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FORM 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark one)
[X] Annual Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 (Fee Required)
For the fiscal year ended DECEMBER 31, 1995
OR
[ ] Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 (No Fee Required)
For the transition period from __________to __________.
Commission file number : 2-89516
HARTFORD LIFE INSURANCE COMPANY
Incorporated in the State of Connecticut
06-0974148
(I.R.S. Employer Identification Number)
P.O. Box 2999
Hartford, Connecticut 06104-2999
(Principal Executive Offices)
Telephone number (860) 843-8291
Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing requirements for the
past 90 days. Yes X No
--- ---
As of March 1, 1996 there were outstanding 1,000 shares of Common Stock, $5,690
par value per share, of the registrant, all of which were directly owned by
Hartford Life and Accident Insurance Company.
The registrant meets the conditions set forth in General Instruction J (1) (a)
and (b) of Form 10-K and is therefore filing this form with the reduced
disclosure format.
1
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT FOR 1995 ON FORM 10-K
TABLE OF CONTENTS
ITEM PAGE
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PART I
1. Business of Hartford Life Insurance Company* 3
2. Properties* 9
3. Legal Proceedings 9
4. **
PART II
5. Market for Hartford Life Insurance Company's Common Stock and
Related Stockholder Matters 10
6. **
7. Management's Narrative Analysis of Results of Operations* 10
8. Consolidated Financial Statements and Supplementary Data 11
9. Disagreements on Accounting and Financial Disclosure 11
PART III
10. **
11. **
12. **
13. **
PART IV
14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K 11
Signatures II-1
Exhibit Index II-2
* Item prepared in accordance with General Instruction J(2) of Form 10-K
** Item omitted pursuant to General Instruction J(2) of Form 10-K
2
PART I
ITEM 1. BUSINESS OF HARTFORD LIFE INSURANCE COMPANY
ORGANIZATION
Hartford Life Insurance Company ("Hartford Life" or the "Company") was
organized in 1902 and is incorporated under the laws of the State of
Connecticut. It is a direct subsidiary of Hartford Life and Accident
Insurance Company ("HLA") and is ultimately a wholly-owned subsidiary of
Hartford Fire Insurance Company ("Hartford Fire") which is ultimately a
subsidiary of ITT Hartford Group, Inc. ("ITT Hartford Group"), formerly a
wholly-owned subsidiary of ITT Corporation. On December 19, 1995, ITT
Corporation distributed all of the outstanding shares on ITT Hartford
Group to ITT Corporation shareholders of record in an action known herein
as the "Distribution". As a result of the Distribution, ITT Hartford
became an independent publicly traded company. Hartford Life is the parent
of ITT Hartford Life and Annuity Insurance Company ("ILA"), formerly ITT
Life Insurance Corporation, and ITT Hartford International Life Reassurance
Corporation ("HLRE"), formerly American Skandia Life Reinsurance Corporation,
which was purchased in 1993.
Hartford Life provides for the insurance and retirement needs of millions of
Americans 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, 1995, Hartford Life's total assets of $64.2 billion
included 22.4% of fixed maturities and 56.5% of separate accounts with the
remainder representing equity securities, cash, mortgage loans, policy loans,
reinsurance recoverables and other assets. Hartford Life is engaged in a
business that is highly competitive because of the large number of stock and
mutual life insurance companies and other entities marketing insurance
products. There are approximately 2,000 stock, mutual, and other types of
insurers in the life insurance business in the United States. In the June 26,
1995 edition of NATIONAL UNDERWRITER LIFE-HEALTH INSURANCE magazine, Hartford
Life ranked 12th among all life insurance companies in the United States based
upon total assets. A.M. Best assigned Hartford Life its second highest ranking
classification, A+, as of December 31, 1994.
The reportable divisions of Hartford Life and its subsidiaries are:
Individual Life and Annuity
Asset Management Services
Specialty Insurance Operations
Revenue, income before taxes and identifiable assets by reportable division
are set forth in Note 6 in Notes to Consolidated Financial Statements and are
incorporated herein by reference.
BRIEF DESCRIPTION OF REPORTABLE DIVISIONS
The following is a description of Hartford Life's key products and services,
distribution methods, competition and certain other relative data for each of
its reportable divisions.
INDIVIDUAL LIFE AND ANNUITY ("ILAD")
Hartford Life is a leader in the annuity marketplace, selling both variable
and fixed products through a wide distribution of broker-dealers, financial
and other institutions. Hartford Life was the number one writer of variable
annuities for 1995 (excluding TIAA-CREF) with an 11.0% market share according
to VARDS (Variable Annuity Research and Data Service). The individual annuity
market is highly competitive with insurance companies and other financial
institutions selling similar products. Selection depends on fund performance,
the array of fund and product options, product design, credited rates and a
company's financial strength ratings.
Hartford Life earns fees for managing ILAD assets and maintaining
policyholders' accounts. The policyholder has a variety of fund and product
choices, some of which are managed internally; however, most of the investment
funds are managed by Wellington Management Company, Putnam, NBD First Chicago,
Fidelity, Twentieth Century or Dean Witter.
