<PAGE>
Form 10-K
United States Securities and Exchange Commission
Washington, D.C. 20549
(Mark one)
[X] Annual Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 (Fee Required)
For the fiscal year ended December 31, 1996
OR
[ ] Transition report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934 (No Fee Required)
For the transition period from ________ to ________.
Commission file number: 2-89516
HARTFORD LIFE INSURANCE COMPANY
Incorporated in the State of Connecticut
06-0974148
(I.R.S. Employer Identification Number)
P.O. Box 2999
Hartford, Connecticut 06104-2999
(Principal Executive Offices)
Telephone number (860) 843-8291
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
--- ---
As of March 28, 1997, there were outstanding 1,000 shares of Common Stock,
$5,690 par value per share, of the registrant, all of which were directly
owned by Hartford Life and Accident Insurance Company.
The registrant meets the conditions set forth in General Instruction J (1)
(a) and (b) of Form 10-K and is therefore filing this form with the reduced
disclosure format.
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HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
Annual Report for 1996 on Form 10-K
Table of Contents
<TABLE>
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ITEM PAGE
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<S> <C>
Part I
1. Business of Hartford Life Insurance Company* 3
2. Properties* 9
3. Legal Proceedings 9
4. **
Part II
5. Market for Hartford Life Insurance Company's Common Stock and
Related Stockholder Matters 10
6. **
7. Management's Narrative Analysis of the Results of Operations* 10
8. Consolidated Financial Statements and Supplementary Data 13
9. Disagreements on Accounting and Financial Disclosure 13
Part III
10. **
11. **
12. **
13. **
Part IV
14. Exhibits, Financial Statements, Schedules and Reports
on Form 8-K 13
Signatures II-1
Exhibits Index II-2
</TABLE>
* Item prepared in accordance with General Instruction J(2) of Form 10-K
** Item omitted pursuant to General Instruction J(2) of Form 10-K
2
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PART I
ITEM 1.
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 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+.
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
3
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December 31, 1996. Growth in the Company's assets has been driven by its sale
of variable annuities. For the year ended December 31, 1996, the Company was
the largest writer of both individual annuities and individual variable
annuities. New sales of individual annuities were approximately $9.8 billion
in 1996, bringing total individual annuity account value to $41.7 billion as
of December 31, 1996. Of the total annuity account value, $32.4 billion
relates to variable annuities and $9.0 billion relates to fixed MVA annuities
held in guaranteed separate accounts. Of the Company's $32.4 billion in
variable annuities in force, $29.9 billion, or 92%, are held in
non-guaranteed separate accounts, as of December 31, 1996. In contrast, the
next nine largest writers in the United States of variable annuities held an
average of 68% of their variable annuities in force in non-guaranteed
separate accounts, as of December 31, 1996, based on the Company's analysis
of information compiled by Variable Annuity and Research Data Service
("VARDS").
The Company has distribution arrangements to sell its individual annuity
products with approximately 1,350 national and regional broker-dealers and
200 banks. Management believes that it has established a strong distribution
franchise through its long-standing relationships with the members of its
bank and broker-dealer network and is committed both to expanding sales
through these established channels of distribution and promoting new
distributors for all its products and services.
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.
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.
4
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The NAIC has established solvency laws that relate an insurance company's
capital requirements to the risks inherent in its overall operations. These
rules are known as risk based capital ("RBC"). As of December 31, 1996, the
Company's RBC ratio was in excess of 200% of its RBC.
Each insurance company is required to file detailed annual reports with
supervisory agencies in each of the jurisdictions in which it does business
and its operations and accounts are subject to examination by such agencies
at regular intervals. The Company prepares its statutory financial statements
in accordance with accounting practices prescribed or permitted by the State
of Connecticut Insurance Department. Prescribed statutory accounting
practices include publications of the NAIC, as well as state laws,
regulations, and general administrative rules. In accordance with the
insurance laws and regulations under which the Company operates, it is
obligated to carry on its books, as liabilities, actuarially determined
reserves to meet its obligations on its outstanding life insurance contracts
and universal life and investment contracts. Reserves for life insurance
contracts are based on mortality and morbidity tables in general use in the
United States, modified to reflect actual experience. These reserves are
computed at amounts that, with additions from premiums to be received, and
with interest on such reserves compounded annually at certain assumed rates,
are expected to be sufficient to meet the Company's policy obligations at
their maturities or in the event of an insured's death. Reserves for
universal life insurance and investment products represent policy account
balances before applicable surrender charges. In the accompanying
consolidated financial statements, these life insurance reserves are
determined in accordance with generally accepted accounting principles, which
may vary from statutory requirements.
The Health Insurance Portability and Accountability Act of 1996 ("the HIPA
Act of 1996") phases out the deductibility of interest on policy loans under
COLI by 1998, thus eliminating all future sales of leveraged COLI. The
Company's leveraged COLI product has been an important contributor to its
profitability in recent years and will continue to contribute to the
profitability of the Company (although such contribution will be reduced in
the future due to the effects of this legislation). As a result of the
elimination of leveraged COLI sales, net income contributed by COLI may be
lower in the future (particularly 1999 and later years).
INVESTMENT OPERATIONS
The Company's investment operations are managed by its investment strategy
group which reports directly to senior management of the Company and consists
of a risk management unit and portfolio management unit. The risk management
unit is responsible for monitoring and managing the Company's asset/liability
profile and establishing investment objectives and guidelines; and, the
portfolio management unit is responsible for determining, within specified
risk tolerances and investment guidelines, the general asset allocation,
duration and convexity and other characteristics of the Company's general
account and guaranteed separate account investment portfolios. The investment
staff of the Company executes the strategic investment decisions of the
portfolio management unit, including the identification and purchase of
securities that fulfill the objectives of the investment strategy group.
