 and the payout would be $1,520,000 x
.8578 = $1,303,856.
EXAMPLE 2
B = .07
If the Book Value Spread Option is selected, then the Book Value Spread rate
of interest would equal 7% (the maximum value of i) and the Contract Owner would
receive six (6) annual payments (beginning immediately) of $298,027.68.
If the Market Value Lump Sum Option is selected, then the Market Value
factor would be 1 and the payment would be $1,520,000.
The assessment of Policy Fees, if any, will reduce the amount of the payment
on contract termination.
28
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<S> <C>
Report of Management.............................................................. F-1
Report of Independent Public Accountants.......................................... F-2
Consolidated Statements of Income for the three years ended December 31, 1996..... F-3
Consolidated Balance Sheets as of December 31, 1996 and 1995...................... F-4
Consolidated Statements of Stockholders Equity for the three years ended
December 31, 1996................................................................ F-5
Consolidated Statements of Cash Flows for the three years ended December 31,
1996............................................................................. F-6
F-7 thru
Notes to Consolidated Financial Statements........................................ F-21
Schedule I -- Summary of Investments -- Other than Investments in Affiliates as of
December 31, 1996................................................................ S-1
Schedule III -- Supplementary Insurance Information for the three years ended
December 31, 1996................................................................ S-2
Schedule IV -- Reinsurance for the three years ended December 31, 1996............ S-3
</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>
THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY
<PAGE>
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 Companys
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 Companys consolidated financial statements. Their
report appears on Page F-2.
An essential element in meeting managements 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 Companys internal auditors independently assess the
effectiveness of the controls and make recommendations for improvement. Also,
Arthur Andersen LLP took into consideration the Companys system of internal
controls in determining the nature, timing and extent of its audit tests.
Another important element is managements recognition of its responsibility
for fostering a strong, ethical climate, thereby ensuring that the Companys
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.
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Hartford Life Insurance Company and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Hartford
Life Insurance Company (a Connecticut corporation and wholly-owned subsidiary of
Hartford Life and Accident Insurance Company) and subsidiaries as of December
31, 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
Companys 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 Commissions 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
F-2
<PAGE>
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<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 are an integral part of these consolidated financial
statements.
F-3
<PAGE>
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
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 are an integral part of these consolidated financial
statements.
F-4
<PAGE>
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(IN MILLIONS)
<TABLE>
<CAPTION>
NET UNREALIZED
GAIN (LOSS) TOTAL
CAPITAL ON INVESTMENTS, RETAINED STOCKHOLDER'S
COMMON STOCK SURPLUS NET OF TAX EARNINGS EQUITY
------------- --------- ----------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
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 are an integral part of these consolidated financial
statements.
F-5
<PAGE>
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
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 are an integral part of these consolidated financial
statements.
F-6
<PAGE>
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
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
F-7
<PAGE>
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 $91million. 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.
F-8
<PAGE>
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(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 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
F-9
<PAGE>
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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.
F-10
<PAGE>
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(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>
