<PAGE>
CRC-REGISTERED TRADEMARK- COMPOUND RATE
CONTRACT
MODIFIED GUARANTEED ANNUITY CONTRACT
HARTFORD LIFE INSURANCE COMPANY
P.O. BOX 5085
HARTFORD, CONNECTICUT 06102-5085
[LOGO] TELEPHONE: 1-800-862-6668
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This Prospectus describes participating interests in a group deferred annuity
Contract and individual deferred annuity Contracts. Both are designed and
offered to provide retirement programs for you if you are an eligible
individual. With respect to the group Contract, eligible individuals include
persons who have established accounts with certain broker-dealers which have
entered into a distribution agreement to offer participating interests in the
Contract, and members of other eligible groups. (See "Distribution of
Contracts," page 14.) An individual deferred annuity Contract is offered in
certain states and to certain trusts. Certain Qualified Plans may also purchase
the Contract. (See Appendix A).
For a description of individual Contracts issued in certain states where this
Contract has not been approved, see Appendix B. Participation in a group
Contract will be separately accounted for by the issuance of a Certificate
evidencing your interest under the Contract. Participation in an individual
Contract is evidenced by the issuance of an individual annuity Contract. The
Certificate and individual annuity Contract are hereafter referred to as the
"Contract."
A minimum single purchase payment of at least $5,000 for Non-Qualified Contracts
($2,000 for Qualified Contracts) must accompany the application for a Contract.
Hartford Life Insurance Company ("Hartford") reserves the right to limit the
maximum single purchase payment amount. No additional payment is permitted on a
Contract although eligible individuals may purchase more than one Contract. (See
"Application and Purchase Payment," page 8.)
Purchase payments become part of the general assets of Hartford. Hartford
intends generally to invest proceeds from the Contracts in investment-grade
securities. (See "Investments by Hartford," page 13.)
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ANNUITY CONTRACTS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY ANY BANK,
NOR ARE THEY INSURED BY THE FDIC; THEY ARE SUBJECT TO INVESTMENT RISKS,
INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
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FOR A MORE DETAILED DESCRIPTION OF THE RISKS ASSOCIATED WITH PURCHASING A
CONTRACT, PLEASE REFER TO PAGES THROUGH OF THIS PROSPECTUS.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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THE DATE OF THIS PROSPECTUS IS MAY 1, 1998
<PAGE>
2 HARTFORD LIFE INSURANCE COMPANY
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AVAILABLE INFORMATION
Hartford is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and in accordance therewith
files reports and other information with the Securities and Exchange Commission
(the "Commission"). Such reports and other information can be inspected and
copied at the public reference facilities of the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C., and at the Commission's Regional Offices
located at 75 Park Place, New York, New York and Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois. Copies of such materials
also can be obtained from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission
maintains a WebSite that contains reports, proxy and information statements and
other information regarding Hartford, which files such documents electronically
with the Commission, at the following address: http://www.sec.gov.
Hartford has filed a registration statement (the "Registration Statement")
relating to the Contracts offered by this Prospectus with the Commission under
the Securities Act of 1933. This Prospectus has been filed as a part of the
Registration Statement and does not contain all of the information set forth in
the Registration Statement and exhibits thereto, and reference is hereby made to
such Registration Statement and exhibits for further information relating to
Hartford and the Contracts. The Registration Statement and the exhibits thereto
may be inspected and copied, and copies can be obtained at prescribed rates, in
the manner set forth in the preceding paragraph.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Annual Report on Form 10-K for the fiscal year ended December 31, 1997,
dated March 31, 1998, previously filed by Hartford with the Commission under the
1934 Act is incorporated herein by reference.
Hartford will provide without charge to each person to whom a copy of this
Prospectus has been delivered, upon the written or oral request of such person,
a copy of the document referred to above which has been incorporated by
reference in this Prospectus, other than exhibits to such document. Requests for
such copies should be directed to Hartford Life Insurance Company, P.O. Box
5085, Hartford, Connecticut 06102-5085, telephone: 1-800-862-6668.
<PAGE>
HARTFORD LIFE INSURANCE COMPANY 3
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <C> <C> <C>
SUMMARY............................................................... 5
GLOSSARY OF SPECIAL TERMS............................................. 7
DESCRIPTION OF CONTRACTS.............................................. 8
A. Application and Purchase Payment................................... 8
B. Accumulation Period................................................ 8
1. Initial and Subsequent Guarantee Periods........................ 8
2. Establishment of Guarantee Rates and Current Rates.............. 9
3. Surrenders...................................................... 10
(a) General..................................................... 10
(b) Surrender Charge............................................ 10
(c) Market Value Adjustment..................................... 10
(d) Special Surrenders.......................................... 11
4. Guarantee Period Exchange Option................................ 11
5. Premium Taxes................................................... 11
6. Death Benefit................................................... 11
7. Payment Upon Partial or Full Surrender.......................... 12
C. Annuity Period..................................................... 12
1. Electing the Annuity Commencement Date and Form of Annuity...... 12
2. Change of Annuity Commencement Date or Annuity Option........... 12
3. Annuity Options................................................. 12
4. Annuity Payment................................................. 13
5. Death of Annuitant After Annuity Commencement Date.............. 13
INVESTMENTS BY HARTFORD............................................... 13
AMENDMENT OF CONTRACTS................................................ 14
ASSIGNMENT OF CONTRACTS............................................... 14
DISTRIBUTION OF CONTRACTS............................................. 14
FEDERAL TAX CONSIDERATIONS............................................ 14
A. General............................................................ 14
B. Taxation of Hartford............................................... 15
C. Taxation of Annuities -- General Provisions Affecting Purchasers
Other than Qualified Retirement Plans.............................. 15
1. Non-Natural Persons, Corporations, Etc.......................... 15
2. Other Contract Owners (Natural Persons)......................... 15
a. Distributions Prior to the Annuity Commencement Date........ 15
b. Distributions After Annuity Commencement Date............... 15
c. Aggregation of Two or More Annuity Contracts................ 16
d. 10% Penalty Tax -- Applicable to Certain Withdrawals and
Annuity Payments............................................ 16
e. Special Provisions Affecting Contracts Obtained through a
Tax-Free Exchange of Other Annuity or Life Insurance
Contracts Purchased Prior to August 14, 1982................ 16
f. Required Distributions...................................... 17
D. Information Regarding Tax Qualified Plans.......................... 17
1. Tax Qualified Pension or Profit-Sharing Plans................... 17
2. Tax Sheltered Annuities Under Section 403(b).................... 17
3. Deferred Compensation Plans Under Section 457................... 18
4. Individual Retirement Annuities Under Section 408............... 18
5. Federal Tax Penalties and Withholding........................... 18
a. Premature Distributions..................................... 18
b. Minimum Distribution Tax.................................... 19
c. Withholding................................................. 19
E. Annuity Purchases by Nonresident Aliens and Foreign Corporations... 19
</TABLE>
<PAGE>
4 HARTFORD LIFE INSURANCE COMPANY
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<TABLE>
<CAPTION>
PAGE
----
THE COMPANY........................................................... 20
<C> <C> <C> <C>
A. Business of Hartford Life Insurance Company........................ 20
B. Selected Financial Data............................................ 21
C. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 22
1. Consolidated Results............................................ 22
2. Business Segment Information.................................... 24
D. Reinsurance........................................................ 24
E. Reserves........................................................... 24
F. Investments........................................................ 24
G. Competition........................................................ 28
H. Employees.......................................................... 28
I. Properties......................................................... 28
J. State Regulation................................................... 28
LEGAL OPINION......................................................... 29
EXPERTS............................................................... 29
APPENDIX A (MODIFIED GUARANTEED ANNUITY FOR QUALIFIED PLANS).......... 30
APPENDIX B (SPECIAL PROVISIONS FOR INDIVIDUAL CONTRACTS ISSUED IN THE
STATES OF CALIFORNIA, MICHIGAN, MISSOURI,
NEW YORK, OREGON, SOUTH CAROLINA, TEXAS, VIRGINIA AND WISCONSIN)....
31
APPENDIX C (MARKET VALUE ADJUSTMENT).................................. 32
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES.............. 34
REPORT OF MANAGEMENT.................................................. 35
FINANCIAL STATEMENTS.................................................. 36
</TABLE>
THIS CONTRACT IS NOT AVAILABLE IN ALL STATES.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO DEALER, SALES PERSON, OR OTHER PERSON
IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATION IN CONNECTION
WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE RELIED ON.
<PAGE>
HARTFORD LIFE INSURANCE COMPANY 5
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SUMMARY
Upon application, or purchase order, you select an initial Guarantee Period
from among those then offered by Hartford. (See "Initial and Subsequent
Guarantee Periods," page 8, and "Establishment of Guarantee Rates and Current
Rates," page 9.) Your purchase payment (less surrenders and less applicable
premium taxes, if any) will earn interest at the Initial Guarantee Rate which is
an Annual Effective Rate of Interest. Interest is credited daily to your account
using the Compound Interest Method. (See "Accumulation Period -- Initial and
Subsequent Guarantee Periods," page 8.)
At the end of each Guarantee Period, a subsequent Guarantee Period of the
same duration will begin unless, within the 30-day period preceding the end of
such Guarantee Period, you elect a different duration from among those offered
by us at that time. In no event may subsequent Guarantee Periods extend beyond
the Annuity Commencement Date then in effect.
The Account Value as of the first day of each subsequent Guarantee Period
will earn interest at the Subsequent Guarantee Rate. HARTFORD'S MANAGEMENT WILL
MAKE THE FINAL DETERMINATION AS TO GUARANTEE RATES TO BE DECLARED. WE CANNOT
PREDICT, NOR CAN WE GUARANTEE, FUTURE GUARANTEE RATES. (See "Initial and
Subsequent Guarantee Periods," page 8, and "Establishment of Guarantee Rates and
Current Rates," page 9.)
Subject to certain restrictions, partial and total surrenders are permitted.
However, such surrenders may be subject to a surrender charge and/or a Market
Value Adjustment. A full or partial surrender made preceding the end of a
Guarantee Period will be subject to a Market Value Adjustment. Except as
described below, the surrender charge will be deducted from any partial or full
surrender made before the end of the seventh Contract Year. The surrender charge
will be equal to seven percent of the Gross Surrender Value in the first
Contract Year, and be reduced by one percentage point for each of the next six
Contract Years. FOR A SURRENDER MADE AT THE END OF THE INITIAL GUARANTEE PERIOD,
NO SURRENDER CHARGE WILL BE APPLIED, PROVIDED SUCH SURRENDER OCCURS ON OR AFTER
THE END OF THE THIRD CONTRACT YEAR. FOR A SURRENDER MADE AT THE END OF ANY OTHER
GUARANTEE PERIOD, NO SURRENDER CHARGE WILL BE APPLIED, PROVIDED SUCH SURRENDER
OCCURS ON OR AFTER THE END OF THE FIFTH CONTRACT YEAR. A REQUEST FOR SURRENDER
AT THE END OF A GUARANTEE PERIOD MUST BE RECEIVED IN WRITING WITHIN 30 DAYS
PRECEDING THE END OF THE GUARANTEE PERIOD. A MARKET VALUE ADJUSTMENT WILL NOT BE
APPLIED.
No surrender charges will be applicable to the application of your Account
Value to purchase an annuity on the Annuity Commencement Date. A Market Value
Adjustment will be applied if the Annuity Commencement Date is not at the end of
a Guarantee Period. To elect an Annuity Option you must notify us at least 30
days before the Annuity Commencement Date.
In addition, we will send you any interest that has been credited during the
prior 12 months if you so request in writing. No surrender charge or Market
Value Adjustment will be imposed on such interest payments. Any such surrender
may, however, be subject to tax. (See "Surrenders," page 10, and "Federal Tax
Considerations," page 14.)
The Market Value Adjustment reflects the relationship between the Current
Rate for the duration remaining in the Guarantee Period at the time you request
the surrender and the applicable Guarantee Rate being applied to your Account
Value. Since Current Rates may reflect, in part, the investment yields available
to Hartford (see "Investments By Hartford," page 13), the effect of the Market
Value Adjustment will be closely related to the levels of such yields. It is
possible, therefore, that, should such yields increase significantly from the
time you purchased your Contract, the amount you would receive upon a full
surrender of your Contract may be less than your original purchase payment. If
such yields should decrease significantly, the amount you would receive upon a
full surrender may be more than your original purchase payment.
We may defer payment of any partial or full surrender for a period not
exceeding six months from the date of our receipt of your written notice of
surrender or the period permitted by state insurance law, if less, but such a
deferral of payment will be for a period greater than 30 days only under highly
unusual circumstances. Interest of at least 4 1/2% per annum will be paid on any
amounts deferred for more than 30 days if Hartford chooses to exercise this
deferral right. (See "Payment Upon Partial or Full Surrender," page 12.)
On the Annuity Commencement Date specified by you, Hartford will make a
lump-sum payment or start to pay a series of payments based on the Annuity
Options selected by you. (See "Annuity Period," page 12.)
The Contract provides for a Death Benefit. If the Annuitant dies before the
Annuity Commencement Date and there is no designated Contingent Annuitant
surviving, or if the Participant dies before the Annuity Commencement Date, the
Death Benefit will be payable to the Beneficiary as determined under the
Contract Control Provisions. With regard to joint Participants, at the first
death of a joint Participant preceding the Annuity Commencement Date, the
Beneficiary will be the surviving Participant notwithstanding that the
designated Beneficiary may be different. The Death Benefit is calculated as of
the date we receive
<PAGE>
6 HARTFORD LIFE INSURANCE COMPANY
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written notification of Due Proof of Death at the offices of Hartford.
The Death Benefit will equal the Account Value. If the named Beneficiary is
the spouse of the Participant and the Annuitant is living, the spouse may elect,
in lieu of receiving the Death Benefit, to become the Participant and continue
the Contract. (See "Death Benefit," page 11.)
A deduction will be made for premium taxes for Contracts sold in certain
states. (See "Premium Taxes," page 11.)
Certain special provisions apply only with respect to Contracts issued in
the states of California, Michigan, Missouri, New York, Oregon, South Carolina,
Texas, Virginia and Wisconsin. These are set forth in detail in Appendix B.
For Contracts issued as individual retirement annuities, Hartford will
refund the purchase payment to the Participant if the Contract is returned to
Hartford within seven days after Contract delivery.
<PAGE>
HARTFORD LIFE INSURANCE COMPANY 7
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GLOSSARY OF SPECIAL TERMS
In this Prospectus, "we," "us," and "our" refer to Hartford Life Insurance
Company. With respect to a group deferred annuity Contract, "you," "yours," and
"Participant" refer to a person/persons who has/have been issued a Certificate.
With respect to an individual annuity Contract, "you," "yours," and
"Participant" refer to a person/persons who has/have been issued a Contract.
In addition, as used in this Prospectus, the following terms have the indicated
meanings:
ACCOUNT VALUE: As of any date, the Account Value is the sum of the purchase
payment and all interest earned to date less the sum of the Gross Surrender
Value of any surrenders made to that date.
ANNUAL EFFECTIVE RATE OF INTEREST: At the beginning of a year, the rate of
return an investment will earn during that year, where interest is not paid
until the end of the year (i.e., no surrenders or interest withdrawals are made
during the year). If interest withdrawals are taken more frequently than
annually, the total interest for a given year will be less than the Annual
Effective Rate of Interest times the Account Value at the beginning of the year.
ANNUITANT: The person upon whose life the Contract is issued.
ANNUITY COMMENCEMENT DATE: The date designated in the Contract or otherwise by
the Participant on which annuity payments are to start.
BENEFICIARY: The person entitled to receive benefits per the terms of the
Contract in case of the death of the Annuitant or the Participant or Joint
Participant, as applicable.
COMPOUND INTEREST METHOD: The process of interest being reinvested to earn
additional interest on a daily basis. This method results in an exponential
calculation of daily interest.
CONTRACT: For a group annuity Contract, "Contract" means the Certificate
evidencing a participating interest in the group annuity Contract as set forth
in this Prospectus. Any reference in this Prospectus to "Contract" includes the
underlying group annuity Contract. For an individual annuity Contract,
"Contract" means that individual annuity contract.
CONTRACT DATE: The effective date of Participant's participation under the group
annuity Contract, as designated in the Contract, or the date of issue of an
individual annuity Contract.
CONTRACT YEAR: A continuous 12 month period commencing on the Contract Date and
each anniversary thereof.
CONTINGENT ANNUITANT: The person so designated by the Participant, who upon the
Annuitant's death, prior to the Annuity Commencement Date, becomes the
Annuitant.
CURRENT RATE: The applicable interest rate contained in a schedule of rates
established by us from time to time for various durations.
DUE PROOF OF DEATH: A certified copy of a death certificate, an order of a court
of competent jurisdiction, a statement from a physician who attended the
deceased or any other proof acceptable to Hartford.
GROSS SURRENDER VALUE: As of any date, that portion of the Account Value
specified by you for a full or a partial surrender.
GUARANTEE PERIOD: The period for which either an Initial Guarantee Rate or
Subsequent Guarantee Rate is credited.
HARTFORD: Hartford Life Insurance Company.
INITIAL GUARANTEE RATE: The rate of interest credited and compounded annually
during the initial Guarantee Period.
IN WRITING: A written form satisfactory to us and received at our offices,
Attn.: Individual Annuity Services, P.O. Box 5085, Hartford, Connecticut
06102-5085.
MARKET VALUE ADJUSTMENT: A positive or negative financial adjustment made in
connection with a full or partial surrender or annuitization during a Guarantee
Period. The adjustment will reflect the relationship between the Current Rate
for a new contract of the duration remaining in the Guarantee Period(s) at
surrender or upon annuitization during a Guarantee Period and the interest rate
for the Guarantee Period then applicable under the Contract.
NET SURRENDER VALUE: The amount payable to you on a full or partial surrender
under the Contract after the application of any Contract charges and/or Market
Value Adjustment.
NON-QUALIFIED CONTRACT: A Contract which is not classified as, or issued in
connection with, a tax-qualified retirement plan using pre-tax dollars under the
Internal Revenue Code of 1986, as amended (the "Code").
QUALIFIED CONTRACT: A Contract which qualifies as, or issued in connection with,
a tax-qualified retirement plan using pre-tax dollars under the Code, such as an
employer-sponsored Section 401(k) plan or an eligible state deferred
compensation plan under Section 457.
SUBSEQUENT GUARANTEE RATE: The rate of interest established by us for the
applicable subsequent Guarantee Period.
<PAGE>
8 HARTFORD LIFE INSURANCE COMPANY
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DESCRIPTION OF CONTRACTS
A. APPLICATION AND PURCHASE PAYMENT
To apply for a Contract, you must complete an application form or an order
to purchase. The application, along with your purchase payment, must be
submitted to Hartford for its approval.
The Contracts are issued within a reasonable time after the payment of a
single purchase payment. You may not contribute additional purchase payments to
a Contract in the future. You may, however, purchase additional Contracts, if
you are an eligible individual, at then-prevailing Guarantee Rates and terms.
The minimum purchase payment for a Contract is $5,000 for Non- Qualified
Contracts ($2,000 for Qualified Contracts). Hartford retains the right to limit
the amount of the maximum purchase payment.
Your purchase payment becomes part of our general assets and is credited to
an account we establish for you. We will generally confirm your purchase payment
in writing within five business days of receipt. You start earning interest on
your account the day the purchase payment is applied.
In the event that your application or an order to purchase is not properly
completed, we will attempt to contact you in writing or by telephone. We will
return the purchase payment three weeks after its receipt by us if the
application or an order to purchase has not, by that time, been properly
completed.
B. ACCUMULATION PERIOD
1. INITIAL AND SUBSEQUENT GUARANTEE PERIODS
Upon application, you will select the duration of your Initial Guarantee
Period from among those durations offered by us. The duration you select will
determine your Initial Guarantee Rate. Your purchase payment (less surrenders
and less applicable premium taxes, if any) will earn interest at the Initial
Guarantee Rate which is an Annual Effective Rate of Interest. Interest is
credited daily to your account using the Compound Interest Method. With compound
interest, the total investment of principal and interest earned to date is
invested at all times. You continue to earn interest on interest already earned.
However, when withdrawals are made during the year, interest on the amount of
the withdrawals is lost for the remainder of the year.
Set forth below is an illustration of how interest would be credited to your
Account Value during each Guarantee Period, using a five year Guarantee Period.
For the purpose of this example, we have made the assumptions.
NO FULL OR PARTIAL SURRENDERS OR PRE-AUTHORIZED DISTRIBUTIONS OF INTEREST
DURING THE ENTIRE FIVE YEAR PERIOD. A MARKET VALUE ADJUSTMENT, SURRENDER CHARGE,
OR BOTH MAY APPLY TO ANY SUCH SURRENDERS OR DISTRIBUTIONS (SEE "SURRENDERS,"
PAGE 10). THE HYPOTHETICAL INTEREST RATES ARE ILLUSTRATIVE ONLY AND ARE NOT
INTENDED TO PREDICT FUTURE INTEREST RATES TO BE DECLARED UNDER THE CONTRACT.
ACTUAL INTEREST RATES DECLARED FOR ANY GIVEN TIME MAY BE MORE OR LESS THAN THOSE
SHOWN.