The primary investment objective of the Company for its general account and
guaranteed separate accounts is to maximize after-tax returns consistent with
acceptable risk parameters (including the management of interest rate
sensitivity of invested assets to that of policyholder obligations). The
Company is exposed to two primary sources of investment risk: credit risk,
relating to the uncertainty associated with the continued ability of a given
obligor to make timely payments of principal and interest, and interest rate
risk, relating to the market price and/or cash flow variability associated
with changes in market yield curves. The Company manages credit risk through
industry and issuer diversification and asset allocation. The Company manages
interest rate risk as part of its asset/liability management strategies,
including the use of certain hedging techniques (which may include the use of
certain financial derivatives), product design, such as the use of MVA
features and surrender charges, and proactive monitoring and management of
certain non-guaranteed elements of the Company's products (such as resetting
of credited interest rates for policies that permit such adjustments).
INVESTED ASSET CHARACTERISTICS AND DERIVATIVE STRATEGIES
Invested assets totaled approximately $17.6 billion at December 31, 1996 and
were comprised of asset-backed securities, including government agency
collateralized mortgage obligations ("CMOs") and mortgage backed securities
("MBSs") of $5.2 billion, bonds and notes and short-term investments of $8
billion, inverse floating securities of $352 million, and other investments
(primarily policy loans) of $4 billion. Policy loans of $3.8 billion, which
carry a 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
5
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December 31, 1996, are reflected below. Asset-backed securities (including
Government Agency, CMOs and MBSs) are distributed to maturity year based on
the Company's estimate of the rate of future prepayments of principal over
the remaining life of the securities. These estimates are developed using
broker consensus prepayment speeds. Expected maturities differ from
contractual maturities due to call or prepayment provisions.
FIXED MATURITY INVESTMENTS MATURITY SCHEDULE
(in millions)
<TABLE>
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ESTIMATED MATURITY
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<S> <C> <C> <C> <C> <C> <C> <C>
1997 1998 1999 2000 2001 THEREAFTER TOTAL
--------- --------- --------- --------- --------- ----------- ---------
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>
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(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.
6
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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 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.
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INSURANCE LIABILITY CHARACTERISTICS
Insurance liabilities, other than non-guaranteed separate accounts, totaled
$28.5 billion (net of ceded reinsurance) at December 31, 1996, and were
backed by $38 billion in total assets (including investments of $27.8
billion). Matching of the duration of the investments with respective
policyholder obligations is an explicit objective of the Company's management
strategy. The Company's insurance policy liabilities, along with estimated
duration periods based upon internal actuarial assumptions, can be summarized
based on investment needs in the five categories described below at December
31, 1996.
Estimated Duration Years (1)
(in billions)
<TABLE>
<CAPTION>
LESS
BALANCE AT THAN 1-5 6-10 OVER
DESCRIPTION DECEMBER 31, 1996 1 YEAR YEARS 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>
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(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.
8
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LONG-TERM PAYOUT LIABILITIES
Products in this category are long-term in nature and may contain significant
actuarial (including mortality and morbidity) pricing risks. The cash flows
are not interest sensitive, but do vary based on the timing and amount of
benefit payments. The primary risks associated with these products are that
the benefits will exceed expected actuarial pricing and/or the investment
return will be lower than assumed in pricing. Product examples include
structured settlement contracts, on-benefit annuities (i.e., the annuitant is
currently receiving benefits thereon) and long-term disability contracts.
Contract duration is generally six to ten years but, at times, exceeds thirty
years. Policy liabilities under these contracts are not interest rate
sensitive.
SHORT-TERM PAYOUT LIABILITIES
These liabilities are short-term in nature with a duration of less than one
year. The primary risks associated with these products are determined by the
non-investment contingencies such as mortality or morbidity. Liquidity is of
greater concern than for the long-term payout liabilities. Products include
individual and group term life insurance contracts.
SEPARATE ACCOUNT PRODUCTS
The Company's separate accounts reflect two categories of risk assumption:
non-guaranteed separate accounts totaling $39.4 billion as of December 31,
1996, wherein the policyholder assumes substantially all of the risk and
reward, and guaranteed separate accounts totaling $10.3 billion as of
December 31, 1996, wherein the Company contractually guarantees either a
minimum return or account value to the policyholder. The investment strategy
followed varies by fund choice, as outlined in the applicable fund prospectus
or separate account plan of operations. Non-guaranteed products include
variable annuities and variable life contracts. The funds underlying such
contracts are managed by the investment staff of The Hartford and a variety
of independent money managers, including Wellington Management Company, LLP,
Putnam Financial Services, Inc. and Dean Witter InterCapital, Inc. Guaranteed
separate account products primarily consist of modified guaranteed individual
annuity and modified guaranteed life insurance, and generally include MVA
features to mitigate the disintermediation risk upon surrenders. Virtually
all of the assets in the guaranteed separate accounts are fixed maturity
securities and, as of December 31, 1996, $10.2 billion, or approximately 99%,
of 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.
OTHER MATTERS
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.
ITEM 2.
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.
ITEM 3.
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.
9
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PART II
ITEM 5.
Market for Hartford Life Insurance Company's Common Stock
and Related Stockholder Matters
All of The Company's outstanding shares are ultimately owned by Hartford Life
which is ultimately a subsidiary of The Hartford. As of March 28, 1997,
Hartford Life had issued and outstanding 1,000 shares of common stock at a
par value of $5,690 per share.
ITEM 7.
MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS
(Dollar Amounts in Millions)
CONSOLIDATED RESULTS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Revenues $ 2,889 $ 2,804
Expenses 2,851 2,675
------- -------
Net income $ 38 $ 129
------- -------
------- -------
</TABLE>
Revenues increased $85 million, or 3%, to $2.9 billion in 1996 from $2.8
billion in 1995. This increase in revenues was primarily a result of
increased maintenance and expense fees, in the Investment Products segment,
from a larger block of separate account assets, which resulted from strong
annuity sales and market appreciation partially offset by a decrease in net
investment income and net realized capital gains (losses) of $133 mainly due
to losses associated with sales and an other than temporary impairment of
Closed Book GRC, see "--Runoff". Expenses increased $176 million, or 7%, to
$2.9 billion in 1996 from $2.7 billion in 1995. This increase in expenses is
primarily a result of increased interest credited, amortization of deferred
acquisition costs and other insurance expenses due to increased sales and
higher account values of individual annuity and individual life contracts
which were partially offset by a decrease in benefits, claims and claim
adjustment expenses of Closed Book GRC and a decrease in policyholder
dividends as a result of the elimination of sales of leveraged COLI as a
result of the enactment of the HIPA Act of 1996.
INVESTMENT PRODUCTS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Revenues $ 1,013 $ 759
Expenses 863 643
------- -------
Net income $ 150 $ 116
------- -------
------- -------
</TABLE>
Revenues increased $254 million, or 33%, to $1 billion in 1996 from $759
million in 1995. This increase in revenues was principally the result of a
$217 million increase in premiums and other considerations which reflects a
substantial increase in aggregate fees earned due to the Company's growing
block of separate account assets. The average separate account assets in this
segment increased to $37.5 billion in 1996 from $26.3 billion in 1995
primarily due to sales of individual annuities of $9.8 billion in 1996 and $7
billion in 1995, as well as strong market appreciation in both 1996 and 1995.
In addition, the average general account assets of this segment increased to
approximately $7.7 billion in 1996 from $6.5 billion in 1995 largely as a
result of growth in the general account portion of the individual variable
annuity products of the Company. The growth in this segment is also reflected
in an increase in total expenses of $220 million, primarily as a result of an
increase in benefits, claims and claim adjustment expenses of $102 million,
or 29%, to $451 million in 1996 from $349 million in 1995. The 38% growth in
average account value in 1996, coupled with an overall reduction in
individual annuity expenses as a percentage of total individual annuity
10
<PAGE>
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 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.
11
<PAGE>
Although the Closed Book GRC asset portfolio as a whole is duration matched
with its liabilities, certain investments continue to have a longer maturity
than their corresponding liabilities and will need to be liquidated prior to
maturity in order to meet the specific liability commitments. To protect the
existing value of these investments, the Company entered into various
interest rate swap, cap and floor transactions in late September 1996 with
the objective of offsetting the market price sensitivity of hedged assets to
changes in interest rates. As a result of the hedge, the Company
substantially eliminated further fluctuation in the fair value of these
investments due to interest rate changes, thereby substantially reducing the
likelihood of any further loss on the assets due to such changes.
The Company's accounting policy for impairment recognition of investments
requires recognition of an other than temporary impairment charge on a
security if it is determined that the Company is unable to recover all
amounts due under the contractual obligations of the security. In addition,
the Company has established specific criteria to be used in the impairment
evaluation of an individual portfolio of assets. Specifically, if the asset
portfolio supports a runoff operation and is expected to be liquidated prior
to maturity to meet liability commitments and has a fair value below
amortized cost which will not materially fluctuate as a result of future
interest rate changes, then an other than temporary impairment condition has
been determined to have occurred. Each individual security within this
portfolio is evaluated to determine whether or not it is impaired. Once an
impairment charge has been recorded, the Company then continues to review the
impaired securities for appropriate valuation on an ongoing basis.
The following table sets forth the after-tax losses incurred by the Company
in respect of Closed Book GRC for the two years ended December 31, 1996.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-------------------
1996 1995
--------- ---------
<S> <C> <C>
Runoff losses $ (51) $ (68)
Other than temporary
impairment charges (88) --
Net realized capital
losses (55) --
Other charges (32) --
------- ------
Net loss $ (226) $ (68)
------- ------
------- ------
</TABLE>
During 1996, Closed Book GRC incurred a $51 million after-tax loss from
operations as a result of negative interest spread, as compared with an
after-tax loss from operations of $68 million in 1995. With the initiation of
the hedge transactions discussed above, which eliminated the possibility that
the fair value of Closed Book GRC investments would recover to their current
amortized cost, an other than temporary impairment loss of $82 million,
after-tax, was determined to have occurred and was recorded in September
1996. An additional other than temporary impairment loss of $6 million,
after-tax, occurred in the fourth quarter of 1996, bringing the total
impairment to $88 million. Also, during the third quarter of 1996, Closed
Book GRC had asset sales resulting in proceeds of approximately $500 million
and a realized loss of $55 million, after-tax. The asset sales were
undertaken as a result of liquidity needs and favorable market conditions for
certain securities. Other charges of $32 million, after-tax, were also
incurred in the third quarter of 1996.
In response to the losses associated with Closed Book GRC, the Company
instituted an improved risk management process. Management expects that the
net income (loss) from Closed Book GRC in the years subsequent to 1996 will
be immaterial based on the Company's current projections for the performance
of the assets and liabilities associated with Closed Book GRC, the Company's
expectations regarding future sales of assets from the Closed Book 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
12
<PAGE>
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.
ITEM 8.
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements and Schedules.
ITEM 9.
DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART IV
ITEM 14.
EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents Filed:
(1) See Index to Consolidated Financial Statements and Schedules.
(2) See Exhibits Index.
(b) No reports on Form 8-K have been filed during the last quarter of 1996.
13
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Report of Management F-1
Report of Independent Public Accountants F-2
Consolidated Statements of Income for the F-3
three years ended December 31, 1996
Consolidated Balance Sheets as of December F-4
31, 1996 and 1995
Consolidated Statements of Stockholder's
Equity for the three years ended
December 31, 1996 F-5
Consolidated Statements of Cash Flows for the F-6
three years ended December 31, 1996
Notes to Consolidated Financial Statements F-7 thru 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
All schedules not listed above have been omitted because they are not
applicable or the amounts are insignificant, immaterial or the information has
been otherwise supplied in the financial statements or notes thereto.