(D) NET UNREALIZED CAPITAL GAINS (LOSSES) ON FIXED MATURITIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Gross unrealized gains......................................................... $ 386 $ 529 $ 150
Gross unrealized losses........................................................ (341) (569) (1,185)
Unrealized (gains) losses credited to policyholders............................ (11) (52) 37
--------- --------- ---------
Net unrealized capital gains (losses).......................................... 34 (92) (998)
Deferred income tax liability (asset).......................................... 12 (34) (350)
--------- --------- ---------
Net unrealized capital gains (losses), after tax............................... 22 (58) (648)
Balance beginning of year...................................................... (58) (648) 161
--------- --------- ---------
Change in net unrealized capital gains (losses) on investments................. $ 80 $ 590 $ (809)
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-11
<PAGE>
3. INVESTMENTS (CONTINUED)
(E) COMPONENTS OF FIXED MATURITIES INVESTMENTS
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
------------------------------------------------
GROSS UNREALIZED
AMORTIZED ------------------------ FAIR
COST GAINS LOSSES VALUE
----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
U.S. government and government agencies and authorities (guaranteed and
sponsored)................................................................... $ 166 $ 12 $ (3) $ 175
U.S. government and government agencies and authorities (guaranteed and
sponsored) -- asset-backed................................................... 1,970 161 (128) 2,003
States, municipalities and political subdivisions............................. 373 6 (11) 368
International governments..................................................... 281 12 (4) 289
Public utilities.............................................................. 877 12 (8) 881
All other corporate including international................................... 4,656 120 (107) 4,669
All other corporate -- asset-backed........................................... 3,601 49 (59) 3,591
Short-term investments........................................................ 1,655 14 (21) 1,648
----------- ----- ----------- ---------
Total fixed maturities........................................................ $ 13,579 $ 386 $ (341) $ 13,624
----------- ----- ----------- ---------
----------- ----- ----------- ---------
<CAPTION>
AS OF DECEMBER 31, 1996
------------------------------------------------
GROSS UNREALIZED
AMORTIZED ------------------------ FAIR
COST GAINS LOSSES VALUE
----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
U.S. government and government agencies and authorities (guaranteed and
sponsored)................................................................... $ 502 $ 4 $ (9) $ 497
U.S. government and government agencies and authorities (guaranteed and
sponsored) -- asset-backed................................................... 3,568 210 (387) 3,391
States, municipalities and political subdivisions............................. 201 4 (3) 202
International governments..................................................... 291 19 (4) 306
Public utilities.............................................................. 949 29 (2) 976
All other corporate including international................................... 3,065 76 (55) 3,086
All other corporate -- asset-backed........................................... 5,056 187 (109) 5,134
Short-term investments........................................................ 808 -- -- 808
----------- ----- ----------- ---------
Total fixed maturities........................................................ $ 14,440 $ 529 $ (569) $ 14,400
----------- ----- ----------- ---------
----------- ----- ----------- ---------
</TABLE>
The amortized cost and fair value of fixed maturities at December 31, 1996,
by maturity, are shown below. Asset-backed securities, including mortgage-backed
securities and collateralized mortgage obligations, are distributed to maturity
year based on the Company's estimates of the rate of future prepayments of
principal over the remaining 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-12
<PAGE>
3. INVESTMENTS (CONTINUED)
(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).
F-13
<PAGE>
3. INVESTMENTS (CONTINUED)
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)
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PURCHASED
TOTAL ISSUED CAPS OPTIONS, INTEREST FOREIGN
CARRYING & FLOORS CAPS & RATE SWAPS CURRENCY
1996 VALUE (C) FLOORS (D) FUTURES (E) (H) SWAPS (F)
- ------------------------------------------------- --------- ----------- ----------- ------------- ----------- -------------
Asset-backed securities (excluding inverse