<PAGE>
HARTFORD LIFE INSURANCE COMPANY 9
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EXAMPLE OF COMPOUNDING AT THE INITIAL GUARANTEE RATE
<TABLE>
<S> <C>
Beginning Account Value: $50,000
Guarantee Period: 5 years
Guarantee Rate: 5.50% per annum
</TABLE>
<TABLE>
<CAPTION>
END OF CONTRACT YEAR:
----------------------------------------------------------
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Beginning Account Value................. $50,000.00
X (1+Guarantee Rate).................. 1.055
----------
$52,750.00
Account Value at end of Contract Year
1...................................... $52,750.00
X (1+Guarantee Rate).................. 1.055
----------
$55,651.25
Account Value at end of Contract Year
2...................................... $55,651.25
X (1+Guarantee Rate).................. 1.055
----------
$58,712.07
Account Value at end of Contract Year
3...................................... $58,712.07
X (1+Guarantee Rate).................. 1.055
----------
$61,941.23
Account Value at end of Contract Year
4...................................... $61,941.23
X (1+Guarantee Rate).................. 1.055
----------
$65,348.00
Account Value at end of Guarantee
Period................................. $65,348.00
Total Interest Credited in Guarantee
Period -- $65,348.00 - 50,000.00 = $15,348.00
----------
Account Value at end of Guarantee Period
-- $50,000.00 + 15,348.00 = $65,348.00
Account Value after 180 days from the $50,000 X (1.055)(180/365)
Contract Date -- = $51,337.77
</TABLE>
Unless you elect to make a surrender (see "Surrenders," page 10), a
subsequent Guarantee Period will automatically commence at the end of a
Guarantee Period. Each subsequent Guarantee Period will be of the same duration
as the previous Guarantee Period unless you elect in writing, on any day within
the 30 day period preceding the end of the current Guarantee Period, a Guarantee
Period of a different duration from among those offered by us at that time.
In no event may subsequent Guarantee Periods extend beyond the Annuity
Commencement Date then in effect. For example, if you are age 62 upon the
expiration of a Guarantee Period and you have chosen age 65 as an Annuity
Commencement Date, we will provide a three year Guarantee Period to equal the
number of years remaining before your Annuity Commencement Date. Your Account
Value will then earn interest at a Guarantee Rate which we have declared for
that duration. The Guarantee Rate for the Guarantee Period automatically applied
in these circumstances may be higher or lower than the Guarantee Rate for longer
durations.
The Account Value at the beginning of any subsequent Guarantee Period will
be equal to the Account Value at the end of the Guarantee Period just ending.
This Account Value (less surrenders made after the beginning of the subsequent
Guarantee Period) will earn interest compounded annually at the Subsequent
Guarantee Rate.
Within 30 days preceding the end of a Guarantee Period, we will notify you
of the expiry of the current rate Guarantee Period.
2. ESTABLISHMENT OF GUARANTEE RATES AND
CURRENT RATES
You will know the Initial Guarantee Rate for the Guarantee Period you choose
at the time you purchase your Contract. Under certain circumstances, Hartford
may offer a rate in excess of the Guarantee Rate for the first year only of a
subsequent Guarantee Period. Current Rates will be established periodically
along with the Guarantee Rates which will be applicable to subsequent Guarantee
Periods. After the end of each Contract Year, we will send you a statement which
will show (a) your Account Value as of the end of the preceding Contract Year,
(b) all transactions regarding your Contract during the Contract Year, (c) your
Account Value at the end of the current Contract Year, and (d) the rate of
interest being credited to your Contract.
Hartford has no specific formula for determining the rate of interest that
it will declare as Current Rates or Guarantee Rates in the future. The
determination of Current Rates and Guarantee Rates may reflect, in part, the
income anticipated from the types of debt instruments in which
<PAGE>
10 HARTFORD LIFE INSURANCE COMPANY
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Hartford intends to invest the proceeds attributable to the Contracts. (See
"Investments by Hartford," page 13.) In addition, Hartford's management may also
consider various other factors in determining Current Rates and Guarantee Rates
for given periods, including regulatory and tax requirements; sales commissions
and administrative expenses borne by Hartford; general economic trends; and
competitive factors. HARTFORD'S MANAGEMENT WILL MAKE THE FINAL DETERMINATION AS
TO CURRENT RATES AND GUARANTEE RATES TO BE DECLARED. WE CANNOT PREDICT, NOR CAN
WE GUARANTEE, FUTURE CURRENT RATES OR GUARANTEE RATES.
3. SURRENDERS
(a) GENERAL
Full surrenders may be made under a Contract at any time. Partial surrenders
may only be made if:
i. the Gross Surrender Value is at least $1,000; and
ii. the remaining Account Value after the Gross Surrender Value has been
deducted is at least $5,000.
In the case of all surrenders, the Account Value will be reduced by the
Gross Surrender Value on the Surrender Date and the Net Surrender Value will be
payable to you. The Net Surrender Value equals:
(A - B) x C, where:
A = the Gross Surrender Value,
B = the surrender charge plus any unpaid premium tax (see page 11), and
C = the Market Value Adjustment (see page 10).
Hartford will, upon request, inform you of the amount payable upon a full or
partial surrender.
Any full, partial or special surrender may be subject to tax. (See "Federal
Tax Considerations," page 14.)
THERE ARE CERTAIN RESTRICTIONS ON SECTION 403(b) TAX-SHELTERED ANNUITIES. AS
OF DECEMBER 31, 1988, ALL SECTION 403(b) ANNUITIES HAVE LIMITS ON FULL AND
PARTIAL SURRENDERS. CONTRIBUTIONS TO THE CONTRACT MADE AFTER DECEMBER 31, 1988
AND ANY INCREASES IN CASH VALUE AFTER DECEMBER 31, 1988 MAY NOT BE DISTRIBUTED
UNLESS THE CONTRACT OWNER/ EMPLOYEE HAS: (A) ATTAINED AGE 59 1/2, (B) TERMINATED
EMPLOYMENT, (C) DIED, (D) BECOME DISABLED, OR (E) EXPERIENCED FINANCIAL
HARDSHIP.
DISTRIBUTIONS DUE TO FINANCIAL HARDSHIP OR SEPARATION FROM SERVICE MAY STILL
BE SUBJECT TO A PENALTY TAX OF 10%.
HARTFORD WILL NOT ASSUME ANY RESPONSIBILITY IN DETERMINING WHETHER A
WITHDRAWAL IS PERMISSIBLE, WITH OR WITHOUT TAX PENALTY, IN ANY PARTICULAR
SITUATION OR IN MONITORING WITHDRAWAL REQUESTS REGARDING PRE- OR POST-JANUARY 1,
1989 ACCOUNT VALUES.
(b) SURRENDER CHARGE
No deduction for a sales charge is made from the purchase payment when
received. A surrender charge, however, may be deducted from the Gross Surrender
Value (before application of any Market Value Adjustment) of any partial or full
surrender made before the end of the seventh Contract Year regardless of the
length of Guarantee Periods, as follows:
<TABLE>
<CAPTION>
CHARGE AS
CONTRACT YEAR PERCENTAGE
IN WHICH OF GROSS
SURRENDER IS MADE SURRENDER VALUE
- ----------------- -------------------
<S> <C>
1 7%
2 6%
3 5%
4 4%
5 3%
6 2%
7 1%
Thereafter 0%
</TABLE>
No surrender charge will be made for surrenders after Contract Year 7 or
certain surrenders effective at the end of a Guarantee Period. (See "Special
Surrenders," page 11).
The surrender charge may be reduced if you are surrendering to purchase a
variable annuity contract issued by Hartford or an affiliate of Hartford.
For example, assume you select an initial Guarantee Period of five years and
then you take no action to change the duration of the second Guarantee Period,
resulting in a second Guarantee Period also with a duration of five years. Any
surrenders made during the sixth Contract Year will be subject to a two percent
surrender charge even though you could have made a surrender of up to the
Account Value at the end of the initial five year Guarantee Period which would
not have been subject to a surrender charge.
(c) MARKET VALUE ADJUSTMENT
The amount payable on a partial or full surrender made during any Guarantee
Period may be adjusted up or down by the application of the Market Value
Adjustment. Where applicable, the Market Value Adjustment is applied to Gross
Surrender Value, net of any surrender charge.
In the case of either a partial or full surrender, the Market Value
Adjustment will reflect the relationship between the Current Rate for the
duration remaining in the Guarantee Period at the time you request the
surrender, and the Guarantee Rate then applicable to your Contract.
<PAGE>
HARTFORD LIFE INSURANCE COMPANY 11
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Generally, if your Guarantee Rate is lower than the applicable Current Rate,
then the application of the Market Value Adjustment will reduce the payment upon
surrender.
Similarly, if your Guarantee Rate is higher than the applicable Current
Rate, the application of the Market Value Adjustment will increase the payment
upon surrender.
For example, assume you purchase a Contract and select an initial Guarantee
Period of ten years and our Guarantee Rate for that duration is 8% per annum.
Assume that at the end of seven years you make a partial surrender. If the three
year Current Rate is then 6%, the amount payable upon partial surrender will
increase after the application of the Market Value Adjustment. On the other
hand, if such Current Rate is higher than your Guarantee Rate (for example,
10%), the application of the Market Value Adjustment will cause a decrease in
the amount payable to you upon this partial surrender.
Since Current Rates may reflect, in part, the investment yields available to
Hartford (see "Investments by Hartford," page 13), the Market Value Adjustment
may also reflect, in part, the levels of such yields. It is possible, therefore,
that should such yields increase significantly from the time you purchased your
Contract, coupled with the application of the surrender charges, the amount you
would receive upon a full surrender of your Contract could be less than your
original purchase payment.
The formula for calculating the Market Value Adjustment is set forth in
Appendix C, which also contains an additional illustration of the application of
the Market Value Adjustment.
(d) SPECIAL SURRENDERS
No surrender charge is imposed:
(1) Upon a surrender made at the end of the initial Guarantee Period,
provided such surrender occurs on or after the end of the third Contract
Year.
(2) Upon a surrender made at the end of any subsequent Guarantee Period,
provided such surrender occurs on or after the end of the fifth Contract
Year.
A request for surrender at the end of a Guarantee Period pursuant to (1)
and (2) above must be received in writing by Hartford during the 30 day
period preceding the end of that Guarantee Period.
(3) Upon the application of your Account Value to purchase an annuity on the
Annuity Commencement Date. A Market Value Adjustment will be applied if
the Annuity Commencement Date is not at the end of a Guarantee Period.
To elect an Annuity Option, Hartford must receive your notice in writing
at least 30 days before the end of that Guarantee Period.
In addition, we will send you any interest that has been credited during
the prior 12 months if you so request in writing. No surrender charge or
Market Value Adjustment will apply to such interest payments. Any such
surrender may, however, be subject to tax.
For certain tax-qualified plans, we reserve the right to offer by rider
an extended surrender privilege, without imposing a surrender charge or
Market Value Adjustment.
4. GUARANTEE PERIOD EXCHANGE OPTION
Once each Contract Year you may elect to transfer from your current rate
Guarantee Period into a new rate Guarantee Period of a different duration. A
Market Value Adjustment will be applied to your current Account Value at the
time of transfer. There will be no surrender charge for this exchange. Surrender
charges will continue to be based on time elapsed from the original Contract
Date. While we currently do not impose a transfer charge, Hartford reserves the
right to charge a fee of up to $50 for each transfer.
5. PREMIUM TAXES
A deduction is also made for premium taxes, if applicable, imposed by a
state or other governmental entity, currently ranging up to 3.5%. Some states
assess the tax at the time purchase payments are made; others assess the tax at
the time of annuitization. Hartford will pay premium taxes at the time imposed
under applicable law. At its sole discretion, Hartford may deduct premium taxes
at the time Hartford pays such taxes to the applicable taxing authorities, upon
surrender, or when annuity payments commence.
6. DEATH BENEFIT
If the Annuitant dies before the Annuity Commencement Date and there is no
designated Contingent Annuitant surviving, or if the Participant dies before the
Annuity Commencement Date, the Death Benefit will be payable to the Beneficiary
as determined under the Contract Control Provisions. With regard to Joint
Participants, at the first death of a Joint Participant preceding the Annuity
Commencement Date, the Beneficiary will be the surviving Participant,
notwithstanding that the Designated Beneficiary may be different. The Death
Benefit is calculated as of the date we receive at the offices of Hartford
written notification of Due Proof of Death. The Death Benefit will equal the
Account Value.
The Death Benefit may be taken in one sum, to be paid within six months
after the date we receive Due Proof of Death, or under any of the Annuity
Options available under the Contract; provided, however, that: (a) in the event
of the death of a Participant prior to the Annuity Commencement Date, any
Annuity Option selected must provide that any
<PAGE>
12 HARTFORD LIFE INSURANCE COMPANY
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amount payable as a Death Benefit will be distributed within five years of the
date of death; and (b) in the event of the death of a Participant or Annuitant
which occurs on or after the Annuity Commencement Date, any remaining interest
in the Contract will be paid at least as rapidly as under the method of
distribution in effect at the time of death, or, if the benefit is payable over
a period not extending beyond the life expectancy of the Beneficiary or over the
life of the Beneficiary, such distribution must commence within one year of the
date of death. Notwithstanding the foregoing, in the event of the Participant's
death, where the sole Beneficiary is the spouse of the Participant and the
Annuitant or Contingent Annuitant is living, such sole Beneficiary may elect, in
lieu of receiving the Death Benefit, to be treated as the Participant.
If the Contract is owned by a corporation or other non-individual, the Death
Benefit payable upon the death of the Annuitant preceding the Annuity
Commencement Date will be payable only as one sum or under the same Annuity
Options and in the same manner as if an individual Contract Owner died on the
date of the Annuitant's death.
7. PAYMENT UPON PARTIAL OR FULL SURRENDER
We may defer payment of any partial or full surrender for a period not
exceeding six months from date of our receipt of your notice of surrender or the
period permitted by state insurance law, if less. Only under highly unusual
circumstances will we defer a surrender payment more than 30 days, and if we
defer payment for more than 30 days, we will pay interest of at least 4 1/2% per
annum on the amount deferred. While all circumstances under which we could defer
payment upon surrender may not be foreseeable at this time, such circumstances
could include, for example, a time of an unusually high surrender rate under the
Contracts, accompanied by a radical shift in interest rates. If we intend to
withhold payment for more than 30 days, we will notify you in writing. We will
not, however, defer payment for more than 30 days as to any surrender which is
to be effective at the end of any Guarantee Period.
C. ANNUITY PERIOD
1. ELECTING THE ANNUITY COMMENCEMENT DATE AND
FORM OF ANNUITY
Upon application for a Contract, you select an Annuity Commencement Date.
Within 30 days preceding your Annuity Commencement Date you may elect to have
all or a portion of your Net Surrender Value paid in a lump sum on your Annuity
Commencement Date. Alternatively, or with respect to any portion of your Net
Surrender Value not paid in a lump sum, you may elect, at least 30 days
preceding the Annuity Commencement Date, to have your Account Value with a
Market Value Adjustment, if applicable, or a portion thereof multiplied by the
Market Value Adjustment (less applicable premium taxes, if any) applied on the
Annuity Commencement Date under any of the Annuity Options described below. In
the absence of such election, Account Value with a Market Value Adjustment, if
applicable, will be applied on the Annuity Commencement Date under the Second
Option to provide a life annuity with 120 monthly payments certain. This
Contract may not be surrendered for its Termination Value after the commencement
of annuity payments, except with respect to Option Six.
2. CHANGE OF ANNUITY COMMENCEMENT DATE OR
ANNUITY OPTION
You may change the Annuity Commencement Date and/or the Annuity Option from
time to time, but any such change must be made in writing and received by us at
least 30 days preceding the scheduled Annuity Commencement Date. Also, the
proposed Annuity Commencement Date may not be beyond the Annuitant's 90th
birthday, except in certain states where the Annuity Commencement Date may not
be beyond the Annuitant's 85th birthday.
3. ANNUITY OPTIONS
Any one of the following Annuity Options may be elected:
FIRST OPTION -- Life Annuity
An annuity payable monthly during the lifetime of the Annuitant, and
terminating with the last monthly payment due preceding the death of the
Annuitant. It would be possible under this Option for an Annuitant to receive
only one Annuity payment if he died preceding the due date of the second Annuity
payment, two payments if he died before the due date of the third Annuity
payment, and so on.
SECOND OPTION -- Life Annuity with 120, 180 or 240 Monthly Payments Certain
An annuity providing monthly income to the Annuitant for a fixed period of
120 months, 180 months or 240 months (as selected), and for as long thereafter
as the Annuitant shall live.
THIRD OPTION -- Cash Refund Life Annuity
An annuity payable monthly during the lifetime of the Annuitant, provided
that, at the death of the Annuitant, the Beneficiary will receive an additional
payment equal to (a) minus (b), where (a) is the Account Value applied on the
Annuity Commencement Date under this Option and (b) is the dollar amount of
annuity payments already paid.
FOURTH OPTION -- Joint and Last Survivor Life Annuity
An annuity payable monthly during the joint lifetime of the Annuitant and a
designated second person, and thereafter during the remaining lifetime of the
survivor, ceasing with the last payment preceding the death of the survivor. It
would be possible under this Option for the Annuitant, and
<PAGE>
HARTFORD LIFE INSURANCE COMPANY 13
- --------------------------------------------------------------------------------
designated second person in the event of the common or simultaneous death of the
parties, to receive only one payment in the event of death preceding the due
date for the second payment, and so on.
FIFTH OPTION -- Payments for a Designated Period
An amount payable monthly for the number of years selected which may be from
five to 30 years.
The Tables in the Contract provide for guaranteed dollar amounts of monthly
payments for each $1,000 applied under the five Annuity Options. Under the
First, Second or Third Options, the amount of each payment will depend upon the
age and sex of the Annuitant at the time the first payment is due. Under the
Fourth Option, the amount of each payment will depend upon the sex of both
payees and their ages at the time the first payment is due.
The Tables for the First, Second, Third and Fourth Options are based on the
1983a Individual Annuity Mortality Table, with ages set back one year and a net
investment rate of 4% per annum. The table for the Fifth Option is based on a
net investment rate of 4% per annum.
We may, from time to time, at our discretion if mortality appears more
favorable and interest rates justify, apply other tables which will result in
higher monthly payments for each $1,000 applied under one or more of the five
Annuity Options.
SIXTH OPTION -- Annuity Proceeds Settlement Option
Proceeds from the Death Benefit may be left with Hartford for a period not
to exceed five years from the date of the Participant's death preceding the
Annuity Commencement Date. The proceeds will remain in the same Guarantee Period
and continue to earn the same interest rate as at the time of death. If the
Guarantee Period ends before the end of the five year period, the Beneficiary
may elect a new Guarantee Period with a duration closest to but not to exceed
the time remaining in the period of five years from the date of the
Participant's death. Full or partial surrenders may be made at any time. In the
event of surrenders, the remaining value will equal the proceeds left with
Hartford, minus any surrenders, plus any interest earned. A Market Value
Adjustment will be applied to all surrenders except those occurring at the end
of a Guarantee Period.
4. ANNUITY PAYMENT
The first payment under any Annuity Option will be made following the
Annuity Commencement Date. Subsequent payments will be made on the same day in
accordance with the manner of payment selected.
The option elected must result in a payment of an amount at least equal to
the minimum payment amount according to Hartford's rules then in effect. If at
any time payments are less than the minimum payment amount, Hartford has the
right to change the frequency to an interval resulting in a payment at least
equal to the minimum. If any amount due is less than the minimum per year,
Hartford may make other arrangements that are equitable to the Annuitant.
Once annuity payments have commenced, no surrender of the annuity benefit
(including benefits under the Fifth Option) can be made for the purpose of
receiving a lump sum settlement in lieu thereof.
5. DEATH OF ANNUITANT AFTER ANNUITY
COMMENCEMENT DATE
In the event of the death of the Annuitant after the Annuity Commencement
Date, the present values on the date of death of the current dollar amount of
any remaining guaranteed payments will be paid in one sum to the Beneficiary
unless other provisions shall have been made and approved by us. Calculations of
such present value will be based on the interest rate that is used by us to
determine the amount of each certain payment.
INVESTMENTS BY HARTFORD
Assets of Hartford must be invested in accordance with the requirements
established by applicable state laws regarding the nature and quality of
investments that may be made by life insurance companies and the percentage of
their assets that may be committed to any particular type of investment. In
general, these laws permit investments, within specified limits and subject to
certain qualifications, in federal, state and municipal obligations, corporate
bonds, preferred and common stocks, real estate mortgages, real estate and
certain other investments. (See pages 25 and 26 for percentage breakdown of
Hartford's investments.)
Contract reserves will be accounted for in a non-unitized separate account.
Contract Owners have no priority claims on assets accounted for in this separate
account. All assets of Hartford, including those accounted for in this separate
account, are available to meet the guarantees under the Contracts and are
available to meet the general obligations of Hartford.
Nonetheless, in establishing Guarantee Rates and Current Rates, Hartford
intends to take into account the yields available on the instruments in which it
intends to invest the proceeds from the Contracts. (See "Establishment of
Guarantee Rates and Current Rate," page 9.) Hartford's investment strategy with
respect to the proceeds attributable to the Contracts will generally be to
invest in investment-grade debt instruments having durations tending to match
the applicable Guarantee Periods.
Investment-grade debt instruments in which Hartford intends to invest the
proceeds from the Contracts include:
<PAGE>
14 HARTFORD LIFE INSURANCE COMPANY
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Securities issued by the United States Government or its agencies or
instrumentalities, which issues may or may not be guaranteed by the United
States Government.