REPORT OF MANAGEMENT
The management of Hartford Life Insurance Company and subsidiaries ("the
Company") is responsible for the preparation and integrity of the information
contained in the accompanying consolidated financial statements and other
sections of the Annual Report. The consolidated financial statements are
prepared in accordance with generally accepted accounting principles, and,
where necessary, include amounts that are based on management's informed
judgments and estimates. Management believes these statements present fairly
the Company's financial position and results of operations, and, that any
other information contained in the Annual Report is consistent with the
financial statements.
Management has made available the Company's financial records and related
data to Arthur Andersen LLP, independent public accountants, in order for them
to perform an audit of the Company's consolidated financial statements. Their
report appears on Page F-2.
An essential element in meeting management's financial responsibilities is
the Company's system of internal controls. These controls, which include
accounting controls and the internal auditing program, are designed to provide
reasonable assurance that assets are safeguarded, and transactions are properly
authorized, executed and recorded. The controls, which are documented and
communicated to employees in the form of written codes of conduct and policies
and procedures, provide for the careful selection of personnel and for
appropriate division of responsibility. Management continually monitors for
compliance, while the Company's internal auditors independently assess the
effectiveness of the controls and make recommendations for improvement. Also,
Arthur Andersen LLP took into consideration the Company's system of internal
controls in determining the nature, timing and extent of its audit tests.
Another important element is management's recognition of its responsibility
for fostering a strong, ethical climate, thereby ensuring that the Company's
affairs are transacted according to the highest standards of personal and
professional conduct. The Company has a long-standing reputation of integrity in
business conduct and utilizes communication and education to create and fortify
a strong compliance culture.
The Audit Committee of the Board of Directors of The Hartford, composed of
non-employee directors, meets periodically with the external and internal
auditors to evaluate the effectiveness of the work performed by them in
discharging their respective responsibilities and to ensure their independence
and free access to the Committee.
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
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Hartford Life Insurance Company and subsidiaries as of December 31, 1996 and
1995, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
As discussed in Note 2 of Notes to Consolidated Financial Statements,
Hartford Life Insurance Company adopted a new accounting standard promulgated by
the Financial Accounting Standards Board, changing its method of accounting, as
of January 1, 1994, for debt and equity securities .
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedules listed in the
Index to Consolidated Financial Statements and Schedules are presented for
purposes of complying with the Securities and Exchange Commission's rules and
are not a required part of the basic consolidated financial statements. These
schedules have been subjected to the auditing procedures applied in the audits
of the basic consolidated financial statements and, in our opinion, fairly state
in all material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Hartford, Connecticut
February 10, 1997
F-2
<PAGE>
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in millions)
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
--------- --------- ---------
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
------ --------- ---------
------ --------- ---------
The accompanying Notes to Consolidated Financial Statements are an integral
part of the above statements.
F-3
<PAGE>
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions except for share data)
AS OF DECEMBER 31,
--------------------
1996 1995
--------- ---------
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
--------- ---------
--------- ---------
The accompanying Notes to Consolidated Financial Statements are an integral
part of the above statements.
F-4
<PAGE>
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Stockholder's Equity
(in millions)
<TABLE>
<CAPTION>
NET UNREALIZED
CAPITAL
GAIN (LOSS) TOTAL
COMMON CAPITAL ON INVESTMENTS, RETAINED STOCKHOLDER'S
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 to Consolidated Financial Statements are an integral
part of the above statements.
F-5
<PAGE>
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
<TABLE>
<CAPTION>
FOR THE YEARS 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 to Consolidated Financial Statements are an integral
part of the above 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 had not adopted an employee stock
compensation plan. Certain officers of the Company participate in The
Hartford's stock option plan.
F-7
<PAGE>
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 $91 million. The Company's cash flows were not impacted
by this change in accounting principle.
(c) Revenue Recognition
Revenues for universal life policies and investment products consist of
policy charges for the cost of insurance, policy administration and surrender
charges assessed to policy account balances and are recognized in the period in
which services are provided. Premiums for traditional life insurance policies
are recognized as revenues when they are due from policyholders.
(d) Future Policy Benefits and Other Policyholder Funds
Liabilities for future policy benefits are computed by the net level premium
method using interest rate assumptions varying from 3% to 11% and withdrawal and
mortality assumptions appropriate at the time the policies were issued.
Liabilities for universal life-type and investment contracts are stated at
policyholder account values before surrender charges.
(e) Deferred Policy Acquisition Costs
Policy acquisition costs, including commissions and certain underwriting
expenses associated with acquiring business, are deferred and amortized over the
estimated lives of the contracts, generally 20 years. Generally, acquisition
costs are deferred and amortized using the retrospective deposit method. Under
the retrospective deposit method, acquisition costs are amortized in proportion
to the present value of expected gross profits from surrender charges,
investment, mortality and expense margins. Actual gross profits can vary from
management's estimates resulting in increases or decreases in the rate of
amortization. Management periodically updates these estimates, when appropriate,
and evaluates the recoverability of the deferred acquisition cost asset. When
appropriate, management revises its assumptions on the estimated gross profits
of these contracts and the cumulative amortization for the books of business are
reestimated and readjusted by a cumulative charge or credit to income.
(f) Policyholder Realized Capital Gains and Losses
Realized capital gains and losses on security transactions associated with
the Company's immediate participation guaranteed contracts are excluded from
revenues and deferred, since under the terms of the contracts the realized gains
and losses will be credited to policyholders in future years as they are
entitled to receive them.
(g) Foreign Currency Translation
Foreign currency translation gains and losses are reflected in stockholder's
equity. Balance sheet accounts are translated at the exchange rates in effect at
each year end and income statement accounts are translated at the average rates
of exchange prevailing during the year. The national currencies of international
operations are generally their functional currencies.
(h) Investments
The Company's investments in fixed maturities include bonds, redeemable
preferred stock and commercial paper which are classified as
"available-for-sale" and accordingly are carried at fair value with the
after-tax difference from cost reflected as a component of stockholder's equity
designated as "Net unrealized capital gain (loss) on investments, net of tax".