floaters and anticipatory)...................... $ 5,242 $ 500 $ 2,454 $ -- $ 941 $ --
Inverse floaters (A)............................. 352 98 856 -- 346 --
Anticipatory (G)................................. -- -- -- 132 -- --
Other bonds and notes............................ 7,369 425 440 5 1,079 125
Short-term investments........................... 661 -- -- -- -- --
--------- ----------- ----------- ----- ----------- -----
Total fixed maturities......................... 13,624 1,023 3,750 137 2,366 125
Equity securities, policy loans and other
investments..................................... 4,011 -- -- -- 19 --
--------- ----------- ----------- ----- ----------- -----
Total investments.............................. $ 17,635 $ 1,023 $ 3,750 $ 137 $ 2,385 $ 125
--------- ----------- ----------- ----- ----------- -----
--------- ----------- ----------- ----- ----------- -----
Total derivatives -- fair value (B)............ $ (10) $ 35 $ -- $ (25) $ (9)
----------- ----------- ----- ----------- -----
----------- ----------- ----- ----------- -----
<CAPTION>
<S> <C>
TOTAL
NOTIONAL
1996 AMOUNT
- ------------------------------------------------- -----------
Asset-backed securities (excluding inverse
floaters and anticipatory)...................... $ 3,895
Inverse floaters (A)............................. 1,300
Anticipatory (G)................................. 132
Other bonds and notes............................ 2,074
Short-term investments........................... --
-----------
Total fixed maturities......................... 7,401
Equity securities, policy loans and other
investments..................................... 19
-----------
Total investments.............................. $ 7,420
-----------
-----------
Total derivatives -- fair value (B)............ $ (9)
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
1995
- --------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Asset-backed securities (excluding inverse
floaters and anticipatory)....................... $ 5,764 $ 118 $ 3,133 $ 322 $ 290 $ --
Inverse floaters (A).............................. 711 560 354 6 681 --
Anticipatory (G).................................. -- -- -- 213 25 --
Other bonds and notes............................. 7,118 33 66 322 757 187
Short-term investments............................ 807 -- -- -- 0 --
--------- ----------- ----------- ----- ----------- -----
Total fixed maturities.......................... 14,400 711 3,553 863 1,753 187
Equity securities, policy loans and other
investments...................................... 3,865 -- -- -- 18 --
--------- ----------- ----------- ----- ----------- -----
Total investments............................... $ 18,265 $ 711 $ 3,553 $ 863 $ 1,771 $ 187
--------- ----------- ----------- ----- ----------- -----
--------- ----------- ----------- ----- ----------- -----
Total derivatives -- fair value (B)............. $ (32) $ 46 $ -- $ (108) $ (24)
----------- ----------- ----- ----------- -----
----------- ----------- ----- ----------- -----
<CAPTION>
1995
- --------------------------------------------------
<S> <C>
Asset-backed securities (excluding inverse
floaters and anticipatory)....................... $ 3,863
Inverse floaters (A).............................. 1,601
Anticipatory (G).................................. 238
Other bonds and notes............................. 1,365
Short-term investments............................ --
-----------
Total fixed maturities.......................... 7,067
Equity securities, policy loans and other
investments...................................... 18
-----------
Total investments............................... $ 7,085
-----------
-----------
Total derivatives -- fair value (B)............. $ (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
F-14
<PAGE>
3. INVESTMENTS (CONTINUED)
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.
(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
Companys 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.
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
F-15
<PAGE>
3. INVESTMENTS (CONTINUED)
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>
1997 1998 1999 2000 20001 THEREAFTER
----------- ----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Pay Fixed/Receive Variable
Notional Value $-- $50 $125 $35 $125 $170
Weighted Average Pay Rate -- 5.7 % 5.9 % 5.5 % 5.5 % 5.7 %
Weighted Average Receive Rate -- 3.2 % -- 6.5 % 6.4 % 6.9 %
Pay Variable/Receive Fixed
Notional Value $86 $25 $486 $74 $582 $349
Weighted Average Pay Rate 7.5 % -- 6.4 % 6.7 % 7.0 % 6.9 %
Weighted Average Receive Rate 5.6 % -- 5.6 % 5.7 % 6.2 % 5.9 %
Pay Variable/Receive Different Variable
Notional Value $19 $15 $-- $200 $-- $44
Weighted Average Pay Rate 5.9 % 5.7 % -- 6.4 % -- 12.9 %
Weighted Average Receive Rate 3.7 % 5.5 % -- 5.0 % -- 6.4 %