Debt securities which have an investment grade, at the time of purchase,
within the four highest grades assigned by Moody's Investors Services, Inc.
(Aaa, Aa, A or Baa), Standard & Poor's Corporation (AAA, AA, A or BBB) or any
other nationally recognized rating service.
Other debt instruments, including, but not limited to, issues of or
guaranteed by banks or bank holding companies and corporations, which
obligations, although not rated by Moody's Investors Services, Inc. or Standard
& Poor's Corporation are deemed by Hartford's management to have an investment
quality comparable to securities which may be purchased as stated above.
While the foregoing generally describes our investment strategy with respect
to the proceeds attributable to the Contracts, we are not obligated to invest
the proceeds attributable to the Contract according to any particular strategy,
except as may be required by Connecticut and other state insurance laws.
AMENDMENT OF CONTRACTS
We reserve the right to amend the Contracts to meet the requirements of
applicable federal or state laws or regulations. We will notify you in writing
of any such amendments.
ASSIGNMENT OF CONTRACTS
Your rights as evidenced by a Contract may be assigned as permitted by
applicable law. An assignment will not be binding upon us until we receive
notice from you in writing. We assume no responsibility for the validity or
effect of any assignment. You should consult your tax adviser regarding the tax
consequences of an assignment.
DISTRIBUTION OF CONTRACTS
The Contracts are sold by certain independent broker-dealers registered
under the 1934 Act to persons who have established an account with the
broker-dealer. In addition, the Contracts may be offered to members of certain
other eligible groups or certain individuals. Hartford will pay a maximum
commission of 5% for the sale of a Contract. From time to time, customers of
certain broker-dealers may be offered special initial Guarantee Rates and
negotiated commissions.
The Contracts may also be sold directly to employees of Hartford and of
Hartford Fire Insurance Company, of which Hartford is a subsidiary. The
Contracts will be credited with an additional 2% of the employee's purchase
payment by Hartford. This additional percentage of purchase payment in no way
affects present or future charges, rights, benefits or current values of other
Contract Owners.
Hartford Securities Distribution Company, Inc. ("HSD") serves as principal
underwriter for the Contracts. HSD is a wholly-owned subsidiary of Hartford. The
principal business address of HSD is the same as Hartford. HSD is registered
with the Commission under the 1934 Act as a broker-dealer and is a member of the
National Association of Securities Dealers, Inc.
Broker-dealers or financial institutions are compensated according to a
schedule set forth by HSD and any applicable rules or regulations for insurance
compensation. Compensation is generally based on premium payments made by
policyholders or contract owners.
In addition, a broker-dealer or financial institution may also receive
additional compensation for, among other things, training, marketing or other
services provided. HSD, its affiliates or Hartford may also make compensation
arrangements with certain broker-dealers or financial institutions based on
total sales by the broker-dealer or financial institution of insurance products.
These payments, which may be different for different broker-dealers or financial
institutions, will be made by HSD, its affiliates, or Hartford out of their own
assets and will not affect the amounts paid by the policyholders or contract
owners to purchase, hold or surrender insurance products.
FEDERAL TAX CONSIDERATIONS
A. GENERAL
SINCE THE TAX LAW IS COMPLEX AND SINCE TAX CONSEQUENCES WILL VARY ACCORDING
TO THE ACTUAL STATUS OF THE PARTICIPANT INVOLVED, LEGAL AND TAX ADVICE MAY BE
NEEDED BY A PERSON, EMPLOYER OR OTHER ENTITY CONTEMPLATING THE PURCHASE OF A
CONTRACT DESCRIBED IN THIS PROSPECTUS.
It should be understood that any detailed description of the federal income
tax consequences regarding the purchase of the Contracts cannot be made in this
Prospectus and that special tax rules may be applicable with respect to certain
purchase situations not discussed herein. In addition, no attempt is made here
to consider any applicable state or other tax laws. For detailed information, a
qualified tax adviser should always be consulted. This discussion is based upon
Hartford's understanding of existing federal income tax laws as they are
currently interpreted. No representation is made as to the likelihood of
continuation
<PAGE>
HARTFORD LIFE INSURANCE COMPANY 15
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of the present federal income tax laws or of the current or future
interpretations of those laws by the Internal Revenue Service.
THE FOLLOWING DISCUSSION IS GENERAL AND IS NOT INTENDED AS LEGAL ADVICE
REGARDING THE TAX LAWS. Any person with questions about the tax consequences
regarding the Contracts should consult a competent tax advisor prior to making
any decisions.
B. TAXATION OF HARTFORD
Hartford is taxed as a life insurance company under the Internal Revenue
Code of 1986, as amended (the "Code"). The assets underlying the Contracts will
be owned by Hartford. The income earned on such assets will be Hartford's
income.
C. TAXATION OF ANNUITIES -- GENERAL
PROVISIONS AFFECTING PURCHASERS OTHER
THAN QUALIFIED RETIREMENT PLANS
Section 72 of the Code governs the taxation of annuities in general.
1. NON-NATURAL PERSONS, CORPORATIONS, ETC.
Section 72 contains provisions for Contract Owners which are non-natural
persons. Non-natural persons include corporations, trusts, limited liability
companies and partnerships. The annual net increase in the value of the Contract
is currently includable in the gross income of a non-natural person, unless the
non-natural person holds the Contract as an agent for a natural person. There
are additional exceptions from current inclusion for (i) certain annuities held
by structured settlement companies, (ii) certain annuities held by an employer
with respect to a terminated qualified retirement plan and (iii) certain
immediate annuities. A non-natural person which is a tax-exempt entity for
federal tax purposes will not be subject to income tax as a result of this
provision.
If the Contract Owner is not an individual, Section 72 requires that the
primary Annuitant shall be treated as the Contract Owner for purposes of making
the required distributions. If the Contract Owner is not an individual, then a
change in the primary Annuitant will be treated as the death of the Contract
Owner for purposes of required distributions where the Contract Owner dies
before the entire interest in the Contract is distributed.
2. OTHER CONTRACT OWNERS (NATURAL PERSONS).
In general, and with certain exceptions, interest or earnings credited under
the Contract are not included in the Contract Owner's income for tax purposes
until actually distributed from the Contract.
The provisions of Section 72 of the Code concerning distributions are
summarized briefly below. Also summarized are special rules affecting
distributions from Contracts obtained in a tax-free exchange for other annuity
contracts or life insurance contracts which were purchased prior to August 14,
1982.
a. DISTRIBUTIONS PRIOR TO THE ANNUITY
COMMENCEMENT DATE.
i. Total premium payments less amounts received which were not includable in
gross income equal the "investment in the contract" under Section 72 of the
Code.
ii. To the extent that the value of the Contract (ignoring any surrender
charges except on a full surrender) exceeds the "investment in the
contract," such excess constitutes the "income on the contract."
iii. Any amount received or deemed received prior to the Annuity Commencement
Date (e.g., upon a partial surrender) is deemed to come first from any such
"income on the contract" and then from "investment in the contract," and for
these purposes such "income on the contract" shall be computed by reference
to any aggregation rule in subparagraph 2.c. below. As a result, any such
amount received or deemed received (1) shall be includable in gross income
to the extent that such amount does not exceed any such "income on the
contract," and (2) shall not be includable in gross income to the extent
that such amount does exceed any such "income on the contract." If at the
time that any amount is received or deemed received there is no "income on
the contract" (e.g., because the gross value of the Contract does not exceed
the "investment in the contract" and no aggregation rule applies), then such
amount received or deemed received will not be includable in gross income,
and will simply reduce the "investment in the contract."
iv. The receipt of any amount as a loan under the Contract or the assignment or
pledge of any portion of the value of the Contract shall be treated as an
amount received for purposes of this subparagraph a. and the next
subparagraph b.
v. In general, the transfer of the Contract, without full and adequate
consideration, will be treated as an amount received for purposes of this
subparagraph a. and the next subparagraph b. This transfer rule does not
apply, however, to certain transfers of property between spouses or incident
to divorce.
b. DISTRIBUTIONS AFTER ANNUITY COMMENCEMENT DATE.
Annuity payments made periodically after the Annuity Commencement Date are
excluded from gross income to the extent that part of the amount of the payment
bears the same ratio to the payment as the "investment in the contract" bears to
the expected return under the Contract ("exclusion ratio").
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16 HARTFORD LIFE INSURANCE COMPANY
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i. When the total of amounts excluded from income by application of the
exclusion ratio is equal to the investment in the contract as of the Annuity
Commencement Date, any additional payments (including surrenders) will be
entirely includable in gross income.
ii. If the annuity payments cease by reason of the death of the Annuitant and,
as of the date of death, the amount of annuity payments excluded from gross
income by the exclusion ratio does not exceed the investment in the contract
as of the Annuity Commencement Date, then the remaining portion of
unrecovered investment shall be allowed as a deduction for the last taxable
year of the Annuitant.
iii. Generally, nonperiodic amounts received or deemed received after the
Annuity Commencement Date are not entitled to any exclusion ratio and shall
be fully includable in gross income. However, upon a full surrender after
the Annuity Commencement Date, only the excess of the amount received (after
any surrender charge) over the remaining "investment in the contract" shall
be includable in gross income (except to the extent that the aggregation
rule referred to in the next subparagraph c. may apply).
iv. For annuity payments made under a qualified plan, the portion of each
annuity payment that represents nontaxable return of basis is generally
equal to the total investment in the Contract as of the Annuity Commencement
Date, divided by the number of anticipated payments, which is determined by
reference to the age of the Annuitant under a table in Section 72(d) of the
Code.
c. AGGREGATION OF TWO OR MORE ANNUITY CONTRACTS.
Contracts issued after October 21, 1988 by the same insurer (or affiliated
insurer) to the same Contract Owner within the same calendar year (other than
certain contracts held in connection with a tax-qualified retirement
arrangement) will be treated as one annuity Contract for the purpose of
determining the taxation of distributions prior to the Annuity Commencement
Date. An annuity contract received in a tax-free exchange for another annuity
contract or life insurance contract may be treated as a new Contract for this
purpose. Hartford believes that for any annuity subject to such aggregation, the
values under the Contracts and the investment in the contracts will be added
together to determine the taxation under subparagraph 2.a., above, of amounts
received or deemed received prior to the Annuity Commencement Date. Withdrawals
will first be treated as withdrawals of income until all of the income from all
such Contracts is withdrawn. As of the date of this Prospectus, there are no
regulations interpreting this provision.
d. 10% PENALTY TAX -- APPLICABLE TO CERTAIN
WITHDRAWALS AND ANNUITY PAYMENTS.
i. If any amount is received or deemed received on the Contract (before or
after the Annuity Commencement Date), the Code applies a penalty tax equal
to ten percent of the portion of the amount includable in gross income,
unless an exception applies.
ii. In general, the 10% penalty tax will not apply to the following
distributions (exceptions vary based upon the precise plan involved):
1. Distributions made on or after the date the recipient has attained the
age of 59 1/2.
2. Distributions made on or after the death of the holder or where the
holder is not an individual, the death of the primary annuitant.
3. Distributions attributable to a recipient's becoming disabled.
4. A distribution that is part of a scheduled series of substantially equal
periodic payments for the life (or life expectancy) of the recipient (or
the joint lives or life expectancies of the recipient and the
recipient's Beneficiary).
5. Distributions of amounts which are allocable to the "investment in the
contract" prior to August 14, 1982 (see next subparagraph e.).
e. SPECIAL PROVISIONS AFFECTING CONTRACTS OBTAINED THROUGH A TAX-FREE EXCHANGE
OF OTHER ANNUITY OR LIFE INSURANCE CONTRACTS PURCHASED PRIOR TO AUGUST 14,
1982.
If the Contract was obtained by a tax-free exchange of a life insurance or
annuity Contract purchased prior to August 14, 1982, then any amount received or
deemed received prior to the Annuity Commencement Date shall be deemed to come
(1) first from the amount of the "investment in the contract" prior to August
14, 1982 ("pre-8/14/82 investment") carried over from the prior Contract, (2)
then from the portion of the "income on the contract" (carried over to, as well
as accumulating in, the successor Contract) that is attributable to such
pre-8/14/82 investment, (3) then from the remaining "income on the contract" and
(4) last from the remaining "investment in the contract." As a result, to the
extent that such amount received or deemed received does not exceed such
pre-8/14/82 investment, such amount is not includable in gross income. In
addition, to the extent that such amount received or deemed received does not
exceed the sum of (a) such pre-8/14/82 investment and (b) the "income on the
contract" attributable thereto, such amount is not subject to the 10% penalty
tax. In all other respects, amounts received or deemed received from such post-
exchange Contracts are generally subject to the rules described in this
subparagraph 3.
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HARTFORD LIFE INSURANCE COMPANY 17
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f. REQUIRED DISTRIBUTIONS
i. Death of Contract Owner or Primary Annuitant
Subject to the alternative election or spouse beneficiary provisions in ii.
or iii. below:
1. If any Contract Owner dies on or after the Annuity Commencement Date and
before the entire interest in the Contract has been distributed, the
remaining portion of such interest shall be distributed at least as
rapidly as under the method of distribution being used as of the date of
such death;
2. If any Contract Owner dies before the Annuity Commencement Date, the
entire interest in the Contract will be distributed within 5 years after
such death; and
3. If the Contract Owner is not an individual, then for purposes of 1. or
2. above, the primary annuitant under the Contract shall be treated as
the Contract Owner, and any change in the primary annuitant shall be
treated as the death of the Contract Owner. The primary annuitant is the
individual, the events in the life of whom are of primary importance in
affecting the timing or amount of the payout under the Contract.
ii. Alternative Election to Satisfy Distribution Requirements If any portion of
the interest of a Contract Owner described in i. above is payable to or for
the benefit of a designated beneficiary, such beneficiary may elect to have
the portion distributed over a period that does not extend beyond the life
or life expectancy of the beneficiary. The election and payments must begin
within a year of the death.
iii. Spouse Beneficiary
If any portion of the interest of a Contract Owner is payable to or for the
benefit of his or her spouse, and the Annuitant or Contingent Annuitant is
living, such spouse shall be treated as the Contract Owner of such portion
for purposes of section i. above.
D. INFORMATION REGARDING
TAX-QUALIFIED PLANS
The tax rules applicable to tax-qualified contract owners, including
restrictions on contributions and distributions, taxation of distributions and
tax penalties, vary according to the type of plan as well as the terms and
conditions of the plan itself. Various tax penalties may apply to contributions
in excess of applicable limits, distributions prior to age 59 1/2 (subject to
certain exceptions), distributions which do not conform to applicable
commencement and minimum distribution rules, and certain other transactions with
respect to tax-qualified plans. Therefore, this summary does not attempt to
provide more than general information about the tax rules associated with use of
a Contract by a tax-qualified retirement plan. Contract owners, plan
participants and beneficiaries are cautioned that the rights and benefits of any
person to benefits may be controlled by the terms and conditions of the
tax-qualified retirement plan itself, regardless of the terms and conditions of
a Contract, but that Hartford is not bound by the terms and conditions of such
plans to the extent such terms conflict with a Contract, unless Hartford
specifically consents to be bound. Additionally, some tax-qualified retirement
plans are subject to distribution and other requirements which are not
incorporated into Hartford's administrative procedures. Contract owners,
participants and beneficiaries are responsible for determining that
contributions, distributions and other transactions comply with applicable law.
Because of the complexity of these rules, owners, participants and beneficiaries
are encouraged to consult their own tax advisors as to specific tax
consequences.
1. TAX-QUALIFIED PENSION OR PROFIT-SHARING PLANS.
Provisions of the Code permit eligible employers to establish tax-qualified
pension or profit sharing plans (described in Section 401(a) and 401(k), if
applicable, and exempt from taxation under Section 501(a) of the Code), and
Simplified Employee Pension Plans (described in Section 408(k)). Such plans are
subject to limitations on the amount that may be contributed, the persons who
may be eligible to participate and the time when distributions must commence.
Employers intending to use these contracts in connection with tax-qualified
pension or profit-sharing plans should seek competent tax and other legal
advice.
2. TAX SHELTERED ANNUITIES UNDER SECTION 403(b).
Section 403(b) of the Code permits public school employees and employees of
certain types of charitable, educational and scientific organizations, as
specified in Section 501(c)(3) of the Code, to purchase annuity contracts, and,
subject to certain limitations, to exclude such contributions from gross income.
Generally, such contributions may not exceed the lesser of $10,000 (indexed) or
20% of an employee's "includable compensation" for such employee's most recent
full year of employment, subject to other adjustments. Special provisions under
the Code may allow some employees to elect a different overall limitation.
Tax-sheltered annuity programs under Section 403(b) are subject to a
PROHIBITION AGAINST DISTRIBUTIONS FROM THE CONTRACT ATTRIBUTABLE TO
CONTRIBUTIONS MADE PURSUANT TO A SALARY REDUCTION AGREEMENT, unless such
distribution is made:
(a) after the participating employee attains age 59 1/2;
(b) upon separation from service;
(c) upon death or disability; or
<PAGE>
18 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
(d) in the case of hardship (and in the case of hardship, any income
attributable to such contributions may not be distributed).
Generally, the above restrictions do not apply to distributions attributable
to cash values or other amounts held under a Section 403(b) contract as of
December 31, 1988.
3. DEFERRED COMPENSATION PLANS UNDER SECTION 457.
Employees and independent contractors performing services for eligible
employers may have contributions made to an Eligible Deferred Compensation Plan
of their employer in accordance with the employer's plan and Section 457 of the
Code. Section 457 places limitations on contributions to Eligible Deferred
Compensation Plans maintained by a State or other tax-exempt organization. For
these purposes, the term "State" means a State, a political sub-division of a
State, and an agency or instrumentality of a State or political sub-division of
a State. Generally, the limitation is 33 1/3% of includable compensation
(typically 25% of gross compensation) or, for 1998, $8,000 (indexed), whichever
is less. Such a plan may also provide for additional "catch-up" deferrals during
the three taxable years ending before a Participant attains normal retirement
age.
An employee electing to participate in an Eligible Deferred Compensation
Plan should understand that his or her rights and benefits are governed strictly
by the terms of the plan and that the employer is the legal owner of any
contract issued with respect to the plan. The employer, as owner of the
contract(s), retains all voting and redemption rights which may accrue to the
contract(s) issued with respect to the plan. The participating employee should
look to the terms of his or her plan for any charges in regard to participating
therein other than those disclosed in this Prospectus. Participants should also
be aware that effective August 20, 1996, the Small Business Job Protection Act
of 1996 requires that all assets and income of an Eligible Deferred Compensation
Plan established by a governmental employer which is a State, a political
subdivision of a State, or any agency or instrumentality of a State or political
subdivision of a State, must be held in trust (or under certain specified
annuity contracts or custodial accounts) for the exclusive benefit of
participants and their beneficiaries. Special transition rules apply to such
Eligible governmental Deferred Compensation Plans already in existence on August
20, 1996, and provide that such plans need not establish a trust before January
1, 1999. However, this requirement of a trust does not apply to amounts under an
Eligible Deferred Compensation Plan of a tax-exempt (non-governmental)
organization, and such amounts will be subject to the claims of such tax-exempt
employer's general creditors.
In general, distributions from an Eligible Deferred Compensation Plan are
prohibited under Section 457 of the Code unless made after the participating
employee attains age 70 1/2, separates from service, dies, or suffers an
unforeseeable financial emergency. Present federal tax law does not allow
tax-free transfers or rollovers for amounts accumulated in a Section 457 plan
except for transfers to other Section 457 plans in limited cases.
4. INDIVIDUAL RETIREMENT ANNUITIES UNDER SECTION 408.
Section 408 of the Code permits eligible individuals to establish individual
retirement programs through the purchase of Individual Retirement Annuities
("IRAs"). IRAs are subject to limitations on the amount that may be contributed,
the contributions that may be deducted from taxable income, the persons who may
be eligible and the time when distributions may commence. Also, distributions
from certain qualified plans may be "rolled-over" on a tax-deferred basis into
an IRA.
The Contracts may be offered as SIMPLE IRAs in connection with a SIMPLE IRA
plan of an employer. Special rollover rules apply to SIMPLE IRAs. Amounts can be
rolled over from one SIMPLE IRA to another SIMPLE IRA. However, amounts can be
rolled over from a SIMPLE IRA to a regular IRA only after two years have expired
since the participant first commenced participation in your employer's SIMPLE
IRA plan. Amounts cannot be rolled over to a SIMPLE IRA from a qualified plan or
a regular IRA. Hartford is a non-designated financial institution.
Beginning in 1998, the Contracts may be offered as ROTH IRAs under Section
408A of the Code. Contributions to a ROTH IRA are not deductible. Subject to
special limitations, a regular IRA may be converted into a ROTH IRA or a
distribution from a regular IRA may be rolled over to a ROTH IRA. However, a
conversion or a rollover from a regular IRA to a ROTH IRA is not excludable from
gross income. If certain conditions are met, qualified distributions from a ROTH
IRA are tax-free.
5. FEDERAL TAX PENALTIES AND WITHHOLDING.
Distributions from retirement plans are generally taxed under Section 72 of
the Code. Under these rules, a portion of each distribution may be excludable
from income. The excludable amount is the portion of the distribution which
bears the same ratio as the after-tax contributions bear to the expected return.
a. PREMATURE DISTRIBUTION.