Equity securities, which include common and non-redeemable preferred stocks, are
carried at fair value with the after-tax difference from cost reflected in
stockholder's equity. Policy and mortgage loans are each carried at their
outstanding balance which approximates fair value. Investments in partnerships
and trusts are carried at cost. Net realized capital gains (losses), after
deducting the policyholders' share, are reported as a component of revenue and
are determined on a specific identification basis.
F-8
<PAGE>
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 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.
F-9
<PAGE>
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 it's parent HLA.
(k) Dividends to Policyholders
Certain life insurance policies contain dividend payment provisions that
enable the policyholder to participate in the earnings of the life insurance
subsidiaries of the Company. The participating insurance in force accounted for
44%, 41%, and 43% in 1996, 1995, and 1994, respectively, of total life insurance
in force.
F-10
<PAGE>
3. INVESTMENTS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
(a) Components of Net Investment Income
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>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
(b) Components of Net Realized Capital Gains (Losses)
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>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
(c) Net Unrealized Capital Gains (Losses) on Equity Securities
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>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
(d) Net Unrealized Capital Gains (Losses) on Fixed Maturities
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>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
(e) Components of Fixed Maturities Investments
AS OF DECEMBER 31, 1996
--------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
U.S. government and government agencies and authorities (guaranteed
and sponsored)................................................... $ 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
----------- ----- ----- ---------
----------- ----- ----- ---------
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1995
--------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
U.S. government and government agencies and authorities (guaranteed
and sponsored)................................................... $ 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>
(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>
The following table summarizes the Company's derivatives, segregated by
major categories, as of December 31, 1996 and 1995:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
AMOUNTS HEDGED (NOTIONAL AMOUNTS)(EXCLUDING LIABILITY HEDGES)
-------------------------------------------------------------
PURCHASED
TOTAL ISSUED OPTIONS, INTEREST FOREIGN
CARRYING CAPS & CAPS & FUTURES RATE CURRENCY
1996 VALUE FLOORS(C) FLOORS(D) (E) SWAPS(H) SWAPS(F)
- ------------------------------------------------- --------- ----------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
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>
TOTAL
NOTIONAL
1996 AMOUNT
- ------------------------------------------------- -----------
<S> <C>
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)
-----------
-----------
<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 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-14
<PAGE>
(F) As of December 31, 1996 and 1995, over 42% and 25%, respectively, of the
Company's foreign currency swaps, expire within one year; the balance mature
over the succeeding 4 to 5 years.
(G) Deferred gains and losses on anticipatory transactions are included in
the carrying value of bond investments in the Consolidated Balance Sheets. At
the time of the ultimate purchase, they are reflected as a basis adjustment to
the purchased asset. At December 31, 1996, the Company had $1 million in net
deferred gains for futures, interest rate swaps and purchased options. The
Company expects to basis adjust $1 million of the deferred gains in 1997. At
December 31, 1995, the Company had $5.3 million in net deferred gains for
futures, interest rate swaps and purchased options.
(H) The following table summarizes the maturities by notional value of
interest rate swaps outstanding at December 31, 1996 and 1995, and the
related weighted average interest pay rate or receive rate. The variable
rates represent spot rates (primarily 90 day LIBOR), as of December 31, 1996
and 1995. Such variable rates have been calculated assuming that the spot
rates remain unchanged throughout the life of the interest rate swaps.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
1996 1997 1998 1999 2000 2001
- --------------------------------------------------------- ----- ----- --------- ----- ---------
<S> <C> <C> <C> <C> <C>
Pay Fixed/Receive Variable
- --------------------------------
Notional Value........................................... $ -- $ 50 $ 125 $ 35 $ 125
Weighted Average Pay Rate................................ -- 5.7% 5.9% 5.5% 5.5%
Weighted Average Receive Rate............................ -- 3.2% -- 6.5% 6.4%
Pay Variable/Receive Fixed
Notional Value........................................... $ 86 $ 25 $ 486 $ 74 $ 582
Weighted Average Pay Rate................................ 7.5% -- 6.4% 6.7% 7.0%
Weighted Average Receive Rate............................ 5.6% -- 5.6% 5.7% 6.2%
Pay Variable/Receive Different Variable
- ---------------------------------------
Notional Value........................................... $ 19 $ 15 $ -- $ 200 $ --
Weighted Average Pay Rate................................ 5.9% 5.7% -- 6.4% --
Weighted Average Receive Rate............................ 3.7% 5.5% -- 5.0% --
Total Interest Rate Swaps................................ $ 105 $ 90 $ 611 $ 309 $ 707
Total Weighted Average Pay Rate.......................... 7.2% 5.7% 6.3% 6.4% 6.7%
Total Weighted Average Receive Rate...................... 5.2% 3.8% 4.3% 5.4% 6.3%
<CAPTION>
LATEST
1996 THEREAFTER TOTAL MATURITY
- --------------------------------------------------------- ------------- --------- -----------
<S> <C> <C> <C>
Pay Fixed/Receive Variable
Notional Value........................................... $ 170 $ 505 2003
Weighted Average Pay Rate................................ 5.7% 5.7%
Weighted Average Receive Rate............................ 6.9% 4.7%
Pay Variable/Receive Fixed
- ---------------------------
Notional Value........................................... $ 349 $ 1,602 2007
Weighted Average Pay Rate................................ 6.9% 6.8%
Weighted Average Receive Rate............................ 5.9% 5.9%
Pay Variable/Receive Different Variable
- -----------------------------------------