Total Interest Rate Swaps $105 $90 $611 $309 $707 $563
Total Weighted Average Pay Rate 7.2 % 5.7 % 6.3 % 6.4 % 6.7 % 7.0 %
Total Weighted Average Receive Rate 5.2 % 3.8 % 4.3 % 5.4 % 6.3 % 6.3 %
<CAPTION>
LAST
TOTAL MATURITY
----------- ------------
<S> <C> <C>
Pay Fixed/Receive Variable
Notional Value $505 2003
Weighted Average Pay Rate 5.7 %
Weighted Average Receive Rate 4.7 %
Pay Variable/Receive Fixed
Notional Value $1,602 2007
Weighted Average Pay Rate 6.8 %
Weighted Average Receive Rate 5.9 %
Pay Variable/Receive Different Variable
Notional Value $278 2003
Weighted Average Pay Rate 7.4 %
Weighted Average Receive Rate 5.2 %
Total Interest Rate Swaps $2,385 2007
Total Weighted Average Pay Rate 6.6 %
Total Weighted Average Receive Rate 5.5 %
</TABLE>
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000 THEREAFTER
----------- ----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Pay Fixed/Receive Variable
Notional Value $15 $50 $0 $453 $31 $229
Weighted Average Pay Rate 5.0 % 7.2 % 0.0 % 8.1 % 7.1 % 7.8 %
Weighted Average Receive Rate 5.8 % 5.9 % 0.0 % 5.8 % 5.7 % 5.9 %
Pay Variable/Receive Fixed
Notional Value $100 $68 $25 $25 $35 $190
Weighted Average Pay Rate 5.9 % 8.6 % 5.9 % 0.0 % 5.9 % 5.4 %
Weighted Average Receive Rate 2.4 % 7.9 % 4.0 % 0.0 % 6.5 % 6.9 %
Pay Variable/Receive Different Variable
Notional Value $50 $18 $36 $12 $200 $234
Weighted Average Pay Rate 5.8 % 0.0 % 3.7 % 3.5 % 4.5 % 16.3 %
Weighted Average Receive Rate 5.4 % 0.0 % 5.6 % 5.2 % 6.8 % 5.9 %
Total Interest Rate Swaps $165 $136 $61 $490 $266 $653
Weighted Average Pay Rate 5.8 % 7.8 % 4.6 % 7.6 % 5.0 % 7.3 %
Weighted Average Receive Rate 3.6 % 7.2 % 4.9 % 5.4 % 6.6 % 6.3 %
<CAPTION>
LAST
TOTAL MATURITY
----------- ------------
<S> <C> <C>
Pay Fixed/Receive Variable
Notional Value $778 2004
Weighted Average Pay Rate 7.8 %
Weighted Average Receive Rate 5.9 %
Pay Variable/Receive Fixed
Notional Value $443 2007
Weighted Average Pay Rate 5.4 %
Weighted Average Receive Rate 6.9 %
Pay Variable/Receive Different Variable
Notional Value $550 2004
Weighted Average Pay Rate 5.7 %
Weighted Average Receive Rate 6.4 %
Total Interest Rate Swaps $1,771 2007
Weighted Average Pay Rate 6.9 %
Weighted Average Receive Rate 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.
F-16
<PAGE>
3. INVESTMENTS (CONTINUED)
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/ 12/31/96
NOTIONAL AMOUNT ADDITIONS TERMINATIONS NOTIONAL AMOUNT
----------------- ----------- ------------- -----------------
<S> <C> <C> <C> <C>
Caps................................................... $ 2,184 $ 1,286 $ 1,715 $ 1,755
Floors................................................. 2,180 2,053 1,065 3,168
Options................................................ -- 10 -- 10
Swaps/Forwards......................................... 3,566 3,989 2,694 4,861
Futures................................................ 863 2,092 2,818 137
------- ----------- ------------- -------
Total.................................................. $ 8,793 $ 9,430 $ 8,292 $ 9,931
------- ----------- ------------- -------
------- ----------- ------------- -------
<CAPTION>
BY STRATEGY
----------------------------------------------------------------
12/31/94 MATURITIES/ 12/31/96
NOTIONAL AMOUNT ADDITIONS TERMINATIONS NOTIONAL AMOUNT
----------------- ----------- ------------- -----------------
<S> <C> <C> <C> <C>
Liability.............................................. $ 1,708 $ 1,940 $ 1,137 $ 2,511
Anticipatory........................................... 238 516 622 132
Asset.................................................. 2,984 1,265 2,137 2,112
Portfolio.............................................. 3,863 5,709 4,396 5,176
------- ----------- ------------- -------
Total.................................................. $ 8,793 $ 9,430 $ 8,292 $ 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
F-17
<PAGE>
4. INCOME TAX (CONTINUED)
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 Companys effective tax rate was 35%, 32% and 32%
in 1996, 1995 and 1994, respectively.
Income tax expense was as follows:
<TABLE>
<CAPTION>
YEAR 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>
YEAR 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>
FOR THE YEARS 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>
F-18
<PAGE>
5. REINSURANCE (CONTINUED)
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.
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
F-19
<PAGE>
7. BUSINESS SEGMENT INFORMATION (CONTINUED)
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
F-20
<PAGE>
9. SEPARATE ACCOUNTS (CONTINUED)
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 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
F-21
<PAGE>
11. SUBSEQUENT EVENTS (CONTINUED)
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 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.