Distributions from a tax-qualified plan before the Participant attains age
59 1/2 are generally subject to an additional penalty tax equal to 10% of the
taxable portion of the distribution. The 10% penalty does not apply to
distributions made after the employee's death, on account of disability, for
eligible medical expenses and distributions in the form of a life annuity and,
except in the case of an IRA, certain distributions after separation from
service after age 55. For these purposes, a life annuity means a scheduled
series of substantially equal periodic payments for the life or
<PAGE>
HARTFORD LIFE INSURANCE COMPANY 19
- --------------------------------------------------------------------------------
life expectancy of the Participant (or the joint lives or life expectancies of
the Participant and Beneficiary).
In addition, effective for distributions made from an IRA after December 31,
1997, there is no such penalty tax on distributions that do not exceed the
amount of certain qualifying higher education expenses, as defined by Section
72(t)(7) of the Code, or which are qualified first-time homebuyer distributions
meeting the requirements of Section 72(t)(8) of the Code.
If you are a participant in a SIMPLE IRA plan, you should be aware that the
10% penalty tax discussed above is increased to 25% with respect to non-exempt
premature distributions made from your SIMPLE IRA during the first two years
following the date you first commenced participation in any SIMPLE IRA plan of
your employer.
b. MINIMUM DISTRIBUTION TAX.
If the amount distributed is less than the minimum required distribution for
the year, the Participant is subject to a 50% tax on the amount that was not
properly distributed.
An individual's interest in a tax-qualified retirement plan generally must
be distributed, or begin to be distributed, not later than April 1 of the
calendar year following the later of (i) the calendar year in which the
individual attains age 70 1/2 or (ii) the calendar year in which the individual
retires from service with the employer sponsoring the plan ("required beginning
date"). However, the required beginning date for an individual who is a five (5)
percent owner (as defined in the Code), or who is the owner of an IRA, is April
1 of the calendar year following the calendar year in which the individual
attains age 70 1/2. The entire interest of the Participant must be distributed
beginning no later than the required beginning date over a period which may not
extend beyond a maximum of the life expectancy of the Participant and a
designated Beneficiary. Each annual distribution must equal or exceed a "minimum
distribution amount" which is determined by dividing the account balance by the
applicable life expectancy. This account balance is generally based upon the
account value as of the close of business on the last day of the previous
calendar year. In addition, minimum distribution incidental benefit rules may
require a larger annual distribution.
If an individual dies before reaching his or her required beginning date,
the individual's entire interest must generally be distributed within five years
of the individual's death. However, this rule will be deemed satisfied, if
distributions begin before the close of the calendar year following the
individual's death to a designated Beneficiary (or over a period not extending
beyond the life expectancy of the beneficiary). If the Beneficiary is the
individual's surviving spouse, distributions may be delayed until the individual
would have attained age 70 1/2.
If an individual dies after reaching his or her required beginning date or
after distributions have commenced, the individual's interest must generally be
distributed at least as rapidly as under the method of distribution in effect at
the time of the individual's death.
c. WITHHOLDING
In general, distributions from IRAs and plans described in Section 457 of
the Code are subject to regular wage withholding rules. Periodic distributions
from other tax-qualified retirement plans that are made for a specified period
of 10 or more years or for the life or life expectancy of the participant (or
the joint lives or life expectancies of the participant and beneficiary) are
generally subject to federal income tax withholding as if the recipient were
married claiming three exemptions. The recipient of periodic distributions may
generally elect not to have withholding apply or to have income taxes withheld
at a different rate by providing a completed election form.
Other distributions from such other tax-qualified retirement plans are
generally subject to mandatory income tax withholding at the flat rate of 20%
unless such distributions are:
1) the non-taxable portion of the distribution;
2) required minimum distributions; or
3) direct transfer distributions.
Direct transfer distributions are direct payments to an IRA or to another
eligible retirement plan under Code section 401(a)(31).
E. ANNUITY PURCHASES BY NONRESIDENT
ALIENS AND FOREIGN CORPORATIONS
The discussion above provides general information regarding U.S. federal
income tax consequences to annuity purchasers that are U.S. citizens or
residents. Purchasers that are not U.S. citizens or residents will generally be
subject to U.S. federal income tax and withholding on annuity distributions at a
30% rate, unless a lower treaty rate applies. In addition, purchasers may be
subject to state premium tax, other state and/or municipal taxes, and taxes that
may be imposed by the purchaser's country of citizenship or residence.
Prospective purchasers are advised to consult with a qualified tax adviser
regarding U.S., state, and foreign taxation with respect to an annuity purchase.
<PAGE>
20 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
THE COMPANY
A. BUSINESS OF HARTFORD LIFE
INSURANCE COMPANY
ORGANIZATION
Hartford Life Insurance Company ("Hartford") is a stock life insurance
company engaged in the business of writing life insurance, both individual and
group, in all states of the United States and the District of Columbia. Hartford
was originally incorporated under the laws of Massachusetts on June 5, 1902, and
was subsequently redomiciled to Connecticut. Its offices are located in
Simsbury, Connecticut; however, its mailing address is P.O. Box 2999, Hartford,
CT 06104-2999. Hartford is a subsidiary of Hartford Fire Insurance Company, one
of the largest multiple line insurance carriers in the United States. Hartford
is ultimately owned by The Hartford Financial Services Group, Inc., a Delaware
corporation.
Hartford is rated A+ (superior) by A.M. Best and Company, Inc. on the basis
of its financial soundness and operating performance. Hartford is rated AA by
Standard & Poor's Corporation and AA+ by Duff and Phelps, on the basis of its
claims paying ability. These ratings do not apply to the investment performance
of the Sub-Accounts of the Separate Accounts. The ratings apply to Hartford's
ability to meet its insurance obligations including those described in this
Prospectus.
Hartford 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, 1997, Hartford's total assets of $98 billion included
14% of fixed maturities and 70% of separate accounts with the remainder
representing equity securities, cash, policy loans, reinsurance recoverable,
deferred policy acquisition costs and other assets.
The reportable segments of the Company and its subsidiaries are:
Annuity
Individual Life Insurance
Employee Benefits
Guaranteed Investment Contracts
Corporate 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 business segments: Annuity,
Individual Life Insurance and Employee Benefits. The Company also maintains a
Guaranteed Investment Contracts segment, which is primarily comprised of
guaranteed rate contract business written prior to 1995 ("Closed Book GRC") and
a Corporate Operation through which it reports net investment income on assets
representing surplus not assigned to any of its business segments and certain
other revenues and expenses not specifically allocable to any of its business
segments. The following is a description of each segment, including a discussion
of principal products, methods of distribution, and competitive environments.
ANNUITY
The Annuity segment focuses on the savings and retirement needs of the
growing number of individuals who are preparing for retirement or have already
retired. The Annuity 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. The Annuity segment accounted for $206 million
of the total segment earnings of the Company for the year ended December 31,
1997. Growth in the Company's assets has been driven by its sale of variable
annuities. For the year ended December 31, 1997, the Company was the largest
writer of both individual annuities and individual variable annuities. New sales
of individual annuities were approximately $10.2 billion in 1997, bringing total
individual annuity account value to $56.3 billion as of December 31, 1997. Of
the total individual annuity account value, $46.9 billion relates to individual
variable annuities and $9.0 billion relates to fixed MVA annuities held in
guaranteed separate accounts. Of the Company's $46.9 billion in individual
variable annuities in force, $43.3 billion, or 92%, are held in non-guaranteed
separate accounts, as of December 31, 1997. In contrast, the next nine largest
writers in the United States of variable annuities held an average of 76% of
their variable annuities in force in non-guaranteed separate accounts, as of
December 31, 1997, 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 450
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
<PAGE>
HARTFORD LIFE INSURANCE COMPANY 21
- --------------------------------------------------------------------------------
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 $55.4 billion in 1997, 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 $55
million in 1997.
The primary Individual Life distribution system is focused on products
designed for high-end estate and business planning. The high-end estate and
business planning organization is managed through a sales office system of
qualified insurance professionals with specialized training in sophisticated
life insurance sales. These employees have access to an extensive network of
licensed life insurance agents. High-end sales also occur, in certain regions,
through a group of independent life insurance marketing organizations, each of
which maintains a separate marketing agreement with the Company. In addition,
other distribution relationships exist to provide incremental sales of life
insurance products for both estate planning and basic protection against lost
income from death. Furthermore, sales of single premium variable life are
generated through the individual annuity distribution system. Along with HLA,
61% of total sales were produced by the sales office system, 11% resulted from
the individual annuity distribution system with the remaining 28% of sales
generated by other life insurance distribution relationships during 1997.
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 1997 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 $32 million in 1997.
The Employee Benefits segment uses an experienced group of Company employees
to distribute its products through a variety of distribution outlets, including
insurance agents, brokers, associations and third-party administrators.
B. SELECTED FINANCIAL DATA
The following selected financial data for Hartford, its subsidiaries and
affiliated companies should be read in conjunction with the consolidated
financial statements and notes thereto included in this Prospectus beginning on
page 36.
<PAGE>
22 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
REVENUES
Premiums and other considerations........................................ $ 1,637 $ 1,705 $ 1,487 $ 1,100 $ 747
Net investment income.................................................... 1,368 1,397 1,328 1,292 1,051
Net realized (losses) gains.............................................. 4 (213) (11) 7 16
--------- --------- --------- --------- ---------
Total Revenues......................................................... 3,009 2,889 2,804 2,399 1,814
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
BENEFITS, CLAIMS AND EXPENSES
Benefits, claims and claim adjustment expenses........................... 1,379 1,535 1,422 1,405 1,046
Amortization of deferred policy acquisition costs........................ 335 234 199 145 113
Dividends to policyholders............................................... 240 635 675 419 227
Other insurance expenses................................................. 586 427 317 227 210
--------- --------- --------- --------- ---------
Total Benefits, Claims and Expenses.................................... 2,540 2,831 2,613 2,196 1,596
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Income before income tax expense......................................... 469 58 191 203 218
Income tax expense....................................................... 167 20 62 65 75
Income before cumulative effect of changes in accounting principles...... 302 38 129 138 143
Cumulative effect of changes in accounting principles net of tax benefits
of $7................................................................... -- -- -- -- --
--------- --------- --------- --------- ---------
NET INCOME................................................................. $ 302 $ 38 $ 129 $ 138 $ 143
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
<CAPTION>
1992
---------
<S> <C>
REVENUES
Premiums and other considerations........................................ $ 259
Net investment income.................................................... 907
Net realized (losses) gains.............................................. 5
---------
Total Revenues......................................................... 1,171
---------
---------
BENEFITS, CLAIMS AND EXPENSES
Benefits, claims and claim adjustment expenses........................... 797
Amortization of deferred policy acquisition costs........................ 55
Dividends to policyholders............................................... 47
Other insurance expenses................................................. 138
---------
Total Benefits, Claims and Expenses.................................... 1,037
---------
---------
Income before income tax expense......................................... 134
Income tax expense....................................................... 45
Income before cumulative effect of changes in accounting principles...... 89
Cumulative effect of changes in accounting principles net of tax benefits
of $7................................................................... (13)
---------
NET INCOME................................................................. $ 76
---------
---------
</TABLE>
C. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATION (DOLLAR AMOUNTS IN MILLIONS)
1. CONSOLIDATED RESULTS
OPERATING SUMMARY
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Revenues..................................... $ 3,009 $ 2,889
Expenses..................................... 2,707 2,851
--------- ---------
Net income................................... $ 302 $ 38
--------- ---------
--------- ---------
</TABLE>
Revenues increased $120, or 4%, to $3 billion in 1997 from $2.9 billion in
1996. Revenues were impacted by the Health Insurance Portability and
Accountability Act of 1996 ("HIPA Act of 1996"), which phases out the
deductibilty of interest expense on policy loans by the end of 1998, virtually
eliminating all new sales of leveraged corporate owned life insurance ("COLI"),
and by the Guaranteed Investment Contracts segment ("GIC"), which had a loss of
$225 in 1996, primarily related to a closed block of guaranteed rate contract
business ("Closed Book GRC"). Excluding COLI and GIC, revenues increased $293,
or 20%, to $1.8 billion in 1997 as compared to $1.5 billion 1996. This growth
was driven by increased Individual Annuity revenues of $256, or 42%, in 1997 as
compared to 1996. This increase is primarily related to premiums and other
considerations where individual variable annuity fee income grew $198, or 54%,
in 1997 as compared to 1996, primarily resulting from increased average
individual variable annuity account values of $13.1 billion, or 49%, to $39.7
billion in 1997. This solid growth in average account value was due to strong
variable annuity sales of $9.7 billion and significant stock market
appreciation. In addition, Individual Life Insurance premiums and other
considerations grew $36, or 13%, reflecting the impact of applying cost of
insurance charges and variable life fees to a larger block of business.
Individual Life Insurance account values increased $555, or 17%, to $3.8 billion
in 1997 as compared to 1996.
Expenses decreased $144 in 1997 as compared to 1996. Excluding COLI and GIC
for the reasons described above, expenses increased $255, or 20%, to $1.5
billion in 1997 as compared to $1.2 billion in 1996. Benefits, claims and
expenses related to the Annuity segment increased $210, or 28%, in 1997 as
compared to 1996. This increase was driven by increased amortization of deferred
policy acquisition costs of $76, or 44%, due to strong sales in both 1997 and
1996, as well as increased operating expenses of $101, or 65%, reflective of the
strong growth in this segment. In addition, Individual Life Insurance benefits,
claims and expenses grew $30, or 8%, primarily related to amortization of
deferred policy acquisition costs associated with this growing block of
business.
<PAGE>
HARTFORD LIFE INSURANCE COMPANY 23
- --------------------------------------------------------------------------------
ANNUITY
OPERATING SUMMARY
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Revenues....................................... $ 1,269 $ 968
Expenses....................................... 1,063 820
--------- ---------
Net income..................................... $ 206 $ 148
--------- ---------
--------- ---------
</TABLE>
Revenues increased $301, or 31%, to $1.3 billion in 1997 from $1.0 billion
in 1996. This increase was principally the result of a $234 increase in premiums
and other considerations, reflecting a substantial increase in aggregate fees
earned due to the segment's growing block of separate account assets. The
average separate account assets of this segment increased to $50.7 billion in
1997, from $37.2 billion in 1996 primarily due to sales of individual variable
annuities of approximately $9.7 billion in 1997, as well as significant market
appreciation. Also, Group Annuity sales were $820 in 1997, an increase of $186,
or 29%, over 1996. In addition, net investment income grew $67, or 15%, to $500
in 1997 primarily due to growth in average general account assets which
increased to $8.1 billion in 1997 from $7.2 billion in 1996 largely as a result
of growth in the general account portion of the individual variable annuity
products.
The growth in this segment in 1997 also resulted in an increase in expenses
of $243, or 30%, to $1.1 billion in 1997 from $820 in 1996. Benefits, claims and
claim adjustment expenses grew $33, or 8%, in 1997 primarily related to
increased interest credited on Group Annuity general account liabilites.
Amortization of DPAC related to the Individual Annuity operation grew $82, or
52%, in 1997 as prior and current year sales remained strong. Also, other
business expenses increased $101, in 1997, as a result of the growth in this
segment.
A 33% growth in average account value in 1997, coupled with a reduction in
individual annuity operating expenses as a percentage of total individual
annuity account value to 25 basis points in 1997 from 28 basis points in 1996,
contributed to the increase in net income of $58, or 39%, to $206 from $148 in
1996.
INDIVIDUAL LIFE INSURANCE
OPERATING SUMMARY
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Revenues......................................... $ 487 $ 440
Expenses......................................... 432 396
--------- ---------
Net income....................................... $ 55 $ 44
--------- ---------
--------- ---------
</TABLE>
Revenues in 1997 increased $47, or 11%, to $487 from $440 in 1996. In the
first quarter of 1996, a block of business was assumed from Investors Equity
Life Insurance Company ("IEL") which increased 1996 revenues by $9. Excluding
this transaction, 1997 revenues increased $56, or 13%, as compared to 1996,
reflecting the impact of applying cost of insurance charges and variable life
fees to a larger block of business. Account values increased $555, or 17%, to
$3.8 billion in 1997 from $3.2 billion in 1996. Sales were $140 in 1997, an
increase of 8% over 1996. Variable life product sales comprised 70%, or $98, of
total 1997 sales and grew $23, or 31%, over 1996 levels. Expenses increased $36,
or 9%, to $432 in 1997 from $396 in 1996. Excluding IEL, expenses increased $45,
or 12%, in 1997. This increase was primarily driven by an increase in
amortization of DPAC of $23 in 1997 related to the growth in new variable life
business.
EMPLOYEE BENEFITS
OPERATING SUMMARY
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Revenues....................................... $ 972 $ 1,366
Expenses....................................... 940 1,337
--------- ---------
Net income..................................... $ 32 $ 29
--------- ---------
--------- ---------
</TABLE>
Revenues decreased $394 to $972 in 1997, which was primarily attributable to
the COLI business for which associated revenues decreased $380. The decrease in
COLI revenues is primarily a result of the elimination of sales of leveraged
COLI due to the HIPA Act of 1996, which phases out the deductibility of interest
on policy loans under leveraged COLI by the end of 1998. The Company continues
to sell variable COLI and recorded $3.6 billion of new deposits in 1997,
increasing total account value to $12.3 billion at December 31, 1997 compared to
$8.5 billion at December 31, 1996.Expenses decreased $397 to $940 in 1997, which
generally reflected a decrease in dividends to policyholders of $394, or 62%,
primarily due to the elimination of sales of leveraged COLI as discussed above.
Net income increased $3, or 10%, in 1997 as compared to 1996 due to an increase
in COLI of $1 and the sale of a block of reinsurance business which resulted in
a gain of approximately $2, after tax.
GUARANTEED INVESTMENT CONTRACTS
OPERATING SUMMARY
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Revenues....................................... $ 241 $ 34
Expenses....................................... 241 259
--------- ---------
Net income..................................... $ -- $ (225)
--------- ---------
--------- ---------
</TABLE>
The GIC segment consists of guaranteed rate contract ("GRC") business that
is supported by assets held in either the Company's general account or a
guaranteed separate
<PAGE>
24 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
account and includes a closed block of guaranteed rate contracts ("Closed Book
GRC"). Historically, a significant majority of these contracts were sold as
general account contracts with fixed rates and fixed maturities. The Company
decided in 1995, after a thorough review of its GRC business, that it would
significantly de-emphasize general account GRC, choosing instead to focus its
distribution efforts on other products sold through other segments and selling
general account GRC primarily as an accommodation to customers. From 1992 to
1994, the GIC segment sold over $5 billion of GRC. In contrast, the GIC segment
sold only $47 and $108 of general account GRC in 1997 and 1996, respectively.
Consistent with management's expectations, the segment had no net income in 1997
and expects no material income or loss from the GIC segment in the future.
Closed Book GRC results in 1996 were negatively affected by lower investment
rates and earnings in the related investment portfolio (primarily consisting of
collateralized mortgage obligations and mortgage backed securities) due to
prepayments experienced in excess of assumed and historical levels. Closed Book
GRC was also affected by the interest rate rise in 1994 when the duration of its
assets lengthened relative to that of the liabilities.
Although the Closed Book GRC asset portfolio as a whole is duration matched
with its liabilities, certain investments continue to have a longer maturity
than their corresponding liabilities and will need to be liquidated prior to
maturity in order to meet the specific liability commitments. To protect the
existing value of these investments, the Company entered into various hedge
transactions in late September 1996 which substantially eliminated further
fluctuation in fair value of the investments due to interest rate changes. As of
December 31, 1997, Closed Book GRC had general account assets and liabilities of
$2.2 billion. The scheduled maturities are $1.0 billion, or 45%, in 1998, $0.7
billion, or 32%, in 1999 and $0.5 billion, or 23%, thereafter.
2. BUSINESS SEGMENT INFORMATION
For business segment information, see Note 14 to Notes to Consolidated
Financial Statements.
D. REINSURANCE
Hartford cedes insurance to non-affiliated insurers in order to limit its
maximum loss. Such transfer does not relieve Hartford of its primary liability.
Hartford also assumes insurance from other insurers. Group life and health
insurance is substantially reinsured to affiliated companies.
E. RESERVES
In accordance with applicable insurance regulations, Hartford establishes
and carries as liabilities actuarially determined reserves which are calculated
to meet its future obligations. The reserves are based on actuarially recognized
methods using prescribed morbidity and mortality tables in general use in the
United States, which are modified to reflect Hartford's actual experience when
appropriate. These reserves are computed at amounts that, with additions from
premiums to be received and with interest on such reserves compounded annually
at certain assumed rates, are expected to be sufficient to meet Hartford's
policy obligations at their maturities or in the event of an insured's death.
Reserves include unearned premiums, premium deposits, claims reported but not
yet paid, claims incurred but not reported and claims in the process of
settlement. Hartford's reserves for assumed reinsurance are computed on bases
essentially comparable to direct insurance reserves.
F. INVESTMENTS
INVESTMENT OPERATIONS
The Company's investments are managed by its investment strategy group which
consists of a risk management unit and a portfolio management unit and directly
reports to senior management of the Company. The risk management unit is
responsible for monitoring and managing the Company's asset/liability profile
and establishing investment objectives and guidelines. The portfolio management
unit is responsible for determining, within specified risk tolerances and
investment guidelines, the general asset allocation, duration, convexity and
other characteristics of the Company's general account and guaranteed separate
account investment portfolios. The Hartford Investment Management Company, a
wholly owned subsidiary of The Hartford, executes the investment plan of the
investment strategy group including the identification and purchase of
securities that fulfill the objectives of the strategy group.