Notional Value........................................... $ 44 $ 278 2003
Weighted Average Pay Rate................................ 12.9% 7.4%
Weighted Average Receive Rate............................ 6.4% 5.2%
Total Interest Rate Swaps................................ $ 563 $ 2,385 2007
Total Weighted Average Pay Rate.......................... 7.0% 6.6%
Total Weighted Average Receive Rate...................... 6.3% 5.5%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
1995 1996 1997 1998 1999 2000
- ---------------------------------------------------------- ----- ----- ----- --------- -----
<S> <C> <C> <C> <C> <C>
Pay Fixed/Receive Variable
- ----------------------------
Notional Value............................................ $ 15 $ 50 $ -- $ 453 $ 31
Weighted Average Pay Rate................................. 5.0% 7.2% -- 8.1% 7.1%
Weighted Average Receive Rate............................. 5.8% 5.9% -- 5.8% 5.7%
Pay Variable/Receive Fixed
- ---------------------------
Notional Value............................................ $ 100 $ 68 $ 25 $ 25 $ 35
Weighted Average Pay Rate................................. 5.9% 8.6% 5.9% -- 5.9%
Weighted Average Receive Rate............................. 2.4% 7.9% 4.0% -- 6.5%
Pay Variable/Receive Different Variable
- ----------------------------------------
Notional Value............................................ $ 50 $ 18 $ 36 $ 12 $ 200
Weighted Average Pay Rate................................. 5.8% -- 3.7% 3.5% 4.5%
Weighted Average Receive Rate............................. 5.4% -- 5.6% 5.2% 6.8%
Total Interest Rate Swaps................................. $ 165 $ 136 $ 61 $ 490 $ 266
Total Weighted Average Pay Rate........................... 5.8% 7.8% 4.6% 7.6% 5.0%
Total Weighted Average Receive Rate....................... 3.6% 7.2% 4.9% 5.4% 6.6%
<CAPTION>
LATEST
1995 THEREAFTER TOTAL MATURITY
- ---------------------------------------------------------- ------------- --------- -----------
<S> <C> <C> <C>
Pay Fixed/Receive Variable
- ----------------------------
Notional Value............................................ $ 229 $ 778 2004
Weighted Average Pay Rate................................. 7.8% 7.8%
Weighted Average Receive Rate............................. 5.9% 5.9%
Pay Variable/Receive Fixed
- ------------------------------
Notional Value............................................ $ 190 $ 443 2007
Weighted Average Pay Rate................................. 5.4% 5.4%
Weighted Average Receive Rate............................. 6.9% 6.9%
Pay Variable/Receive Different Variable
Notional Value............................................ $ 234 $ 550 2004
Weighted Average Pay Rate................................. 16.3% 5.7%
Weighted Average Receive Rate............................. 5.9% 6.4%
Total Interest Rate Swaps................................. $ 653 $ 1,771 2007
Total Weighted Average Pay Rate........................... 7.3% 6.9%
Total Weighted Average Receive Rate....................... 6.3% 5.8%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
F-15
<PAGE>
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.
A reconciliation between notional amounts at December 31, 1995 and 1996 by
derivative type and strategy is as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
BY DERIVATIVE TYPE
----------------------------------------------------
12/31/95 12/31/96
NOTIONAL MATURITIES/ NOTIONAL
AMOUNT ADDITIONS TERMINATIONS AMOUNT
----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Caps................................................................. $ 2,184 $ 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
----------- ----------- ------ -----------
----------- ----------- ------ -----------
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
BY STRATEGY
----------------------------------------------------
12/31/95 12/31/96
NOTIONAL MATURITIES/ NOTIONAL
AMOUNT ADDITIONS TERMINATIONS AMOUNT
----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Liability............................................................ $ 1,708 $ 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>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
(h) Fair Value of Financial Instruments
AS OF AS OF
DECEMBER 31, 1996 DECEMBER 31, 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
F-16
<PAGE>
quarterly comparison to dealer quoted market
prices; and other policy benefits payable for investment type contracts are
determined by estimating future cash flows discounted at the year end market
rate.
4. INCOME TAX
Hartford Life and The Hartford have entered into a tax sharing agreement
under which each member, including the Company, in the consolidated U.S. federal
income tax return will make payments between them such that, with respect to any
period, the amount of taxes to be paid by Hartford Life for the Company, subject
to certain adjustments, generally will be determined as though the Company were
to file separate federal, state and local income tax returns.
As long as The Hartford continues to beneficially own, directly or
indirectly, at least 80% of the combined voting power and 80% of the value of
the outstanding capital stock of Hartford Life, the Company will be included for
federal income tax purposes in the consolidated group of which The Hartford is
the common parent. It is the current intention of The Hartford and its
subsidiaries to continue to file a consolidated federal income tax return. The
Company will continue to remit to (receive from) The Hartford a current income
tax provision (benefit) computed in accordance with such tax sharing agreement.
The Company's effective tax rate was 35%, 32% and 32% in 1996, 1995 and 1994,
respectively.
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>
F-17
<PAGE>
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>
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
F-18
<PAGE>
immaterial impact on the accumulated postretirement benefit
obligation and the annual expense. To the extent that the actual experience
differs from the inherent assumptions, the effect will be amortized over the
average future service of the covered employees.
7. BUSINESS SEGMENT INFORMATION
The Company sells financial products such as fixed and variable
annuities, retirement plan services, and life insurance on both an individual
and a group basis. The Company divides its core businesses into three
segments: Investment Products, Individual Life Insurance and Employee
Benefits. In addition, the Company also maintains a corporate operation and
also classifies certain of its business as Runoff operations. The Investment
Products segment offers individual variable annuities and fixed market value
adjusted annuities, deferred compensation and retirement plan services,
mutual funds, investment management services and other financial products.