F-22
<PAGE>
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>
AMOUNT AT WHICH
ESTIMATED SHOWN ON BALANCE
TYPE OF INVESTMENT COST FAIR VALUE SHEET
- --------------------------------------------------------------------------- --------- ----------- ------------------
<S> <C> <C> <C>
Fixed Maturities
Bonds and Notes
U.S. government and government agencies and authorities (guaranteed and
sponsored)............................................................ $ 166 $ 175 $ 175
U.S. government and government agencies and authorities (guaranteed and
sponsored) -- asset-backed............................................ 1,970 2,003 2,003
States, municipalities and political subdivisions........................ 373 368 368
International governments................................................ 281 289 289
Public utilities......................................................... 877 881 881
All other corporate including international.............................. 4,656 4,669 4,669
All other corporate -- asset-backed...................................... 3,601 3,591 3,591
Short-term investments................................................... 1,655 1,648 1,648
--------- ----------- --------
Total fixed maturities............................................... 13,579 13,624 13,624
--------- ----------- --------
Equity Securities
Common Stocks -- industrial, miscellaneous, and all other................ 110 119 119
--------- ----------- --------
Total fixed maturities and equity securities......................... 13,689 13,743 13,743
--------- ----------- --------
Other investments
Policy loans............................................................. 3,836 3,836 3,836
Mortgage loans........................................................... 2 2 2
Investments in partnerships and trusts................................... 48 48 48
Futures, options, and miscellaneous...................................... 6 56 6
--------- ----------- --------
Total other investments.............................................. 3,892 3,942 3,892
--------- ----------- --------
Total investments.................................................... $ 17,581 $ 17,685 $ 17,635
--------- ----------- --------
--------- ----------- --------
</TABLE>
Note: The fair values for short-term investments approximate cost.
S-1
<PAGE>
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, OTHER
DEFERRED UNPAID CLAIMS POLICY MET
POLICY AND CLAIM CLAIMS AND PREMIUMS NET REALIZED
ACQUISITION ADJUSTMENT BENEFITS AND OTHER INVESTMENT CAPITAL
SEGMENT 1996 COSTS EXPENSES PAYABLE CONSIDERATIONS INCOME (LOSSES) GAINS
- ------------------------------------- ----------- --------------- ----------- --------------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Investment Products.................. $ 2,030 $ 1,554 $ 6,599 $ 536 $ 477 $ --
Individual Life Insurance............ 730 346 2,160 287 153 --
Employee Benefits.................... -- 381 9,834 881 485 --
Corporate operations................. -- -- -- -- 75 6
Runoff operations.................... -- -- 3,541 1 207 (219)
----------- ------- ----------- ------- ----------- ------
Consolidated Operations.............. $ 2,760 2,281 22,134 1,705 1,397 (213)
----------- ------- ----------- ------- ----------- ------
----------- ------- ----------- ------- ----------- ------
1995
Investment Products.................. $ 1,561 $ 1,314 $ 6,204 $ 319 $ 436 $ --
Individual Life Insurance............ 615 706 1,932 246 137 --
Employee Benefits.................... 12 325 9,285 922 351 --
Corporate operations................. -- -- -- -- 67 (11)
Runoff operations.................... -- 28 5,177 -- 337 --
----------- ------- ----------- ------- ----------- ------
Consolidated Operations.............. $ 2,188 $ 2,373 $ 22,598 $ 1,487 $ 1,328 $ (11)
----------- ------- ----------- ------- ----------- ------
----------- ------- ----------- ------- ----------- ------
1994
Investment Products.................. $ 1,244 $ 895 $ 4,617 $ 263 $ 330 $ --
Individual Life Insurance............ 565 582 2,543 268 108 --
Employee Benefits.................... -- 369 6,911 569 350 --
Corporate operations................. -- -- -- -- 23 7
Runoff operations.................... -- 44 7,257 -- 481 --
----------- ------- ----------- ------- ----------- ------