The primary investment objective of the Company's general account and
guaranteed separate accounts is to maximize after-tax returns consistent with
acceptable risk parameters (including the management of the interest rate
sensitivity of invested assets relative to that of policyholder obligations).
The Company does not have any financial instruments entered into for trading
purposes. The Company is exposed to two primary sources of investment risk:
credit risk, relating to the uncertainty associated with an obligor's continued
ability to make timely payment of principal and interest, and interest rate
risk, relating to the market price and/or cash flow variability associated with
changes in market yield curves. See the Asset-Liability Management Strategies
section below for further discussion of the Company's approach to managing these
investment risks.
<PAGE>
HARTFORD LIFE INSURANCE COMPANY 25
- --------------------------------------------------------------------------------
The Company's general account consists of a diversified portfolio of
investments. Although all the assets of the general account support all the
Company's liabilities, the Company's investment strategy group has developed
separate investment portfolios for specific classes of product liabilities
within the general account. The strategy group works closely with the business
lines to develop specific investment guidelines, including duration targets,
asset allocation and convexity constraints, asset/liability mismatch tolerances
and return objectives, for each product line in order to achieve each product
line's individual risk and return objectives.
Invested assets in the Company's general account totaled $18.2 billion at
December 31, 1997 and were comprised of $14.2 billion of fixed maturities, $3.8
billion of policy loans, and other investments of $227. Policy loans, which had
a weighted-average interest rate of 11.2%, as of December 31, 1997, are secured
by the cash value of the underlying life insurance policies. These loans do not
mature in a conventional sense, but expire in conjunction with the related
policy liabilities.
During 1997, the Company continued to concentrate on reducing exposure to
collateralized mortgage obligations ("CMOs") and reallocated the funds into
public and private corporate bonds, commercial mortgage-backed securities
("MBSs") and other nonresidential asset-backed securities. In general,
commercial MBSs and asset-backed securities, although subject to prepayment
risk, are significantly less sensitive to changes in interest rates as compared
to CMOs and MBSs.
As of December 31, 1997 and 1996, approximately 22.1% and 13.2%,
respectively, of the Company's fixed maturity portfolio was invested in private
placement securities (including Rule 144A offerings). Private placement
securities are generally less liquid than public securities; however, covenants
for private placements are designed to mitigate the impact of such increased
liquidity risk. Most of the private placement securities in the Company's
portfolio are rated by nationally recognized rating organizations.
INVESTED ASSET CHARACTERISTICS AND DERIVATIVE STRATEGIES
Invested MBSs assets totaled approximately $18.2 billion at December 31,
1997 and were comprised of asset-backed securities, including government agency
CMOs and MBSs of $5.2 billion, bonds and notes and short-term investments of
$8.8 billion, inverse floating securities of $75 million, and other investments
(primarily policy loans) of $4 billion. Policy loans of $3.7 billion, which
carry a weighted average interest rate of 11.2%, 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 following table reflects the principal amounts of the fixed and variable
rate fixed maturity portfolio at December 31, 1997, along with the respective
weighted average coupons by estimated maturity year. Expected maturities differ
from contractual maturities due to call or prepayment provisions. The weighted
average coupon on variable rate securities is based upon spot rates as of
December 31, 1997, and is primarily based upon the London Interbank Offered Rate
("LIBOR"). Callable bonds and notes are distributed to either call dates or
maturity depending on which date produces the most conservative yield. Asset
backed securities, collateralized mortgage obligations and mortgage backed
securities are distributed to maturity year based on estimates of the rate of
future prepayments of principal over the remaining life of the securities. These
estimates are developed using prepayment speeds provided in broker consensus
data. Such estimates are derived from prepayment speeds previously experienced
at the interest rate levels projected for the underlying collateral. Actual
prepayment experience may vary from these estimates. Financial instruments with
certain leverage features have been included in each of the fixed maturity
categories. These instruments have not been separately displayed because they
were immaterial to the Company's investment portfolio.
FIXED MATURITY INVESTMENTS MATURITY SCHEDULE
(IN MILLIONS)
<TABLE>
<CAPTION>
1997
1998 1999 2000 2001 2002 THEREAFTER TOTAL FAIR VALUE
------- ------- ------- ------- ----- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BONDS AND NOTES - CALLABLE
Fixed Rate
Par value $ 37 $ 50 $ 21 $ 13 $ 12 $ 333 $ 466 $ 435
Weighted average coupon 10.5% 7.5% 8.0% 7.6% 7.7% 5.4% 6.3%
Variable Rate
Par value $ 66 $ 15 $ 28 $ 33 $ 15 $ 863 $ 1,020 $ 966
Weighted average coupon 6.4% 6.7% 7.1% 6.0% 6.4% 6.5% 6.5%
</TABLE>
<PAGE>
26 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997
1998 1999 2000 2001 2002 THEREAFTER TOTAL FAIR VALUE
------- ------- ------- ------- ----- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BONDS AND NOTES - OTHER
Fixed Rate
Par value $2,762 $1,328 $1,192 $1,133 $897 $ 6,075 $13,387 $13,465
Weighted average coupon 3.9% 6.8% 7.1% 7.5% 7.7% 6.3% 6.1%
Variable Rate
Par value $ 140 $ 47 $ 138 $ -- $ 84 $ 841 $ 1,250 $ 1,141
Weighted average coupon 5.1% 1.3% 6.4% -- 5.7% 5.3% 5.3%
ASSET BACKED SECURITIES
Fixed Rate
Par value $ 211 $ 221 $ 433 $ 500 $220 $ 491 $ 2,076 $ 2,109
Weighted average coupon 6.9% 6.5% 6.7% 7.0% 6.8% 7.4% 6.9%
Variable Rate
Par value $ 39 $ 186 $ 184 $ 261 $305 $ 721 $ 1,696 $ 1,696
Weighted average coupon 6.2% 6.2% 6.2% 6.7% 6.2% 6.4% 6.4%
COLLATERALIZED MORTGAGE OBLIGATIONS
Fixed Rate
Par value $ 29 $ 170 $ 529 $ 307 $ 78 $ 506 $ 1,619 $ 1,582
Weighted average coupon 6.5% 6.0% 6.0% 5.6% 5.6% 6.1% 6.0%
Variable Rate
Par value $ 29 $ 11 $ 25 $ 13 $ 6 $ 346 $ 430 $ 408
Weighted average coupon 6.7% 6.6% 4.2% 6.7% 3.4% 7.7% 7.3%
COMMERCIAL MORTGAGE BACKED SECURITIES
Fixed Rate
Par value $ 4 $ 34 $ 176 $ 114 $118 $ 798 $ 1,244 $ 1,246
Weighted average coupon 8.6% 7.7% 6.9% 7.7% 7.0% 7.4% 7.3%
Variable Rate
Par value $ 20 $ 82 $ 75 $ 43 $153 $ 335 $ 708 $ 718
Weighted average coupon 6.1% 7.5% 7.0% 6.6% 6.5% 7.4% 7.1%
MORTGAGE BACKED SECURITIES
Fixed Rate
Par value $ 4 $ 25 $ 3 $ 41 $ 2 $ 424 $ 499 $ 511
Weighted average coupon 7.0% 7.0% 7.4% 6.2% 8.1% 7.5% 7.3%
Variable Rate
Par value $ -- $ -- $ -- $ -- $-- $ 24 $ 24 $ 24
Weighted average coupon -- -- -- -- -- 6.6% 6.6%
</TABLE>
ASSET-LIABILITY MANAGEMENT STRATEGIES
The Company employs several risk management tools to quantify and manage
market risk arising from its investments and interest sensitive liabilities. For
certain portfolios, management monitors the changes in present value between
assets and liabilities resulting from various interest rate scenarios using
integrated asset/liability measurement systems and a proprietary system that
simulates the impacts of parallel and non-parallel yield curve shifts. Based on
this current and prospective information, management implements risk reducing
techniques to improve the match between assets and liabilities.
Derivatives play an important role in facilitating the management of
interest rate risk, creating opportunities to efficiently fund obligations,
hedge against risks that affect the value of certain liabilities and adjust
broad investment risk characteristics as a result of any significant changes in
market risks. The Company uses a variety of derivatives, including swaps, caps,
floors, forwards and exchange-traded financial futures and options, in order to
hedge exposure primarily to interest rate risk on anticipated investment
purchases or existing assets and liabilities. The Company does not make a market
or trade derivatives for the express purpose of earning trading profits. The
Company's derivative program is monitored by an internal compliance unit and is
reviewed by senior management and Hartford Life's Finance Committee. The
notional amounts of derivative contracts, which represent the basis upon which
pay or receive amounts are calculated and are not reflective of credit risk,
totaled $6.5 billion at December 31, 1997 ($4.6 billion related to insurance
investments and $1.9 related to life insurance liabilities).
The strategies described below are used to manage the aforementioned risks.
<PAGE>
HARTFORD LIFE INSURANCE COMPANY 27
- --------------------------------------------------------------------------------
ANTICIPATORY HEDGING
For certain liabilities, the Company commits to the price of the product
prior to receipt of the associated premium or deposit. Anticipatory hedges are
routinely executed to offset the impact of changes in asset prices arising from
interest rate changes pending the receipt of premium or deposit and the
subsequent purchase of an asset. These hedges involve taking a long position in
interest rate futures or entering into an interest rate swap with duration
characteristics equivalent to the associated liabilities or anticipated
investments. The Company did not have any anticipatory hedges as of December 31,
1997.
LIABILITY HEDGING
Several products obligate the Company to credit a return to the contract
holder which is indexed to a market rate. To hedge risks associated with these
products, the Company typically enters into interest rate swaps to convert the
contract rate into a rate that trades in a more liquid and efficient market.
This hedging strategy enables the Company to customize contract terms and
conditions to customer objectives and satisfies the operation's asset/ liability
matching policy. Additionally, interest rate swaps are used to convert certain
fixed contract rates into floating rates, thereby allowing them to be
appropriately matched against floating rate assets. The notional amount of
derivatives used for liability hedging as of December 31, 1997 was $1.9 billion.
ASSET HEDGING
To meet the various policyholder obligations and to provide cost effective
prudent investment risk diversification, the Company may combine two or more
financial instruments to achieve the investment characteristics of a fixed
maturity security or that match an associated liability. The use of derivative
instruments in this regard effectively transfers unwanted investment risks or
attributes to others. The selection of the appropriate derivative instruments
depends on the investment risk, the liquidity and efficiency of the market, and
the asset and liability characteristics. The notional amount of asset hedges as
of December 31, 1997 was $1.8 billion.
PORTFOLIO HEDGING
The Company periodically compares the duration and convexity of its
portfolios of assets to their corresponding liabilities and enters into
portfolio hedges to reduce any difference to desired levels. Portfolio hedges
reduce the mismatch between assets and liabilities and offset the potential
impact to cash flows caused by changes in interest rates. The notional amount of
portfolio hedges as of December 31, 1997 was $2.8 billion.
INSURANCE LIABILITY CHARACTERISTICS
Insurance liabilities, other than non-guaranteed separate accounts, which
were backed by $39.4 billion in total assets (including investments of $28.7
billion), totaled $24.1 billion (net of ceded reinsurance and policy loans) at
December 31, 1997. These insurance liabilities consisted of future policy
benefits of $3.3 billion, other policyholder funds of $21 billion, guaranteed
separate accounts of $9.9 billion and reinsurance recoverables of $(6.3) billion
and policy loans of $(3.8) billion. Matching of the duration of the investments
with respective policyholder obligations is an explicit objective of the
Company's management strategy. The Company's insurance policy liabilities, along
with estimated duration periods based on the Company's internal actuarial
assumptions, can be summarized based on investment needs in the five categories
described below at December 31, 1997.
ESTIMATED DURATION YEARS (1)
($ IN BILLIONS)
<TABLE>
<CAPTION>
DESCRIPTION 1998 1999 2000 2001 2002 THERAFTER TOTAL
- -------------------------- ----- ----- ----- ----- ----- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed rate asset
accumulation vehicles.... $ 2.9 $ 1.8 $ 1.9 $ 1.2 $ 0.6 $ 4.3 $ 12.7
Weighted average credited
rate..................... 6.6% 7.1% 6.9% 6.9% 7.1% 6.6% 6.8%
Indexed asset accumulation
vehicles................. $ 0.1 $ 0.1 $ -- $ -- $ -- $ -- $ 0.2
Weighted average credited
rate..................... 5.7% 6.3% -- -- -- -- 5.9%
Interest credited asset
accumulation vehicles.... $ 4.2 $ 0.6 $ 0.4 $ 0.4 $ 0.5 $ 4.7 $ 10.8
Weighted average credited
rate..................... 5.7% 6.0% 6.0% 6.0% 6.1% 5.9% 5.8%
Long-term pay out
liabilities.............. $ 0.1 $ 0.1 $ -- $ -- $ -- $ 0.4 $ 0.6
Short-term pay out
liabilities.............. -- -- -- -- -- -- --
</TABLE>
- ------------
(1) As of December 31, 1997, the fair value of the Company's investment
contracts including guaranteed separate accounts was $21.7 billion.
FIXED RATE ASSET ACCUMULATION VEHICLES
Products in this category require the Company to pay a fixed rate for a
certain period of time. The cash flows are not interest sensitive because the
products are written with a market value adjustment feature and the liabilities
have protection against the early withdrawal of funds through surrender charges.
Product examples include fixed rate annuities with a market value adjustment and
fixed rate guaranteed investment contracts. Contract duration is dependent on
the policyholder's choice of guarantee period.
INDEXED ASSET ACCUMULATION VEHICLES
Products in this category are similar to the fixed rate asset accumulation
vehicles but require the Company to pay a rate that is determined by an external
index. The amount and/or timing of cash flows will therefore vary based on the
level of the particular index. The primary risks inherent in these products are
similar to the fixed rate asset accumulation vehicles, with an additional risk
that changes in the index may adversely affect profitability. Product examples
include indexed-guaranteed investment contracts with an estimated duration of up
to two years.
<PAGE>
28 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
INTEREST CREDITED ASSET ACCUMULATION VEHICLES
Products in this category credit interest to policyholders, subject to
market conditions and minimum guarantees. Policyholders may surrender at book
value but are subject to surrender charges for an initial period. Product
examples include universal life contracts and the general account portion of the
Company's variable annuity products. Liability duration is short to intermediate
term.
LONG-TERM PAY OUT LIABILITIES
Products in this category are long-term in nature and may contain
significant actuarial (including mortality and morbidity) pricing and cash flow
risks. The cash flows associated with these policy liabilities are not interest
rate sensitive but do vary based on the timing and amount of benefit payments.
The primary risks associated with these products are that the benefits will
exceed expected actuarial pricing and/or that the actual timing of the cash
flows differ from those anticipated resulting in an investment return lower than
that assumed in pricing. Product examples include structured settlement
contracts, on-benefit annuities (i.e., the annuitant is currently receiving
benefits thereon) and long-term disability contracts. Contract duration is
generally 6 to 10 years but, at times, exceeds 30 years.
SHORT-TERM PAY OUT LIABILITIES
These liabilities are short-term in nature with a duration of less than one
year. The primary risks associated with these products are determined by the
non-investment contingencies such as mortality or morbidity and the variability
in the timing of the expected cash flows. Liquidity is of greater concern than
for the long-term pay out liabilities. Products include individual and group
term life insurance contracts and short-term disability contracts.
SEPARATE ACCOUNT PRODUCTS
The Company's separate accounts reflect two categories of risk assumption:
non-guaranteed separate accounts totaling $46.9 billion as of December 31, 1997,
wherein the policyholder assumes substantially all of the risk and reward, and
guaranteed separate accounts totaling $10.5 billion as of December 31, 1997,
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, 1997, $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 $119 million in carrying value and $3.0 billion in notional
amounts at December 31, 1997.
G. COMPETITION
The Company is engaged in a business that is highly competitive due to the
large number of stock and mutual life insurance companies and other entities
marketing insurance products. There are approximately 2,000 stock, mutual, and
other types of insurers in the life insurance business in the United States.
According to A.M. Best, the Company is the eleventh largest consolidated life
insurance company in the United States based on statutory admitted assets as of
December 31, 1996. As of December 31, 1997, A.M. Best assigned the Company its
second highest ranking classification, A+.
H. EMPLOYEES
As of February 28, 1998, the Company and HLA have approximately 4,000 direct
employees, of which a majority are employed at the home office in Simsbury,
Connecticut.
I. PROPERTIES
The Company occupies office space leased from a third party by Hartford Fire
Insurance Company ("Hartford Fire"), an indirect subsidiary of The Hartford.
Expenses associated with these offices are allocated on a direct and indirect
basis to Hartford Life and its subsidiaries by Hartford Fire.
J. REGULATION
The insurance business of the Company is subject to comprehensive state and
federal regulation and supervision throughout the United States. The purpose of
such regulation is primarily to provide safeguards for policyholders rather than
to protect the interests of the stockholders. The laws of various state
jurisdictions establish supervisory agencies with broad administrative powers
with respect to, among other things, licensing to transact business, admittance
of assets, regulating premium rates, approving policy forms, regulating unfair
trade and claims practices, establishing reserve requirements and solvency
standards, fixing maximum interest rates on life insurance policy loans and
minimum rates for accumulation of surrender values, restricting certain
transactions between affiliates and regulating the type, amount and valuation of
investments permitted. State insurance regulators and the National Association
of Insurance Commissioners ("NAIC") continually re-examine existing laws and
regulations.
<PAGE>
HARTFORD LIFE INSURANCE COMPANY 29
- --------------------------------------------------------------------------------
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, 1997, the
Company's RBC ratio was in excess of 200% of its RBC.
Each insurance company is required to file detailed annual reports with
supervisory agencies in each of the jurisdictions in which it does business and
its operations and accounts are subject to examination by such agencies at
regular intervals. The Company prepares its statutory financial statements in
accordance with accounting practices prescribed or permitted by the State of
Connecticut Insurance Department. Prescribed statutory accounting practices
include publications of the NAIC, as well as state laws, regulations, and
general administrative rules. In accordance with the insurance laws and
regulations under which the Company operates, it is obligated to carry on its
books, as liabilities, actuarially determined reserves to meet its obligations
on its outstanding life insurance contracts and universal life and investment
contracts. Reserves for life insurance contracts are based on mortality and
morbidity tables in general use in the United States, modified to reflect actual
experience. These reserves are computed at amounts that, with additions from
premiums to be received, and with interest on such reserves compounded annually
at certain assumed rates, are expected to be sufficient to meet the Company's
policy obligations at their maturities or in the event of an insured's death.
Reserves for universal life insurance and investment products represent policy
account balances before applicable surrender charges. In the accompanying
consolidated financial statements, these life insurance reserves are determined
in accordance with generally accepted accounting principles, which may vary from
statutory requirements.
The Health Insurance Portability and Accountability Act of 1996 ("the HIPA
Act of 1996") phases out the deductibility of interest on policy loans under
COLI by 1998, thus eliminating all future sales of leveraged COLI. The Company's
leveraged COLI product has been an important contributor to its profitability in
recent years and will continue to contribute to the profitability of the Company
(although such contribution will be reduced in the future due to the effects of
this legislation). As a result of the elimination of leveraged COLI sales, net
income contributed by COLI may be lower in the future (particularly 1999 and
later years).
LEGAL OPINION
The validity of the interests in the Contracts described in this Prospectus
will be passed upon for Hartford by Lynda Godkin, General Counsel and Secretary
of Hartford.
EXPERTS
The audited financial statements and financial statement schedules included
in this prospectus and elsewhere in the registration statement have been audited
by Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said report. The principal business
address of Arthur Andersen LLP is One Financial Plaza, Hartford, Connecticut
06103.
<PAGE>
30 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
APPENDIX A
MODIFIED GUARANTEED ANNUITY FOR QUALIFIED PLANS
The CRC-Registered Trademark- (Compound Rate Contract) Annuity for Qualified
Plans is a group deferred annuity Contract under which one or more purchase
payments may be made. Plans eligible to purchase the Contract are pension and
profit-sharing plans qualified under Section401(a) of the Internal Revenue Code
(the "Code"), Keogh Plans and eligible state deferred compensation plans under
Section457 of the Code ("Qualified Plans").
To apply for a Group Annuity Contract, the trustee or other applicant need
only complete an application for the Group Annuity Contract and make its initial
purchase payment. A Group Annuity Contract will then be issued to the applicant
and subsequent Purchase Payments may be made, subject to the same $2,000 minimum
applicable to qualified purchasers of Certificates. While no Certificates are
issued, each purchase payment, and the Account established thereby, are
confirmed to the Contract Owner. The initial and subsequent purchase payments
operate to establish Accounts under the Group Annuity Contract in the same
manner as non-qualified purchases. Each Account will have its own Initial and
Subsequent Guarantee Periods and Guaranteed Rates. Surrenders under the Group
Annuity Contract may be made, at the election of the Contract Owner, from one or
more of the Accounts established under the Contract. Account surrenders are
subject to the same limitations, adjustments and charges as surrenders made
under a certificate (see "Surrenders," page 10). Net Surrender Values may be
withdrawn or applied to purchase annuities for the Contract Owners' Qualified
Plan Participants.