The Individual Life Insurance segment sells a variety of individual life
insurance products, including variable life, universal life, and
interest-sensitive whole life policies. The Employee Benefits segment sells
corporate owned life insurance. Through its corporate operation, the Company
reports net investment income on assets representing surplus not assigned to
any of its business segments and certain other revenues and expenses not
specifically allocable to any of its business segments. The Company's Runoff
operations are comprised of Closed Book GRC. With the exception of Closed
Book GRC, net realized capital gains and losses are recognized in the period
of realization but are allocated to the segments utilizing durations of the
segment portfolios.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Revenues
Investment Products.............................................................. $ 1,013 $ 759 $ 594
Individual Life Insurance........................................................ 440 383 375
Employee Benefits................................................................ 1,366 1,273 919
Corporate operations............................................................. 81 52 30
Runoff operations................................................................ (11) 337 481
--------- --------- ---------
Total revenues................................................................... $ 2,889 $ 2,804 $ 2,399
--------- --------- ---------
--------- --------- ---------
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
--------- --------- ---------
--------- --------- ---------
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>
F-19
<PAGE>
8. STATUTORY NET INCOME AND SURPLUS
A significant percentage of the consolidated statutory surplus is
permanently reinvested or is subject to various state regulatory restrictions
which limit the payment of dividends without prior approval. The total amount of
statutory dividends which may be paid by the insurance subsidiaries of the
Company in 1997, without prior approval, is estimated to be $121 million.
Statutory net income and surplus as of and for the years ended December 31 were:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Statutory net income................................................................... $ 144 $ 112 $ 58
--------- --------- ---------
Statutory surplus...................................................................... $ 1,207 $ 1,125 $ 941
--------- --------- ---------
--------- --------- ---------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
The insurance subsidiaries of the Company prepare their statutory
financial statements in accordance with accounting practices prescribed by
the State of Connecticut Insurance Department. Prescribed statutory
accounting practices include publications of the National Association of
Insurance Commissioners ("NAIC"), as well as state laws, regulations, and
general administrative rules.
9. SEPARATE ACCOUNTS
The Company maintained separate account assets and liabilities totaling
$49.7 billion and $36.3 billion at December 31, 1996 and 1995, respectively,
which are reported at fair value. Separate account assets are segregated from
other investments, and investment income and gains and losses accrue directly to
the policyholder. Separate accounts reflect two categories of risk assumption:
non-guaranteed separate accounts totaling $39.4 billion and $25.9 billion at
December 31, 1996 and 1995, respectively, wherein the policyholder assumes the
investment risk, and 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
F-20
<PAGE>
insurer's solvency and further provide annual limits on such assessments. A
large part of the assessments paid by the Company's insurance subsidiaries
pursuant to these laws may be used as credits for a portion of the Company's
insurance subsidiaries' premium taxes. The Company paid guaranty fund
assessments of approximately $11, $10 and $8 in 1996, 1995 and 1994,
respectively, of which $5, $6 and $4 were estimated to be creditable against
premium taxes.
The Company is a defendant in various lawsuits arising in the ordinary
course of business. In the opinion of management, the resolution of these
matters is not expected to have a material adverse effect on the Company's
business, financial position, or results of operations.
The rent paid to Hartford Fire for the space occupied by the Company was
$3 in 1996, 1995, and 1994. The Company expects to pay annual rent of $7 in
1997, 1998, and 1999, respectively, $12 in 2000 and 2001, and $96 thereafter,
over the remaining term of the sublease, which expires on December 31, 2009.
Rental expense is recognized on a level basis over the term of the sublease
and amounted to approximately $8 in 1996, 1995 and 1994.
11. SUBSEQUENT EVENTS
On February 10, 1997, Hartford Life filed a registration statement with the
Securities and Exchange Commission relating to the U.S. and international
offerings of shares of Class A common stock ( the "Equity Offerings")
representing up to 20% ownership of Hartford Life. After completion of the
Equity Offerings, The Hartford would own all of the shares of Class B Common
Stock (after reclassification of Hartford Life's common stock into Class B
Common Stock prior to March 31, 1997). Hartford Life intends to use the
estimated net proceeds of the Equity Offerings to make a capital contribution to
its insurance subsidiaries, to reduce its third-party indebtedness and for other
general corporate purposes.
The Hartford has advised the Company that its current intent is to continue
to beneficially own at least 80% of Hartford Life, but it is under no
contractual obligation to do so, except for a limited period. Provided that The
Hartford continues to beneficially own at least 80% of the combined voting power
or the value of the outstanding capital stock of Hartford Life, Hartford Life
will be included for federal income tax purposes in the controlled group of
which The Hartford is the common parent. Each member of a controlled group is
jointly and severally liable for pension funding and pension termination
liabilities of each other member of the controlled group, as well as certain
benefit plan taxes. Accordingly, the Company could be liable for pension
funding, pension termination liabilities and certain other pension related
excise taxes as well as other taxes of another member of The Hartford controlled
group in the event any such liability is incurred, and not discharged, by such
other member.