Consolidated Operations.............. $ 1,809 $ 1,890 $ 21,328 $ 1,100 $ 1,292 $ 7
----------- ------- ----------- ------- ----------- ------
----------- ------- ----------- ------- ----------- ------
<CAPTION>
BENEFITS AMORTIZATION
CLAIMS, OF DEFERRED
AND CLAIM POLICY DIVIDENDS
ADJUSTMENT ACQUISITION TO OTHER
SEGMENT 1996 EXPENSES COSTS POLICYHOLDERS EXPENSES
- ------------------------------------- ----------- --------------- ------------- -----------
<S> <C> <C> <C> <C>
Investment Products.................. $ 451 $ 175 $ -- $ 156
Individual Life Insurance............ 245 59 -- 68
Employee Benefits.................... 546 -- 635 143
Corporate operations................. -- -- -- 16
Runoff operations.................... 293 -- -- 44
----------- ----- ------------- -----------
Consolidated Operations.............. 1,535 234 635 427
----------- ----- ------------- -----------
----------- ----- ------------- -----------
1995
Investment Products.................. $ 349 $ 117 $ -- $ 115
Individual Life Insurance............ 127 70 -- 55
Employee Benefits.................... 496 -- 675 138
Corporate operations................. 33 -- -- 11
Runoff operations.................... 417 12 -- (2)
----------- ----- ------------- -----------
Consolidated Operations.............. $ 1,422 $ 199 $ 675 $ 317
----------- ----- ------------- -----------
----------- ----- ------------- -----------
1994
Investment Products.................. $ 383 $ 90 $ -- $ (31)
Individual Life Insurance............ 179 51 -- 107
Employee Benefits.................... 376 -- 419 100
Corporate operations................. -- -- -- 43
Runoff operations.................... 467 4 -- 8
----------- ----- ------------- -----------
Consolidated Operations.............. $ 1,405 $ 145 $ 419 $ 227
----------- ----- ------------- -----------
----------- ----- ------------- -----------
</TABLE>
S-2
<PAGE>
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE IV
REINSURANCE
(IN MILLIONS)
<TABLE>
<CAPTION>
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1996
Life insurance in force............................ $ 177,094 $ 106,146 $ 31,957 $ 102,905 31.1%
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
INSURANCE REVENUES
Life insurance and annuities....................... $ 1,801 $ 298 $ 169 $ 1,672 10.1%
Accident and health insurance...................... 33 4 4 33 12.1%
----------- ----------- ----------- -----------
Total.............................................. $ 1,834 $ 302 $ 173 $ 1,705 10.1%
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
FOR THE YEAR ENDED DECEMBER 31, 1995
Life insurance in force............................ $ 182,716 $ 112,774 $ 26,996 $ 96,938 27.8%
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
INSURANCE REVENUES
Life insurance and annuities....................... $ 1,232 $ 325 $ 574 $ 1,481 38.8%
Accident and health insurance...................... 313 324 17 6 283.3%
----------- ----------- ----------- -----------
Total.............................................. $ 1,545 $ 649 $ 591 $ 1,487 39.7%
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
FOR THE YEAR ENDED DECEMBER 31, 1994
Life insurance in force............................ $ 136,929 $ 87,553 $ 35,016 $ 84,392 41.5%
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
INSURANCE REVENUES
Life insurance and annuities....................... $ 1,008 $ 211 $ 294 $ 1,091 26.9%
Accident and health insurance...................... 308 304 5 9 55.6%
----------- ----------- ----------- -----------
Total.............................................. $ 1,316 $ 515 $ 299 $ 1,100 27.2%
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
S-3
<PAGE>
PRINCIPAL UNDERWRITER
Hartford Securities Distribution Company, Inc. (HSD)
HARTFORD
Hartford Plaza, Hartford, CT 06115
INDEPENDENT AUDITORS FOR HARTFORD
LIFE INSURANCE COMPANY
AND
LIFE INSURANCE
THE GENERAL ACCOUNT OPTION
Arthur Andersen LLP
Hartford, Connecticut 06103
COMPANY
INSURER
Hartford Life Insurance Company
Executive Offices: P.O. Box 2999
THE GENERAL ACCOUNT PROSPECTUS
Hartford, CT 06104-2999
MAY 1, 1997
Group Variable Annuity Contracts
[LOGO]
HV-1928-9
HARTFORD LIFE INSURANCE COMPANY
P.O. BOX 2999, HARTFORD, CT 06104-2999
BULK RATE
U.S. POSTAGE
PAID
PERMIT NO. 1
HARTFORD, CONN.