Because there are no individual participant accounts, the Qualified Group
Annuity Contract issued in connection with a Qualified Plan does not provide for
death benefits. Annuities purchased for Qualified Plan Participants may provide
for a payment upon the death of the Annuitant, depending on the option chosen
(see "Annuity Options," page 12). Additionally, since there are no Annuitants
prior to the actual purchase of an Annuity by the Contract Owner, the provisions
regarding the Annuity Commencement Date are not applicable.
<PAGE>
HARTFORD LIFE INSURANCE COMPANY 31
- --------------------------------------------------------------------------------
APPENDIX B
SPECIAL PROVISIONS FOR INDIVIDUAL CONTRACTS ISSUED IN THE STATE
OF CALIFORNIA, MICHIGAN, MISSOURI, NEW YORK, OREGON,
SOUTH CAROLINA, TEXAS, VIRGINIA AND WISCONSIN
The following provision, among others, applies only to individual Contracts
issued in the States of California, Michigan, Missouri, New York, Oregon, South
Carolina, Texas, Virginia and Wisconsin:
(1) The Contract Owner has the right to request, in writing, a surrender of the
Contract within ten (10) days after it was purchased. In such event, in
California, Michigan, Missouri, New York, Oregon, Texas, Virginia and
Wisconsin, Hartford will pay the Contract Owner an amount equal to the sum
of (a) the Account Value on the date the written request for surrender was
received multiplied by the Market Value Adjustment formula and (b) any
charges deducted from the Purchase Payment. In Missouri and South Carolina,
the Contract will be cancelled and any premium paid will be refunded in
full.
<PAGE>
32 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
APPENDIX C
MARKET VALUE ADJUSTMENT
The formula which will be used to determine the Market Value Adjustment is:
[(1 + I)/(1 + J)](n/12)
<TABLE>
<C> <C> <S>
I = The Guarantee Rate in effect for the Current Guarantee Period
(expressed as a decimal, e.g., 1% = .01)
J = The Current Rate (expressed as a decimal, e.g., 1% = .01) in effect for durations equal
to the number of years remaining in the current Guarantee Period (years are rounded to
the next highest number of years).
N = The number of complete months from the surrender date to the end of the current
Guarantee Period.
</TABLE>
EXAMPLE OF MARKET VALUE ADJUSTMENT
<TABLE>
<S> <C>
Beginning Account Value: $50,000
Guarantee Period: 5 Years
Guarantee Rate: 5.50% per annum
Full Surrender: Middle of Contract Year 3
</TABLE>
EXAMPLE 1:
<TABLE>
<S> <C> <C>
Gross Surrender Value at middle
of
Contract Year 3 = 50,000 (1.055)(2.5) = 57,161.18
Net Surrender Value at middle of
Contract Year 3 = [57,161.18 - (0.05) X 57,161.18]
X Market Value Adjustment
= $54,303.12 X Market Value Adjustment
Market Value Adjustment
</TABLE>
<TABLE>
<C> <C> <S>
I = 0.055
J = 0.061
N = 30
</TABLE>
<TABLE>
<S> <C> <C>
Market Value Adjustment = [(1 + I)/(1 + J)](n/12)
= (1.055/1.061)(30/12)
= 0.985922
Net Surrender Value at middle of
Contract Year 3 = $54,303.12 X 0.985922
= $53,538.64
</TABLE>
<PAGE>
HARTFORD LIFE INSURANCE COMPANY 33
- --------------------------------------------------------------------------------
EXAMPLE OF MARKET VALUE ADJUSTMENT
<TABLE>
<S> <C>
Beginning Account Value: $50,000
Guarantee Period: 5 Years
Guarantee Rate: 5.50% per annum
Full Surrender: Middle of Contract Year 3
</TABLE>
EXAMPLE 2:
<TABLE>
<S> <C> <C>
Gross Surrender Value at middle
of
Contract Year 3 = 50,000 (1.055)(2.5) = 57,161.18
Net Surrender Value at middle of
Contract Year 3 = [57,161.18 - (0.05) X 57,161.18]
X Market Value Adjustment
= $54,303.12 X Market Value Adjustment
Market Value Adjustment
</TABLE>
<TABLE>
<C> <C> <S>
I = .055
J = 0.050
N = 30
</TABLE>
<TABLE>
<S> <C> <C>
Market Value Adjustment = [(1 + I)/(1 + J)](N/12)
= (1.055/1.05)(30/12)
= 1.011947
Net Surrender Value at middle of
Contract Year 3 = $54,303.12 X 1.011947
= $54,951.88
</TABLE>
This example does not include any applicable taxes.
<PAGE>
34 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Management............................................. 35
Report of Independent Public Accountants......................... 36
Consolidated Statements of Income for the three years ended
December 31, 1997............................................... 37
Consolidated Balance Sheets as of December 31, 1996 and 1995..... 38
Consolidated Statements of Stockholder's Equity for the three
years ended December 31, 1997................................... 39
Consolidated Statements of Cash Flows for the three years ended
December 31, 1997............................................... 40
Notes to Consolidated Financial Statements....................... 41
Schedule I -- Summary of Investments -- Other than Investments in
Affiliates as of December 31, 1997.............................. 53
Schedule III -- Supplementary Insurance Information for the three
years ended December 31, 1997................................... 54
Schedule IV -- Reinsurance for the three years ended December 31,
1997............................................................ 55
</TABLE>
All schedules not listed above have been omitted because they are not
applicable or the amounts are insignificant, immaterial or the information has
been otherwise supplied in the financial statements or notes thereto.
<PAGE>
HARTFORD LIFE INSURANCE COMPANY 35
- --------------------------------------------------------------------------------
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 36.
An essential element in meeting management's financial responsibilities is
the Company's system of internal controls. These controls, which include
accounting controls and the internal auditing program, are designed to provide
reasonable assurance that assets are safeguarded, and transactions are properly
authorized, executed and recorded. The controls, which are documented and
communicated to employees in the form of written codes of conduct and policies
and procedures, provide for the careful selection of personnel and for
appropriate division of responsibility. Management continually monitors for
compliance, while the Company's internal auditors independently assess the
effectiveness of the controls and make recommendations for improvement. Also,
Arthur Andersen LLP took into consideration the Company's system of internal
controls in determining the nature, timing and extent of its audit tests.
Another important element is management's recognition of its responsibility
for fostering a strong, ethical climate, thereby ensuring that the Company's
affairs are transacted according to the highest standards of personal and
professional conduct. The Company has a long-standing reputation of integrity in
business conduct and utilizes communication and education to create and fortify
a strong compliance culture.
The Audit Committee of the Board of Directors of The Hartford, composed of
non-employee directors, meets periodically with the external and internal
auditors to evaluate the effectiveness of the work performed by them in
discharging their respective responsibilities and to ensure their independence
and free access to the Committee.
<PAGE>
36
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Hartford Life Insurance Company:
We have audited the accompanying Consolidated Balance Sheets of Hartford Life
Insurance Company (the "Company") and subsidiaries as of December 31, 1997 and
1996, 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,
1997. These consolidated financial statements and the schedules referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and schedules based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Hartford Life
Insurance Company and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in Index to
Consolidated Financial Statements and Schedules are presented for the purpose of
complying with the Securities and Exchange Commission's rules and are not part
of the basic financial statements. These schedules have been subjected to the
auditing procedures applied in the audits of the basic financial statements and,
in our opinion, fairly state in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Hartford, Connecticut
January 27, 1998
<PAGE>
37
- --------------------------------------------------------------------------------
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
------------------------
1997 1996 1995
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Revenues
Premiums and other considerations............... $1,637 $1,705 $1,487
Net investment income........................... 1,368 1,397 1,328
Net realized capital gains (losses)............. 4 (213) (11)
------ ------ ------
Total revenues................................ 3,009 2,889 2,804
------ ------ ------
Benefits, claims and expenses
Benefits, claims and claim adjustment
expenses....................................... 1,379 1,535 1,422
Amortization of deferred policy acquisition
costs.......................................... 335 234 199
Dividends to policyholders...................... 240 635 675
Other expenses.................................. 586 427 317
------ ------ ------
Total benefits, claims and expenses........... 2,540 2,831 2,613
------ ------ ------
Income before income tax expense................ 469 58 191
Income tax expense.............................. 167 20 62
------ ------ ------
Net income........................................ $ 302 $ 38 $ 129
------ ------ ------
------ ------ ------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
38 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER
31,
-----------------
1997 1996
------- -------
<S> <C> <C>
(IN MILLIONS,
EXCEPT FOR SHARE
DATA)
Assets
Investments
Fixed maturities, available for sale, at fair
value (amortized cost of $13,885 and
$13,579)....................................... $14,176 $13,624
Equity securities, at fair value................ 180 119
Policy loans, at outstanding balance............ 3,756 3,836
Other investments, at cost...................... 47 56
------- -------
Total investments............................. 18,159 17,635
Cash............................................ 54 43
Premiums receivable and agents' balances........ 18 137
Accrued investment income....................... 330 407
Reinsurance recoverables........................ 6,325 6,259
Deferred policy acquisition costs............... 3,315 2,760
Deferred income tax............................. 348 474
Other assets.................................... 352 357
Separate account assets......................... 69,055 49,690
------- -------
Total assets.................................. $97,956 $77,762
------- -------
------- -------
Liabilities
Future policy benefits.......................... $ 3,270 $ 2,474
Other policyholder funds........................ 21,034 22,134
Other liabilities............................... 2,254 1,572
Separate account liabilities.................... 69,055 49,690
------- -------
Total liabilities............................. 95,613 75,870
------- -------
Stockholder's Equity
Common stock -- 1,000 shares authorized, issued
and outstanding, par value $5,690.............. 6 6
Additional paid in capital...................... 1,045 1,045
Net unrealized capital gains on securities, net
of tax......................................... 179 30
Retained earnings............................... 1,113 811
------- -------
Total stockholder's equity.................... 2,343 1,892
------- -------
Total liabilities and stockholder's equity...... $97,956 $77,762
------- -------
------- -------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
HARTFORD LIFE INSURANCE COMPANY 39
- --------------------------------------------------------------------------------
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
NET UNREALIZED
CAPITAL GAINS
ADDITIONAL (LOSSES) ON TOTAL
COMMON PAID IN SECURITIES, RETAINED STOCKHOLDER'S
STOCK CAPITAL NET OF TAX EARNINGS EQUITY
------ -------------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
(IN MILLIONS)
Balance, December 31, 1994.............. $6 $ 826 $(654) $ 644 $ 822
Net income............................ -- -- -- 129 129
Capital contribution.................. -- 181 -- -- 181
Change in net unrealized capital gains
(losses) on securities, 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 gains
(losses) on securities, net of tax... -- -- 87 -- 87
--
------ ------ ----------- ------
Balance, December 31, 1996.............. 6 1,045 30 811 1,892
Net income............................ -- -- -- 302 302
Change in net unrealized capital gains
(losses) on securities, net of tax... -- -- 149 -- 149
--
------ ------ ----------- ------
Balance, December 31, 1997.............. $6 $1,045 $179 $1,113 $2,343
--
--
------ ------ ----------- ------
------ ------ ----------- ------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
40 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER
31,
------------------------------
1997 1996 1995
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Operating Activities
Net income............................ $ 302 $ 38 $ 129
Adjustments to reconcile net income to
cash provided by operating activities
Depreciation and amortization......... 8 14 21
Net realized capital (gains) losses... (4) 213 11
Decrease (increase) in deferred income
taxes................................ 40 (102) (172)
Increase in deferred policy
acquisition costs.................... (555) (572) (379)
Decrease (increase) in premiums
receivable and agents' balances...... 119 10 (81)
Decrease (increase) in accrued
investment income.................... 77 (13) (16)
Decrease (increase) in other assets... 52 (132) (177)
(Increase) decrease in reinsurance
recoverables......................... (416) 179 (35)
Increase (decrease) in liabilities for
future policy benefits............... 796 (92) 483
Increase in other liabilities......... 379 477 281
-------- -------- --------
Cash provided by operating
activities......................... 798 20 65
-------- -------- --------
Investing Activities
Purchases of fixed maturity
investments.......................... (6,231) (5,747) (6,228)
Sales of fixed maturity investments... 4,232 3,459 4,845
Maturities and principal paydowns of
fixed maturity investments........... 2,329 2,693 1,741
Net sales (purchases) of other
investments.......................... 24 (107) (871)
Net (purchases) sales of short-term
investments.......................... (638) 84 (24)
-------- -------- --------
Cash (used for) provided by
investing activities............... (284) 382 (537)
-------- -------- --------
Financing Activities
Capital contribution.................. -- 38 --
Net (disbursements for) receipts from
investment and universal life-type
contracts (charged against) credited
to policyholder accounts............. (503) (443) 498
-------- -------- --------
Cash (used for) provided by
financing activities............... (503) (405) 498
-------- -------- --------
Increase (decrease) in cash........... 11 (3) 26
Cash -- beginning of year............. 43 46 20
-------- -------- --------
Cash -- end of year................... $ 54 $ 43 $ 46
-------- -------- --------
-------- -------- --------
Supplemental Disclosure of Cash Flow
Information:
Net Cash Paid During the Year for:
Income taxes.......................... $ 9 $ 189 $ 162
Noncash Financing Activities:
Capital contribution.................. $ -- $ -- $ 181
-------- -------- --------
-------- -------- --------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
HARTFORD LIFE INSURANCE COMPANY 41
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN MILLIONS EXCEPT PER SHARE DATA UNLESS OTHERWISE STATED)
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"). Hartford Life is a direct subsidiary of Hartford
Accident and Indemnity Company ("HA&I"), an indirect subsidiary of The Hartford
Financial Services Group, Inc. ("The Hartford"). On February 10, 1997, Hartford
Life filed a registration statement, as amended, with the Securities and
Exchange Commission relating to an Initial Public Offering ("IPO") of the
Hartford Life's Class A Common Stock. Pursuant to the IPO on May 22, 1997,
Hartford Life sold to the public 26 million shares at $28.25 per share and
received net proceeds of $687. Of the proceeds, $527 was used to retire debt
related to Hartford Life's outstanding promissory notes and line of credit with
the remaining $160 contributed by Hartford Life to HLA to support growth in its
core businesses.
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. As a result, The Hartford became an
independent, publicly traded company.
Along with its parent, 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 and retirement plan services and mutual funds for savings and
retirement needs; (b) life insurance for income protection and estate planning;
and (c) employee benefits products such as group life and group disability
insurance and corporate owned life insurance.
2. SIGNIFICANT ACCOUNTING POLICIES
(A) BASIS OF PRESENTATION
These consolidated financial statements present the financial position,
results of operations and cash flows of the Company. All material intercompany
transactions and balances between the Company, its subsidiaries and affiliates
have been eliminated. The consolidated financial statements are prepared on the
basis of generally accepted accounting principles which differ materially from
the statutory accounting practices prescribed by various insurance regulatory
authorities.
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The most
significant estimates include those used in determining deferred policy
acquisition costs and the liability for future policy benefits and other
policyholder funds. Although some variability is inherent in these estimates,
management believes the amounts provided are adequate.
Certain reclassifications have been made to prior year financial information
to conform to the current year presentation.
(B) CHANGES IN ACCOUNTING PRINCIPLES
In December 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") No. 97-3 "Accounting by Insurance
and Other Enterprises for Insurance Related Assessments". This SOP provides
guidance on accounting by insurance and other enterprises for assessments
related to insurance activities. Specifically, the SOP provides guidance on when
a guaranty fund or other assessment should be recognized, how to measure the
liability, and what information should be disclosed. This SOP will be effective
for fiscal years beginning after December 15, 1998. Adoption of SOP 97-3 is not
expected to have a material impact on the Company's financial condition or
results of operations.
On November 14, 1996, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 96-12, "Recognition of Interest Income and Balance Sheet
Classification of Structured Notes". This EITF issue requires companies to
record income on certain structured securities on a retrospective interest
method. The Company adopted EITF No. 96-12 for structured securities acquired
after November 14, 1996. Adoption of EITF No. 96-12 did not have a material
effect on the Company's financial condition or results of operations.
In June 1996, the 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"
which is effective for transfers and servicing of financial
<PAGE>
42 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
assets and extinguishments of liabilities occurring after December 31, 1996.
This statement established criteria for determining whether transferred assets
should be accounted for as sales or secured borrowings. Subsequently, in
December 1996, the FASB issued SFAS No. 127, "Deferral of Effective Date of
Certain Provisions of FASB Statement No. 125", which defers the effective date
of certain provisions of SFAS No. 125 for one year. Adoption of SFAS No. 125 is
not expected to have a material effect on the Company's financial condition or
results of operations.
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of". This statement establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles, and goodwill related to
those assets to be held and used and for long-lived assets and certain
identifiable intangibles to be disposed of. Adoption of SFAS No. 121 did not
have a material effect on the Company's financial condition or results of
operations.
The Company's cash flows were not impacted by these changes in accounting
principles.
(C) REVENUE RECOGNITION
Revenues for universal life-type 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 and
disability policies are recognized as revenues when they are due from
policyholders.
(D) FUTURE POLICY BENEFITS AND OTHER POLICYHOLDER FUNDS
Liabilities for future policy benefits are computed by the net level premium
method using interest rate assumptions varying from 3% to 11% and withdrawal and
mortality assumptions appropriate at the time the policies were issued. Health
reserves, which are the result of sales of group long-term and short-term
disability, stop loss, Medicare Supplement and individual disability products,
are stated at amounts determined by estimates on individual cases and estimates
of unreported claims based on past experience. Liabilities for universal
life-type and investment contracts are stated at policyholder account values
before surrender charges.
(E) POLICYHOLDER REALIZED CAPITAL GAINS AND LOSSES
Realized capital gains and losses on security transactions associated with
the Company's immediate participation guaranteed contracts are excluded from
revenues and deferred over the expected maturity of the securities, since under
the terms of the contracts the realized gains and losses will be credited to
policyholders in future years as they are entitled to receive them.
(F) INVESTMENTS
The Company's investments in fixed maturities include bonds and commercial
paper which are considered "available for sale" and accordingly are carried at
fair value with the after-tax difference from cost reflected as a component of
Stockholder's Equity designated "Net unrealized capital gains (losses) on
securities, net of tax". Equity securities, which include common and
non-redeemable preferred stocks, are carried at fair values with the after-tax
difference from cost reflected in Stockholder's Equity. Policy loans are carried
at outstanding balance which approximates fair value. Net realized capital gains
and losses, after deducting pension policyholders' share, are reported as a
component of revenue and are determined on a specific identification basis.
The Company's accounting policy for impairment requires recognition of an
other than temporary impairment charge on a security if it is determined that
the Company is unable to recover all amounts due under the contractual
obligations of the security. In addition, for securities expected to be sold, an
other than temporary impairment charge is recognized if the Company does not
expect the fair value of a security to recover to cost or amortized cost prior
to the expected date of sale. Once an impairment charge has been recorded, the
Company then continues to review the other than temporarily impaired securities
for appropriate valuation on an on-going basis.
During 1996, it was determined that certain individual securities within the
investment portfolio supporting the Company's block of guaranteed rate contract
business written prior to 1995 ("Closed Book GRC") could not recover to
amortized cost prior to sale. Therefore, an other than temporary impairment loss
of $88, after-tax, was recorded.
(G) DERIVATIVE INSTRUMENTS
The Company uses a variety of derivative instruments including swaps, caps,
floors, forwards and exchange traded financial futures and options as part of an
overall risk management strategy. These instruments are used as a means of
hedging exposure to price, foreign currency and/ or interest rate risk on
planned investment purchases or existing assets and liabilities. The Company
does not hold or issue derivative instruments for trading purposes. The
Company's accounting for derivative instruments used to manage risk is in
accordance with the concepts established in SFAS No. 80, "Accounting for Futures
Contracts", SFAS No. 52, "Foreign Currency Translation", AICPA SOP 86-2,
"Accounting for Options" and various EITF pronouncements. Written options are
used, in all cases in conjunction with other assets and derivatives, as part of
the Company's asset and liability management strategy. Derivative instruments
are carried at values consistent with the asset or liability being hedged.
Derivative instruments used to hedge fixed maturities or equity securities are
carried at fair value
<PAGE>
HARTFORD LIFE INSURANCE COMPANY 43
- --------------------------------------------------------------------------------
with the after-tax difference from cost reflected in Stockholder's Equity.
Derivative instruments used to hedge other invested assets or liabilities are
carried at cost.
Derivative instruments must be designated at inception as a hedge and
measured for effectiveness both at inception and on an on-going basis. 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. Derivative
instruments used to create a synthetic asset must meet synthetic accounting
criteria including designation at inception and consistency of terms between the
synthetic and the instrument being replicated. Consistent with industry
practice, synthetic instruments are accounted for like the financial instrument
it is intended to replicate. Derivative instruments which fail to meet risk
management criteria, subsequent to acquisition, are marked to market with the
impact reflected in the Consolidated Statements of Income.
Gains or losses on financial futures contracts entered into in anticipation
of the investment of future receipt of product cash flows are deferred and, at
the time of the ultimate investment purchase, reflected as an adjustment to the
cost basis of the purchased asset. Gains or losses on futures used in invested
asset risk management are deferred and adjusted into the cost basis of the
hedged asset when the contract futures are closed, except for futures used in
duration hedging which are deferred and basis adjusted on a quarterly basis. The
basis adjustments are amortized into net investment income over the remaining
asset life.
Open forward commitment contracts are marked to market through Stockholder's
Equity. Such contracts are accounted for at settlement by recording the purchase
of the specified securities at the previously committed price. Gains or losses
resulting from the termination of forward commitment contracts before the
delivery of the securities are recognized immediately in the Consolidated
Statements of Income as a component of net investment income.