In connection with the proposed Equity Offerings, Hartford Life plans to
enter into formal agreements, including a master intercompany agreement,
investment management agreements and a new tax sharing agreement, with The
Hartford covering such matters as corporate services, approval of certain
corporate activities, registration rights, owned and leased space, allocation of
expenses, taxes and liabilities, investment advisory services, use of trademarks
and certain other corporate matters. As part of the master intercompany
agreement, Hartford Life would agree to remit to The Hartford 30% of any shared
liabilities for which The Hartford is responsible in respect of the ITT
Spin-off, 30% of any taxes which may be assessed to The 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-21
<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 sponsored)............................................... $ 166 $ 175 $ 175
U.S. government and government agencies and authorities
(guaranteed 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
POLICY AND CLAIM CLAIMS AND PREMIUMS NET
ACQUISITION ADJUSTMENT BENEFITS AND OTHER INVESTMENT
SEGMENT COSTS EXPENSES PAYABLE CONSIDERATIONS INCOME
- -------------- ----------- ---------- --------- -------------- ----------
<S> <C> <C> <C> <C> <C>
1996
- --------
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
Runoff operations................ -- -- 3,541 1 207
------- ------- ------- ------- -------
Consolidated Operations........ $ 2,760 2,281 22,134 1,705 1,397
------- ------- ------- ------- -------
------- ------- ------- ------- -------
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
Runoff operations................ -- 28 5,177 -- 337
------- ------- ------- ------- -------
Consolidated Operations....... $ 2,188 $ 2,373 $22,598 $ 1,487 $ 1,328
------- ------- ------- ------- -------
------- ------- ------- ------- -------
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
Runoff operations............... -- 44 7,257 -- 481
------- ------- ------- ------- -------
Consolidated Operations...... $ 1,809 $ 1,890 $21,328 $ 1,100 $ 1,292
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
BENEFITS AMORTIZATION
NET CLAIMS, OF DEFERRED
REALIZED AND CLAIM POLICY DIVIDENDS
CAPITAL ADJUSTMENT ACQUISITION TO OTHER
SEGMENT (LOSSES)GAINS EXPENSES COSTS POLICYHOLDERS EXPENSES
- -------------- ------------- ---------- ------------- --------------- ---------
<S> <C> <C> <C> <C> <C>
1996
- --------
Investment Products.............. $ -- $ 451 $ 175 $ -- $ 156
Individual Life Insurance........ -- 245 59 -- 68
Employee Benefits................ -- 546 -- 635 143
Corporate operations............. 6 -- -- -- 16
Runoff operations................ (219) 293 -- -- 44
------- ------- ------- ------- -------
Consolidated Operations........ (213) 1,535 234 635 427
------- ------- ------- ------- -------
------- ------- ------- ------- -------
1995
- -------
Investment Products.............. $ -- $ 349 $ 117 $ -- $ 115
Individual Life Insurance........ -- 127 70 -- 55
Employee Benefits................ -- 496 -- 675 138
Corporate operations............. (11) 33 -- -- 11
Runoff operations................ -- 417 12 -- (2)
------- ------- ------- ------- -------
Consolidated Operations........ (11) $ 1,422 $ 199 $ 675 $ 317
------- ------- ------- ------- -------
------- ------- ------- ------- -------
1994
- --------
Investment Products............. $ -- $ 383 $ 90 $ -- $ (31)
Individual Life Insurance....... -- 179 51 -- 107
Employee Benefits............... -- 376 -- 419 100
Corporate operations............ 7 -- -- -- 43
Runoff operations............... -- 467 4 -- 8
------- ------- ------- ------- -------
Consolidated Operations....... $ 7 $ 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>
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Hartford Life Insurance Company
/s/ Gregory A. Boyko March 28, 1997
- ----------------------------------------- ----------------------
Gregory A.Boyko Date
Senior Vice President and Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
on the date identified.
Signature
- ------------------------------------------------
Principal Executive Officer
/s/ Lowndes A. Smith March 28, 1997
- --------------------------------------- -------------------------
Lowndes A. Smith Date
President, Chief Operating Officer, and Director
Principal Investment Officer
/s/ David A. Hall March 28, 1997
- ------------------------------------- -------------------------
David A. Hall Date
Senior Vice President
Principal Accounting Officer
/s/ Gregory A. Boyko March 28, 1997
- -------------------------------------- ------------------------
Gregory A. Boyko Date
Senior Vice President and Controller
/s/ Ramani Ayer March 28, 1997
- -------------------------------------- --------------------------
Ramani Ayer Date
Chairman, Chief Executive Officer
and Director
/s/Thomas M. Marra March 28, 1997
- -------------------------------------- -------------------------
Thomas M. Marra Date
Senior Vice President and Director
/s/ John P. Ginnetti March 28, 1997
- -------------------------------------- ------------------------
John P. Ginnetti Date
Executive Vice President and Director
II-1
<PAGE>
EXHIBITS INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION
- ----------- --------------------------------------------------- ---------------------------------------------------
<C> <S> <C>
2 Plan of acquisition, reorganization, arrangement None
liquidation or succession
3(a) Restated Certificate of Incorporation Incorporated by Reference to Hartford Life 10-K
Registration Statement filed March 1985 (File No.
2-89516)
3(b) By-laws Incorporated by Reference to Hartford Life 10-K
Registration Statement filed March 1985 (File No.
2-89516)
4 Instruments defending the rights of security None
holders, including indentures
9 Voting trust agreement None
10 Material contracts None
11 Statement of computation of per share earnings None
12 Statement of computation of ratios Not required to be filed
13 Annual report to security holder, Form 10-K, or None
quarterly report to security holder
18 Letter regarding change in accounting principles None
19 Previously unfiled documents None
22 Subsidiaries of the Registrant None
23 Published report regarding matters submitted to None
vote of security holder
24 Consents of experts and counsel None
25 Power of attorney Incorporated by Reference to Hartford Life S-1
Registration Statement filed February 1984 (File
No. 2-89516)
27 Financial Data Schedule Filed herewith.
28 Additional exhibits None
29 Information from reports furnished to state Not required to be filed
insurance regulatory authorities
</TABLE>
II-2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<CIK> 0000045947
<NAME> HARTFORD LIFE INSURANCE COMPANY
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 13,624
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 119
<MORTGAGE> 2
<REAL-ESTATE> 0
<TOTAL-INVEST> 17,635
<CASH> 43
<RECOVER-REINSURE> 6,066
<DEFERRED-ACQUISITION> 2,760
<TOTAL-ASSETS> 77,569
<POLICY-LOSSES> 2,281
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 22,134
<POLICY-HOLDER-FUNDS> 49,690
<NOTES-PAYABLE> 0
0
0
<COMMON> 6
<OTHER-SE> 1,045
<TOTAL-LIABILITY-AND-EQUITY> 77,569
1,705
<INVESTMENT-INCOME> 1,397
<INVESTMENT-GAINS> (213)
<OTHER-INCOME> 0
<BENEFITS> 1,535
<UNDERWRITING-AMORTIZATION> 234
<UNDERWRITING-OTHER> 1,062
<INCOME-PRETAX> 58
<INCOME-TAX> 20
<INCOME-CONTINUING> 38
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