The cost of options entered into as part of a risk management strategy are
basis adjusted to the underlying asset or liability and amortized over the
remaining life of the option. Gains or losses on expiration or termination are
adjusted into the basis of the underlying asset or liability and amortized over
the remaining asset life.
Interest rate swaps involve the periodic exchange of payments without the
exchange of underlying principal or notional amounts. Net receipts or payments
are accrued and recognized over the life of the swap agreement as an adjustment
to investment income. Should the swap be terminated, the gain or loss is
adjusted into the basis of the asset or liability and amortized over the
remaining life. Should the hedged asset be sold or liability terminated without
terminating the swap position, any swap gains or losses are immediately
recognized in net investment income. Interest rate swaps purchased in
anticipation of an asset purchase ("anticipatory transaction") are recognized
consistent with the underlying asset components such that the settlement
component is recognized in the Consolidated Statements of Income while the
change in market value is recognized as an unrealized capital gain or loss.
Premiums paid on purchased floor or cap agreements and the premium received
on issued cap or floor agreements (used for risk management) are adjusted into
the basis of the applicable asset and amortized over the asset life. Gains or
losses on termination of such positions are adjusted into the basis of the asset
or liability and amortized over the remaining asset life. Net payments are
recognized as an adjustment to income or basis adjusted and amortized depending
on the specific hedge strategy.
Forward exchange contracts and foreign currency swaps are accounted for in
accordance with SFAS No. 52. Changes in the spot rate of instruments designated
as hedges of the net investment in a foreign subsidiary are reflected in the
cumulative translation adjustments component of Stockholder's Equity. Cash flows
from futures, options, and swaps, accounted for as hedges, are included with the
cash flows of the item being hedged.
(H) SEPARATE ACCOUNTS
The Company maintains separate account assets and liabilities which are
reported at fair value. Separate account assets are segregated from other
investments, and investment income and gains and losses accrue directly to the
policyholders. Separate accounts reflect two categories of risk assumption:
non-guaranteed separate accounts, wherein the policyholder assumes the
investment risk, and guaranteed separate account assets, wherein the Company
contractually guarantees either a minimum return or account value to the
policyholder.
(I) DEFERRED POLICY ACQUISITION COSTS
Policy acquisition costs, which include commissions and certain underwriting
expenses associated with acquiring business, are deferred and amortized over the
estimated lives of the contracts, generally 20 years. Generally, acquisition
costs are deferred and amortized using the retrospective deposit method. Under
the retrospective deposit method, acquisition costs are amortized in proportion
to the present value of expected gross profits from surrender charges,
investment, 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
<PAGE>
44 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
for the books of business are reestimated and adjusted by a cumulative charge or
credit to income.
The Company's other expenses include the following:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Commissions........................... $ 976 $ 848 $ 619
Deferred acquisition costs............ (862) (823) (618)
Other................................. 472 402 316
--------- --------- ---------
Total other expenses.............. $ 586 $ 427 $ 317
--------- --------- ---------
--------- --------- ---------
</TABLE>
(J) 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
55%, 44%, and 41% in 1997, 1996, and 1995, respectively, of total insurance in
force.
3. INITIAL PUBLIC OFFERING
On February 10, 1997, Hartford Life filed a registration statement, as
amended, with the Securities and Exchange Commission, relating to the IPO of
Hartford Life's Class A Common Stock. Pursuant to the IPO on May 22, 1997,
Hartford Life sold to the public 26 million shares at $28.25 per share and
received proceeds, net of offering expenses, of $687. Of the proceeds, $527 was
used to retire debt related to Hartford Life's promissory notes outstanding and
line of credit. The remaining $160 was contributed by Hartford Life to HLA to
support growth in its core businesses. The 26 million shares sold in the
Offering represent approximately 18.6% of the equity ownership in Hartford Life
and approximately 4.4% of the combined voting power of Hartford Life's Class A
and Class B Common Stock. The Hartford owns all of the 114 million outstanding
shares of Class B Common Stock of Hartford Life, representing approximately
81.4% of the equity ownership in Hartford Life and approximately 95.6% of the
combined voting power of Hartford Life's Class A and Class B Common Stock.
Holders of Class A Common Stock generally have identical rights to the holders
of Class B Common Stock except that the holders of Class A Common Stock are
entitled to one vote per share while holders of Class B Common Stock are
entitled to five votes per share on all matters submitted to a vote of Hartford
Life's stockholders.
4. INVESTMENTS AND DERIVATIVE INSTRUMENTS
(A) COMPONENTS OF NET INVESTMENT INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Interest income from fixed
maturities......................... $ 932 $ 918 $ 996
Interest income from policy loans... 425 477 342
Income from other investments....... 26 15 1
--------- --------- ---------
Gross investment income............. 1,383 1,410 1,339
Less: Investment expenses........... 15 13 11
--------- --------- ---------
Net investment income............... $ 1,368 $ 1,397 $ 1,328
--------- --------- ---------
--------- --------- ---------
</TABLE>
(B) COMPONENTS OF NET REALIZED CAPITAL GAINS (LOSSES)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------------
1997 1996 1995
----- --------- ---------
<S> <C> <C> <C>
Fixed maturities......................... $ (7) $ (201) $ 23
Equity securities........................ 12 2 (6)
Real estate and other.................... (1) (4) (25)
Less: Increase in liability to
policyholders for realized capital
gains................................... -- (10) (3)
--- --------- ---------
Net realized capital gains (losses) $ 4 $ (213) $ (11)
--- --------- ---------
--- --------- ---------
</TABLE>
(C) NET UNREALIZED CAPITAL GAINS (LOSSES) ON EQUITY SECURITIES
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Gross unrealized capital gains.............. $ 14 $ 13 $ 4
Gross unrealized capital losses............. -- (1) (2)
--- --- ---
Net unrealized capital gains................ 14 12 2
Deferred income tax expense................. 5 4 1
--- --- ---
Net unrealized capital gains, net of tax.... 9 8 1
Balance -- beginning of year................ 8 1 (6)
--- --- ---
Net change in unrealized capital gains
(losses) on equity securities.............. $ 1 $ 7 $ 7
--- --- ---
--- --- ---
</TABLE>
<PAGE>
HARTFORD LIFE INSURANCE COMPANY 45
- --------------------------------------------------------------------------------
(D) NET UNREALIZED CAPITAL GAINS (LOSSES) ON FIXED MATURITIES
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Gross unrealized capital gains................................... $ 371 $ 386 $ 529
Gross unrealized capital losses.................................. (80) (341) (569)
Unrealized capital (gains) losses credited to policyholders...... (30) (11) (52)
----- ----- -----
Net unrealized capital gains (losses)............................ 261 34 (92)
Deferred income tax expense (benefit)............................ 91 12 (34)
----- ----- -----
Net unrealized capital gains (losses), net of tax................ 170 22 (58)
Balance -- beginning of year..................................... 22 (58) (648)
----- ----- -----
Net change in unrealized capital gains (losses) on fixed
maturities...................................................... $ 148 $ 80 $ 590
----- ----- -----
----- ----- -----
</TABLE>
(E) FIXED MATURITY INVESTMENTS
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
---------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
U.S. gov't and gov't agencies and authorities
(guaranteed and sponsored)...................................... $ 217 $ 3 $ (1) $ 219
U.S. gov't and gov't agencies and authorities
(guaranteed and sponsored) -- asset backed...................... 1,175 64 (35) 1,204
States, municipalities and political subdivisions................ 211 7 (1) 217
International governments........................................ 376 20 (3) 393
Public utilities................................................. 871 26 (3) 894
All other corporate including international...................... 5,033 200 (25) 5,208
All other corporate -- asset backed.............................. 4,091 41 (8) 4,124
Short-term investments........................................... 1,318 -- -- 1,318
Certificates of deposit.......................................... 593 10 (4) 599
---------- ----- ----- ----------
Total fixed maturities....................................... $13,885 $371 $(80) $14,176
---------- ----- ----- ----------
---------- ----- ----- ----------
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
---------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
U.S. gov't and gov't agencies and authorities
(guaranteed and sponsored)...................................... $ 166 $ 12 $ (3) $ 175
U.S. gov't and gov't 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>
The amortized cost and estimated fair value of fixed maturity investments at
December 31, 1997 by estimated maturity year are shown below. Expected
maturities differ from contractual maturities due to call or prepayment
provisions. Asset backed securities, including MBS and CMO's, are distributed to
maturity year based on the Company's estimates of the rate of future prepayments
of principal over the remaining lives of the securities. These estimates are
developed using prepayment speeds provided in broker consensus data. Such
estimates are derived from prepayment speeds experienced at the interest rate
levels projected for the applicable underlying collateral and can be expected to
vary from actual experience.
MATURITY
<TABLE>
<CAPTION>
AMORTIZED
COST FAIR VALUE
----------- -----------
<S> <C> <C>
One year or less......................... $ 2,838 $ 2,867
Over one year through five years......... 5,528 5,595
Over five years through ten years........ 3,094 3,156
Over ten years........................... 2,425 2,558
----------- -----------
Total................................ $ 13,885 $ 14,176
----------- -----------
----------- -----------
</TABLE>
<PAGE>
46 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
Sales of fixed maturities, excluding short-term fixed maturities, for the
years ended December 31, 1997, 1996 and 1995 resulted in proceeds of $4.2
billion, $3.5 billion and $4.8 billion, gross realized capital gains of $169,
$87 and $91, gross realized capital losses (including writedowns) of $176, $298
and $72, respectively. Sales of equity security investments for the years ended
December 31, 1997, 1996 and 1995 resulted in proceeds of $132, $74 and $64,
gross realized capital gains of $12, $2 and $28 and gross realized capital
losses of $0, $0 and $59, respectively.
(F) CONCENTRATION OF CREDIT RISK
Excluding investments in U.S. government and agencies, the Company has not
invested in the securities of a single issuer in amounts greater than 10% of
stockholder's equity at December 31, 1997.
(G) DERIVATIVE INSTRUMENTS
The Company utilizes a variety of derivative instruments, including swaps,
caps, floors, forwards and exchange traded futures and options, in accordance
with Company policy and in order to achieve one of three Company approved
objectives: to hedge risk arising from interest rate, price or currency exchange
rate volatility; to manage liquidity; or, to control transactions costs. The
Company utilizes derivative instruments to manage market risk through four
principal risk management strategies: hedging anticipated transactions, hedging
liability instruments, hedging invested assets and hedging portfolios of assets
and/or liabilities. The Company does not trade in these instruments for the
express purpose of earning trading profits.
The Company maintains a derivatives counterparty exposure policy which
establishes market-based credit limits, favors long-term financial stability and
creditworthiness, and typically requires credit enhancement/credit risk reducing
agreements. Credit risk is measured as the amount owed to the Company based on
current market conditions and potential payment obligations between the Company
and its counterparties. Credit exposures are quantified weekly and netted, and
collateral is pledged to or held by the Company to the extent the current value
of derivatives exceed exposure policy thresholds.
The Company's derivative program is monitored by an internal compliance unit
and is reviewed by senior management and Hartford Life's Finance Committee.
Notional amounts, which represent the basis upon which pay or receive amounts
are calculated and are not reflective of credit risk, pertaining to derivative
financial instruments (excluding the Company's guaranteed separate account
derivative investments), totaled $6.5 billion and $9.9 billion ($4.6 billion and
$7.4 billion related to the Company's investments, $1.9 billion and $2.5 billion
on the Company's liabilities) at December 31, 1997 and 1996, respectively.
The table below provides a summary of derivative instruments held by the
Company at December 31, 1997 and 1996, segregated by major investment and
liability category:
<TABLE>
<CAPTION>
1997 -- AMOUNT HEDGED (NOTIONAL AMOUNTS)
----------------------------------------------------------------------------------
PURCHASED
CAPS, FOREIGN
TOTAL ISSUED FLOORS INTEREST CURRENCY TOTAL
CARRYING CAPS & AND FUTURES RATE SWAPS NOTIONAL
ASSETS HEDGED VALUE FLOORS OPTIONS (2) SWAPS (3) AMOUNT
- ----------------------------------- -------- -------- ---------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Asset backed securities (excluding
inverse floaters and
anticipatory)..................... $ 5,253 $ 500 $ 1,404 $ 28 $ 221 $-- $ 2,153
Inverse floaters (1)............... 75 47 80 -- 25 -- 152
Anticipatory (4)................... -- -- -- -- -- -- --
Other bonds and notes.............. 7,531 462 460 22 1,258 91 2,293
Short-term investments............. 1,317 -- -- -- -- -- --
-------- -------- ---------- --- ---------- --- ----------
Total fixed maturities......... 14,176 1,009 1,944 50 1,504 91 4,598
Equity securities, policy loans and
other investments................. 3,983 -- -- -- -- -- --
-------- -------- ---------- --- ---------- --- ----------
Total investments.............. $ 18,159 $ 1,009 $ 1,944 $ 50 $ 1,504 $91 $ 4,598
Long term debt................. -- -- -- -- -- -- --
Other policy claims............ -- 10 150 -- 1,747 -- 1,907
-------- -------- ---------- --- ---------- --- ----------
Total derivatives -- notional
value........................... $ -- $ 1,019 $ 2,094 $ 50 $ 3,251 $91 $ 6,505
-------- -------- ---------- --- ---------- --- ----------
Total derivatives -- fair value.... $ -- $ (8) $ 23 $ -- $ 19 $(6) $ 28
-------- -------- ---------- --- ---------- --- ----------
-------- -------- ---------- --- ---------- --- ----------
</TABLE>
<PAGE>
HARTFORD LIFE INSURANCE COMPANY 47
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 --AMOUNT HEDGED (NOTIONAL AMOUNTS)
--------------------------------------------------------------------------
FOREIGN
TOTAL ISSUED PURCHASED INTEREST CURRENCY TOTAL
CARRYING CAPS & CAPS, FLOORS RATE SWAPS NOTIONAL
ASSETS HEDGED VALUE FLOORS AND OPTIONS FUTURES (2) SWAPS (3) AMOUNT
- ----------------------------------- -------- ------- ------------ ----------- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Asset backed securities (excluding
inverse floaters and
anticipatory)..................... $ 5,242 $ 500 $ 2,454 $ -- $ 941 $ -- $3,895
Inverse floaters (1)............... 352 98 856 -- 346 -- 1,300
Anticipatory (4)................... -- -- -- 132 -- -- 132
Other bonds and notes.............. 7,369 425 440 5 1,079 125 2,074
Short-term investments............. 661 -- -- -- -- -- --
-------- ------- ------------ ----- --------- -------- -------
Total fixed maturities......... 13,624 1,023 3,750 137 2,366 125 7,401
Equity securities, policy loans and
other investments................. 4,011 -- -- -- 19 -- 19
-------- ------- ------------ ----- --------- -------- -------
Total investments.............. $ 17,635 $ 1,023 $ 3,750 $ 137 $ 2,385 $ 125 $7,420
Long term debt................. -- -- -- -- -- -- --
Other policy claims............ -- 10 150 -- 2,351 -- 2,511
-------- ------- ------------ ----- --------- -------- -------
Total derivatives -- notional
value......................... $ -- $ 1,033 $ 3,900 $ 137 $ 4,736 $ 125 $9,931
-------- ------- ------------ ----- --------- -------- -------
Total derivatives -- fair
value......................... $ -- $ (10) $ 38 $ -- $ 2 $ (9 ) $ 21
-------- ------- ------------ ----- --------- -------- -------
-------- ------- ------------ ----- --------- -------- -------
</TABLE>
- ---------
(1) Inverse floaters are variations of collateralized mortgage obligations
("CMO's") for which the coupon rates move inversely with an index rate such as
the London interbank offered rate ("LIBOR"). The risk to principal is considered
negligible as the underlying collateral for the securities is guaranteed or
sponsored by government agencies. To address the volatility risk created by the
coupon variability, the Company uses a variety of derivative instruments,
primarily interest rate swaps, caps and floors.
(2) As of December 31, 1997 and 1996, over 44% and 39% , respectively, of
the notional futures contracts expire within one year.
(3) As of December 31, 1997 and 1996, over 16% and 42%, respectively, of
foreign currency swaps expire within one year; the balance matures over the
succeeding 9 years.
(4) Deferred gains and losses on anticipatory transactions are included in
the carrying value of fixed maturities in the Consolidated Balance Sheets. At
the time of the ultimate purchase, they are reflected as a basis adjustment to
the purchased asset. At December 31, 1997, the Company had $0 deferred gains and
losses. At December 31, 1996, the Company had $0.9 in net deferred gains for
futures, interest rate swaps and purchased options of which $2.0 was basis
adjusted in 1997.
The following is a reconciliation of notional amounts by derivative type and
strategy as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 MATURITIES/ DECEMBER 31, 1997
NOTIONAL AMOUNT ADDITIONS TERMINATIONS (1) NOTIONAL AMOUNT
----------------- -------- ----------------- -----------------
<S> <C> <C> <C> <C>
BY DERIVATIVE TYPE
Caps......................................... $1,755 $ 14 $ 530 $1,239
Floors....................................... 3,168 28 1,332 1,864
Swaps/Forwards............................... 4,861 941 2,460 3,342
Futures...................................... 137 131 218 50
Options...................................... 10 -- -- 10
------- -------- ------- -------
Total.................................... $9,931 $1,114 $4,540 $6,505
------- -------- ------- -------
BY STRATEGY
Liability.................................... $2,511 $ 191 $ 795 $1,907
Anticipatory................................. 132 4 136 --
Asset........................................ 2,112 739 1,046 1,805
Portfolio.................................... 5,176 180 2,563 2,793
------- -------- ------- -------
Total.................................... $9,931 $1,114 $4,540 $6,505
------- -------- ------- -------
------- -------- ------- -------
</TABLE>
- ---------
(1) During 1997, the Company had no significant gains or losses on terminations
of hedge positions using derivative financial instruments.
<PAGE>
48 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 "Disclosure about Fair
Value of Financial Instruments" requires disclosure of fair value information of
financial instruments. For certain financial instruments where quoted market
prices are not available, other independent valuation techniques and assumptions
are used. Because considerable judgment is used, these estimates are not
necessarily indicative of amounts that could be realized in a current market
exchange. SFAS No. 107 excludes certain financial instruments from disclosure,
including insurance contracts.
For cash, short-term investments, accounts receivable, policy loans,
mortgage loans and other liabilities, carrying amounts on the Consolidated
Balance Sheets approximate fair value.
Fair value for fixed maturities and marketable equity securities are based
upon quoted market prices. Fair value for securities that are not publicly
traded are analytically determined. These amounts are disclosed in Note 4 of
Notes to Consolidated Financial Statements.
The fair value of derivative financial instruments, including swaps, caps,
floors, futures, options and forward commitments, is determined using a pricing
model which is validated through quarterly comparison to dealer quoted prices.
Amounts are disclosed in Note 4 of Notes to Consolidated Financial Statements.
Fair value for partnerships and trusts are based on external market
valuations from partnership and trust management.
Other policy claims and benefits payable fair value information is
determined by estimating future cash flows, discounted at the current market
rate.
The carrying amount and fair values of the Company's financial instruments
at December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
------------------ ------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- ------- --------- -------
<S> <C> <C> <C> <C>
ASSETS
Fixed maturities..................................... $ 14,176 $14,176 $ 13,624 $13,624
Equity securities.................................... 180 180 119 119
Policy loans......................................... 3,756 3,756 3,836 3,836
Mortgage loans....................................... -- -- 2 2
Investments in partnerships, trusts and other........ 47 91 54 104
LIABILITIES
Other policy benefits................................ $ 11,769 $11,755 $ 11,707 $11,469
</TABLE>
6. SEPARATE ACCOUNTS
The Company maintained separate account assets and liabilities totaling
$69.1 billion and $49.7 billion at December 31, 1997 and 1996, respectively,
which are reported at fair value. Separate account assets are segregated from
other investments and net investment income and net realized capital gains and
losses accrue directly to the policyholder. Separate accounts reflect two
categories of risk assumption: non-guaranteed separate accounts totaling $58.6
billion and $39.4 billion at December 31, 1997 and 1996, respectively, wherein
the policyholder assumes the investment risk, and guaranteed separate accounts
totaling $10.5 and $10.3 billion at December 31, 1997 and 1996, respectively,
wherein the Company contractually guarantees either a minimum return or account
value to the policyholder. Included in the non-guaranteed category were policy
loans totaling $1.9 billion and $2.0 billion at December 31, 1997 and 1996,
respectively. Net investment income (including net realized capital gains and
losses) and interest credited to policyholders on separate account assets are
not reflected in the Consolidated Statements of Income.
Separate account management fees were $699, $538 and $387 in 1997, 1996 and
1995, respectively. The guaranteed separate accounts include fixed market value
adjusted individual annuity and modified guaranteed life insurance. The average
credited interest rate on these contracts was 6.52% at December 31, 1997. The
assets that support these liabilities were comprised of $10.2 billion in fixed
maturities as of December 31, 1997. The portfolios are segregated from other
investments and are managed to minimize liquidity and interest rate risk. In
order to minimize the risk of disintermediation associated with early
withdrawals, fixed MVA annuity and modified guaranteed life insurance contracts
carry a graded surrender charge as well as a market value adjustment. Additional
investment risk is hedged using a variety of derivatives which totaled $119 in
carrying value and $3.0 billion in notional amounts as of December 31, 1997.
<PAGE>
HARTFORD LIFE INSURANCE COMPANY 49
- --------------------------------------------------------------------------------
7. INCOME TAX
Hartford Life and The Hartford have entered into a tax sharing agreement
under which each member in the consolidated U.S. Federal income tax return will
make payments between them such that, with respect to any period, the amount of
taxes to be paid by the Company, subject to certain adjustments, generally will
be determined as though the Company were filing separate Federal, state and
local income tax returns.
As long as The Hartford continues to beneficially own, directly or
indirectly, at least 80% of the combined voting power and 80% of the value of
the outstanding capital stock of Hartford Life, the Company will be included for
Federal income tax purposes in the affiliated group of which The Hartford is the
common parent. To the extent allowed by law, it is the intention of The Hartford
and its subsidiaries to continue to file a single consolidated Federal income
tax return. The Company will continue to remit (receive from) The Hartford a
current income tax provision (benefit) computed in accordance with such tax
sharing agreement. The Company's effective tax rate was 36%, 35% and 32% in
1997, 1996 and 1995, respectively.
Income tax expense is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------
1997 1996 1995
---- ------ ------
<S> <C> <C> <C>
Current...................................... $119 $ 122 $ 211
Deferred..................................... 48 (102) (149)
---- ------ ------
Income tax expense......................... $167 $ 20 $ 62
---- ------ ------
---- ------ ------
</TABLE>
A reconciliation of the tax provision at the U.S. Federal statutory rate to
the provision for income taxes is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
--------- ----- -----
<S> <C> <C> <C>
Tax provision at the U.S. Federal statutory
rate...................................... $ 164 $ 20 $ 67
Tax-exempt income.......................... -- -- (3)
Foreign tax credit......................... -- -- (4)
Other...................................... 3 -- 2
--------- --- ---
Total.................................... $ 167 $ 20 $ 62
--------- --- ---
--------- --- ---
</TABLE>
Deferred tax assets include the following at December 31:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Tax return deferred acquisition costs............ $ 639 $ 514
Financial statement deferred acquisition costs
and reserves.................................... (366) (242)
Employee benefits................................ 5 8
Net unrealized capital gains on securities....... (96) (16)
Investments and other............................ 166 210
--------- ---------
Total.......................................... $ 348 $ 474
--------- ---------
--------- ---------
</TABLE>
Income taxes paid were $9, $189 and $162 in 1997, 1996 and 1995,
respectively. The Company had a current tax payment of $27 due to The Hartford
at December 31, 1997 and a tax refund due from The Hartford of $72 at December
31, 1996.
Prior to the Tax Reform Act of 1984, the Life Insurance Company Income Tax
Act of 1959 permitted the deferral from taxation of a portion of statutory
income under certain circumstances. In these situations, the deferred income was
accumulated in a "Policyholders' Surplus Account" and will be taxable in the
future only under conditions which management considers to be remote; therefore,
no Federal income taxes have been provided on this deferred income. The balance
for tax return purposes of the Policyholders' Surplus Account as of December 31,
1997 was $37.
8. POSTRETIREMENT BENEFIT AND SAVINGS PLANS
(A) PENSION PLANS
The Company's employees are included in The Hartford's noncontributory
defined benefit pension plans. These plans provide pension benefits that are
based on years of service and the employee's compensation during the last ten
years of employment. The Company's funding policy is to contribute annually an
amount between the minimum funding requirements set forth in the Employee
Retirement Income Security Act of 1974, as amended, and the maximum amount that
can be deducted for U.S. Federal income tax purposes. Generally, pension costs
are funded through the purchase of the Company's group pension contracts. The
cost to the Company was approximately $5, $5 and $2 in 1997, 1996 and 1995,
respectively.
The Company also provides, through The Hartford, certain health care and
life insurance benefits for eligible retired employees. A substantial portion of
the Company's employees may become eligible for these benefits upon retirement.
The Company's contribution for health care benefits will depend on the retiree's
date of retirement and years of service. In addition, the plan has a defined
dollar cap which limits average Company contributions. The Company has prefunded
a portion of the health care and life insurance obligations through trust funds
where such prefunding can be accomplished on a tax effective basis.
Postretirement health care and life insurance benefits expense, allocated by The
Hartford, was immaterial to the results of operations for 1997, 1996 and 1995,
respectively.
The assumed rate in the per capita cost of health care (the health care
trend rate) was 8.5% for 1997, decreasing ratably to 6.0% in the year 2001.
Increasing the health care trend rates by one percent per year would have an
immaterial impact on the accumulated postretirement benefit obligation and the
annual expense. To the extent that the actual experience differs from the
inherent assumptions,
<PAGE>
50 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
the effect will be amortized over the average future service of covered
employees.
(B) INVESTMENT AND SAVINGS PLAN
Substantially all employees of the Company are eligible to participate in The
Hartford's Investment and Savings Plan. Under this plan, designated
contributions, which may be invested in Class A Common Stock of Hartford Life or
certain other investments, are matched, up to 3% of compensation, by the
Company. The cost to the Company for the above-mentioned plans was approximately
$2 in 1997.
9. STOCK COMPENSATION PLANS
During the second quarter of 1997, Hartford Life adopted the 1997 HLI
Incentive Stock Plan (the "Plan"). Under the Plan, options granted may be either
non-qualified options or incentive stock options qualifying under Section 422A
of the Internal Revenue Code. The aggregate number of shares of Class A Common
Stock which may be awarded in any one year shall be subject to an annual limit.
The maximum number of shares of Class A Common Stock which may be granted under
the Plan in each year shall be 1.5% of the total issued and outstanding shares
of Hartford Life Class A Common Stock and treasury stock as reported in the
Annual Report on Hartford Life's Form 10-K for the preceding year plus unused
portions of such limit from prior years. In addition, no more than 5,000,000
shares of Class A Common Stock shall be cumulatively available for awards of
incentive stock options under the Plan, and no more than 20% of the total number
of shares on a cumulative basis shall be available for restricted stock and
performance shares.
All options granted have an exercise price equal to the market price of
Hartford Life's stock on the date of grant and an option's maximum term is ten
years. Certain nonperformance based options become exercisable upon the
attainment of specified market price appreciation of Hartford Life's common
shares or at seven years after the date of grant, while the remaining
nonperformance based options become exercisable over a three year period
commencing with the date of grant.
Also included in the Plan are long term performance awards which become
payable upon the attainment of specific performance goals achieved over a three
year period.
During the second quarter of 1997, Hartford Life established the HLI
Employee Stock Purchase Plan ("ESPP"). Under this plan, eligible employees of
Hartford Life and the Company may purchase Class A Common Stock of Hartford Life
at a 15% discount from the lower of the market price at the beginning or end of
the quarterly offering period. Hartford Life may sell up to 2,700,000 shares of
stock to eligible employees. Hartford Life sold 54,316 shares under the ESPP in
1997.
10. REINSURANCE
The Company cedes insurance to other insurers, including its parent HLA, 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.
Failure of reinsurers to honor their obligations could result in losses to the
Company. The Company evaluates the financial condition of its reinsurers and
monitors concentration of credit risk.
Net premiums and other considerations were comprised of the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Gross premiums............................... $ 2,164 $ 2,138 $ 1,545
Assumed...................................... 159 190 591
Ceded........................................ (686) (623) (649)
--------- --------- ---------
Net premiums and other considerations...... $ 1,637 $ 1,705 $ 1,487
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company ceded approximately $76, $100 and $101 of group life premium in
1997, 1996 and 1995, respectively, representing $33.6 billion, $33.3 billion and
$32.3 billion of insurance in force, respectively. The Company ceded $339, $318
and $320 of accident and health premium to HLA in 1997, 1996 and 1995,
respectively. The Company assumed $89, $101 and $103 of premium in 1997, 1996
and 1995, respectively, representing $8.2 billion, $8.5 billion and $8.5 billion
of individual life insurance in force, respectively, from HLA.
Life reinsurance recoveries, which reduce death and other benefits,
approximated $158, $140 and $220 for the years ended December 31, 1997, 1996 and
1995, respectively.
As of December 31, 1997, the Company had reinsurance recoverables of $5.0
billion from Mutual Benefit Life Assurance Corporation ("Mutual Benefit"),
supported by assets in a security trust of $5.0 billion (including policy loans
and accrued interest of $4.5 billion). The risk of Mutual Benefit becoming
insolvent is mitigated by the reinsurance agreement's requirement that the
assets be kept in a security trust with the Company as sole beneficiary. The
Company has no other significant reinsurance-related concentrations of credit
risk.
11. RELATED PARTY TRANSACTIONS
Transactions of the Company with HA&I and its affiliates relate principally
to tax settlements, reinsurance, insurance coverage, rental and service fees,
payment of dividends and capital contributions. In addition, certain affiliated
insurance companies purchased group annuity contracts from the Company to fund
pension costs and claim annuities to settle casualty claims. Substantially all
general insurance expenses related to the Company, including rent and employee
benefit plan expenses, are initially paid by The Hartford. Direct expenses are
allocated to the Company using specific identification, and indirect expenses
are allocated using other applicable methods. Indirect expenses include those
for corporate areas which,
<PAGE>
HARTFORD LIFE INSURANCE COMPANY 51
- --------------------------------------------------------------------------------
depending on type, are allocated based on either a percentage of direct expenses
or on utilization. Indirect expenses allocated to the Company by The Hartford
were $34, $40, and $45 in 1997, 1996 and 1995, respectively. Management believes
that the methods used are reasonable.
The rent paid to Hartford Fire for space occupied by the Company was $7 in
1997, and $3 in 1996 and 1995. The Company expects to pay annual rent of $7 in
1998 and 1999, respectively, $12 in 2000 and 2001, respectively, $13 in 2002 and
$87 thereafter, over the remaining term of the sublease, which expires on
December 31, 2009. Rental expense is recognized over a level basis over the term
of the sublease and amounted to approximately $9 in 1997 and $8 in 1996 and
1995.
12. STATUTORY RESULTS
The domestic insurance subsidiaries of Hartford Life 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.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Statutory net income......................... $ 214 $ 144 $ 112
------ ------ ------
Statutory surplus............................ $1,441 $1,207 $1,125
------ ------ ------
------ ------ ------
</TABLE>
A significant percentage of the consolidated statutory surplus is
permanently reinvested or is subject to various state regulatory restrictions
which limit the payment of dividends without prior approval. The total amount of
statutory dividends which may be paid by the insurance subsidiaries of the
Company in 1998 is estimated to be $144.
13. COMMITMENTS AND CONTINGENT LIABILITIES
(A) LITIGATION
The Company is involved in pending and threatened litigation in the normal
course of its business in which claims for monetary and punitive damages have
been asserted. Although there can be no assurances, management, at the present
time, does not anticipate that the ultimate liability arising from such pending
or threatened litigation will have a material effect on the financial condition
or operating results of the Company.
(B) GUARANTY FUNDS
Under insurance guaranty fund laws in each state, the District of Columbia
and Puerto Rico, insurers licensed to do business can be assessed by state
insurance guaranty associations for certain obligations of insolvent insurance
companies to policyholders and claimants. Recent regulatory actions against
certain large life insurers encountering financial difficulty have prompted
various state insurance guaranty associations to begin assessing life insurance
companies for the deemed losses. Most of these laws do provide, however, that an
assessment may be excused or deferred if it would threaten an insurer's solvency
and further provide annual limits on such assessments. A large part of the
assessments paid by the Company's insurance subsidiaries pursuant to these laws
may be used as credits for a portion of the Company's insurance subsidiaries'
premium taxes. The Company paid guaranty fund assessments of approximately $15,
$11 and $10 in 1997, 1996 and 1995, respectively, of which $4, $5, and $6 were
estimated to be creditable against premium taxes.
14. BUSINESS SEGMENT INFORMATION
The Company, along with its parent, sells financial products such as fixed
and variable annuities, retirement plan services, and life and disability
insurance on both an individual and a group basis. The Company divides its core
businesses into three segments: Annuity, Individual Life Insurance, and Employee
Benefits. The Company also maintains a Guaranteed Investment Contracts segment,
which is primarily comprised of guaranteed rate contract business written prior
to 1995 and a Corporate Operation. The Annuity segment offers individual
variable annuities and fixed market value adjusted annuities, deferred
compensation and retirement plan services, mutual funds, investment management
services and other financial products. The Individual Life Insurance segment
sells a variety of individual life insurance products, including variable life,
universal life, interest-sensitive whole life, and term life policies. The
Employee Benefits segment sells group insurance products, including group life,
group short and long-term disability and corporate owned life insurance, and
engages in certain international operations. The Guaranteed Investment Contracts
segment sells a limited amount of guaranteed investment contracts and contains
Closed Book GRC. Through its Corporate Operation, the Company reports items that
are not directly allocable to any of its business segments. Included in the
Corporate Operation are unallocated income and expense and certain other items
not directly allocable to any segment. Net realized capital gains and losses are
recognized in the period of realization, but are allocated to the segments
utilizing durations of the segment portfolios.
<PAGE>
52 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
The following table outlines revenues, operating income and assets by
business segment:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
REVENUES
Annuity.............................................. $ 1,269 $ 968 $ 759
Individual Life Insurance............................ 487 440 383
Employee Benefits.................................... 972 1,366 1,273
Guaranteed Investment Contracts...................... 241 34 337
Corporate Operation.................................. 40 81 52
-------- -------- --------
Total revenues..................................... $ 3,009 $ 2,889 $ 2,804
-------- -------- --------
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT)
Annuity.............................................. $ 317 $ 226 $ 171
Individual Life Insurance............................ 85 68 56
Employee Benefits.................................... 53 44 37
Guaranteed Investment Contracts...................... -- (346) (103)
Corporate Operation.................................. 14 66 30
-------- -------- --------
Total income before income tax expense............. $ 469 $ 58 $ 191
-------- -------- --------
-------- -------- --------
ASSETS
Annuity $ 69,152 $ 52,877 $ 39,732
Individual Life Insurance............................ 4,918 3,753 3,173
Employee Benefits.................................... 18,196 14,708 13,494
Guaranteed Investment Contracts...................... 3,347 4,533 6,069
Corporate Operation.................................. 2,343 1,891 1,729
-------- -------- --------
Total assets....................................... $ 97,956 $ 77,762 $ 64,197
-------- -------- --------
-------- -------- --------
</TABLE>
<PAGE>
HARTFORD LIFE INSURANCE COMPANY 53
- --------------------------------------------------------------------------------
SCHEDULE I -- SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN AFFILIATES
AS OF DECEMBER 31, 1997
(IN MILLIONS)
<TABLE>
<CAPTION>
AMOUNT AT
WHICH
FAIR SHOWN ON
TYPE OF INVESTMENT COST VALUE BALANCE SHEET
- --------------------------------------------- ------- ------- --------------
<S> <C> <C> <C>
Fixed Maturities
Bonds and Notes
U. S. gov't and gov't agencies and
authorities (guaranteed and sponsored) $ 217 $ 219 $ 219
U. S. gov't and gov't agencies and
authorities (guaranteed and sponsored) --
asset-backed.............................. 1,175 1,204 1,204
States, municipalities and political
subdivisions.............................. 211 217 217
International governments.................. 376 393 393
Public utilities........................... 871 894 894
All other corporate including
international............................. 5,033 5,208 5,208
All other corporate -- asset-backed........ 4,091 4,124 4,124
Short-term investments..................... 1,318 1,318 1,318
Certificates of deposit...................... 593 599 599
------- ------- -------
Total fixed maturities....................... 13,885 14,176 14,176
------- ------- -------
Equity Securities
Common Stocks
Public utilities........................... -- -- --
Banks, trusts and insurance companies...... -- -- --
Industrial and miscellaneous............... 166 180 180
Nonredeemable preferred stocks............. -- -- --
------- ------- -------
Total equity securities...................... 166 180 180
------- ------- -------
Total fixed maturities and equity
securities.................................. 14,051 14,356 14,356
------- ------- -------
Real Estate.................................. -- -- --
Other Investments
Mortgage loans on real estate.............. -- -- --
Policy loans............................... 3,756 3,756 3,756
Investments in partnerships, trusts and
other..................................... 47 91 47
------- ------- -------
Total other investments...................... 3,803 3,847 3,803
------- ------- -------
Total investments............................ $17,854 $18,203 $18,159
------- ------- -------
------- ------- -------
</TABLE>
<PAGE>
54 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN MILLIONS)
<TABLE>
<CAPTION>
FUTURE
POLICY
BENEFITS,
UNPAID OTHER
DEFERRED 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>
1997
Annuity...................................... $2,478 $2,070 $ 6,838 $ 769 $ 500
Individual Life Insurance.................... 837 392 2,182 323 164
Employee Benefits............................ -- 780 9,232 541 431
Guaranteed Investment Contracts.............. -- -- 2,782 2 239
Corporate Operation.......................... -- 28 -- 2 34
----------- --------- ---------- ------ ---------
Consolidated operations...................... $3,315 $3,270 $21,034 $1,637 $1,368
----------- --------- ---------- ------ ---------
----------- --------- ---------- ------ ---------
1996
Annuity...................................... $2,030 $1,526 $ 6,016 $ 535 $ 433
Individual Life Insurance.................... 730 346 2,160 287 153
Employee Benefits............................ -- 574 9,834 881 485
Guaranteed Investment Contracts.............. -- -- 4,124 2 251
Corporate Operation.......................... -- 28 -- -- 75
----------- --------- ---------- ------ ---------
Consolidated operations...................... $2,760 $2,474 $22,134 $1,705 $1,397
----------- --------- ---------- ------ ---------
----------- --------- ---------- ------ ---------
1995
Annuity...................................... $1,561 $1,314 $ 5,661 $ 319 $ 400
Individual Life Insurance.................... 615 706 1,932 246 137
Employee Benefits............................ 12 325 9,285 922 351
Guaranteed Investment Contracts.............. -- 28 5,720 -- 377
Corporate Operation.......................... -- -- -- -- 63
----------- --------- ---------- ------ ---------
Consolidated operations...................... $2,188 $2,373 $22,598 $1,487 $1,328
----------- --------- ---------- ------ ---------
----------- --------- ---------- ------ ---------
<CAPTION>
NET BENEFITS, AMORTIZATION
REALIZED CLAIMS AND OF DEFERRED
CAPITAL CLAIM POLICY
GAINS ADJUSTMENT ACQUISITION DIVIDENDS TO OTHER
SEGMENT (LOSSES) EXPENSES COSTS POLICYHOLDERS EXPENSES
- --------------------------------------------- ----------- ----------- ------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
1997
Annuity...................................... $ -- $ 445 $250 $ -- $ 257
Individual Life Insurance.................... -- 242 83 -- 77
Employee Benefits............................ -- 425 2 240 252
Guaranteed Investment Contracts.............. -- 232 -- -- 9
Corporate Operation.......................... 4 35 -- -- (9)
----------- ----------- ----- ----- -----
Consolidated operations...................... $ 4 $1,379 $335 $240 $ 586
----------- ----------- ----- ----- -----
----------- ----------- ----- ----- -----
1996
Annuity...................................... $ -- $ 412 $174 $ -- $ 156
Individual Life Insurance.................... -- 245 59 -- 68
Employee Benefits............................ -- 546 -- 635 141
Guaranteed Investment Contracts.............. (219) 332 1 -- 47
Corporate Operation.......................... 6 -- -- -- 15
----------- ----------- ----- ----- -----
Consolidated operations...................... $(213) $1,535 $234 $635 $ 427
----------- ----------- ----- ----- -----
----------- ----------- ----- ----- -----
1995
Annuity...................................... $ -- $ 317 $117 $ -- $ 114
Individual Life Insurance.................... -- 203 70 -- 54
Employee Benefits............................ -- 424 -- 675 137
Guaranteed Investment Contracts.............. -- 453 12 -- 15
Corporate Operation.......................... (11) 25 -- -- (3)
----------- ----------- ----- ----- -----
Consolidated operations...................... $ (11) $1,422 $199 $675 $ 317
----------- ----------- ----- ----- -----
----------- ----------- ----- ----- -----
</TABLE>
<PAGE>
HARTFORD LIFE INSURANCE COMPANY 55
- --------------------------------------------------------------------------------
SCHEDULE IV -- REINSURANCE
(IN MILLIONS)
<TABLE>
<CAPTION>
CEDED TO ASSUMED FROM PERCENTAGE
GROSS OTHER OTHER NET OF AMOUNT
AMOUNT COMPANIES COMPANIES AMOUNT ASSUMED TO NET
-------- -------------- -------------- -------- ---------------
<S> <C> <C> <C> <C> <C>
For the year ended December 31, 1997
Life insurance in force........................... $245,487 $ 178,771 $ 33,156 $ 99,872 33.2%
Insurance revenues
Life insurance and annuities.................... 1,818 340 157 1,635 9.6%
Accident and health insurance................... 346 346 2 2 100.0%
-------- -------------- ------- --------
Total insurance revenues.......................... $ 2,164 $ 686 $ 159 $ 1,637 9.7%
-------- -------------- ------- --------
-------- -------------- ------- --------
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................... 337 325 21 33 63.6%
-------- -------------- ------- --------
Total insurance revenues.......................... $ 2,138 $ 623 $ 190 $ 1,705 11.1%
-------- -------------- ------- --------
-------- -------------- ------- --------
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 insurance revenues.......................... $ 1,545 $ 649 $ 591 $ 1,487 39.7%
-------- -------------- ------- --------
-------- -------------- ------- --------
</TABLE>