3
New sales of individual annuities reached $6.9 billion in 1995 bringing assets
under management to $31.0 billion as of December 31, 1995. Of the total assets
under management, $21.0 billion relate to variable annuities with $18.8
billion of these assets held in separate accounts where the policyholder
selects the investment vehicle and bears the risk of asset performance, and
$2.2 billion of these assets, representing the fixed option, held in the
general account. The remaining $10.0 billion of assets under management, in
the Individual Annuity line of business, are in guaranteed separate accounts.
The guaranteed separate account products offer fixed rate guarantees if held
to maturity, but are market value adjusted, the majority of which have no
minimum guarantees should policyholders withdraw early. The guaranteed rates,
when held to maturity, range from 3.0% to 9.3% with durations from one to ten
years. These guarantees are supported by the general account of Hartford
Life. Deposits to these fixed and variable annuity accumulation accounts are
subject to withdrawal restrictions and to surrender charges which dissipate on
a sliding scale, usually within seven policy years. Fixed and variable annuity
policyholder reserves are held at account value. The minimum death benefits
associated with some 1994 and 1995 annuity sales were reinsured to a third
party. Guaranteed policyholders' account balances are primarily held at
market value with amounts held for deferred expenses.
Products sold by the Individual Life line of business include: universal life,
traditional and interest sensitive whole life, term, modified guaranteed life,
and variable life. These products are primarily sold through life
professionals, broker-dealers, and property-casualty agents, assisted by
Hartford Life's own sales offices or other marketing groups. Hartford Life
competes primarily in the up-scale estate and business planning markets.
Significant competition comes from large, financially strong insurers based on
price, product, credit quality, and quality of distribution systems. Some of
these products permit borrowing against the accumulated cash surrender value
of the policy. As of December 31, 1995, the outstanding policy loan balance
on individual life policies was $236 million. Universal life and interest
sensitive whole life reserves are set equal to premiums collected, plus
interest credited, less charges. Other fixed death benefit reserves are based
on assumed investment yield, persistency, mortality and morbidity per commonly
used actuarial tables, expenses, and margins for adverse deviation. Hartford
Life reinsures all individual life business written by HLA. The maximum
retention on any one individual life is $1.25 million.
ASSET MANAGEMENT SERVICES ("AMS")
This division offers retirement products and services to employer groups
marketed to plan administrators through a direct sales force, assisted by home
office personnel. These services include managing assets and acting as plan
administrator for plans qualified under sections 401(k), 403(b) and 457 of the
Internal Revenue Code. The division markets several products for which the
investments and reserves are held in separate accounts. AMS reported total
assets of $14.0 billion as of December 31, 1995, of which $4.0 billion were
separate account assets. The separate account options include Twentieth
Century funds, Fidelity and Hartford Life's own funds which are managed by
Wellington Management Company or are internally managed. Investment
performance relative to non-guaranteed separate account products is borne by
the participants. For group pension products and services, competition is
significant from a number of financial institutions, including other insurance
companies, based on rate and credit quality.
The Guaranteed Rate Contract ("GRC") line of business, which offer fixed or
indexed rates that are guaranteed for a specific period. The GRC line of
business results have been negatively impacted by lower investment earnings
on mortgage-backed securities due to prepayments experienced in excess of
assumed levels. The GRC line of business was also affected by the interest
rate rise in 1994 when the duration of assets lengthened relative to that of
the liabilities. Hartford Life has positioned itself to enhance its
competitive position in the 401(k) full service and group tax deferred annuity
markets. The Section 457 plan market is a mature market for which growth is
primarily achieved through takeover business from competing companies and
through increased contributions from existing participants.
SPECIALTY INSURANCE OPERATIONS
Hartford Life's Corporate Owned Life Insurance ("COLI") line of business is a
leader in the market. Through the purchase of COLI, corporations are able to
use the favorable tax treatment of life insurance to efficiently fund a
variety of employee benefit liabilities such as postretirement health care
and non-qualified benefit programs. The Company also sees significant growth
opportunities in the rapidly expanding market for funding non-qualified
benefit programs. Current legislative proposals would phase out the
deductibility of interest on policy loans under COLI, thus eliminating all
future sales of leveraged COLI; however, it should not affect variable COLI
product sales or in force. Through its specialty insurance subsidiary, HLRe,
focus is on niche reinsurance markets and not on traditional reinsurance
products where competition is often based solely on price. Products and
services are generally geared to developing, underwriting and marketing
innovative financial solutions to customers who use reinsurance to manage
financial risk. Specialty Insurance Operations has growth opportunities
through variable COLI and other non-qualified deferred compensation
vehicles, reinsurance and international acquisitions.
With a need to diversify its risk exposure and seek above average profits in
its Specialty Insurance Operations division, the Company, through its parent,
HLA, initiated an international expansion strategy. In June 1994, HLA
completed its initial international investment outside North America by joint
venturing with an Argentine insurance company, Cenit Seguros, S.A.
4
Through this joint venture, HLA operates several subsidiaries devoted to life
insurance, retirement annuities, mutual funds, life insurance brokerage and
pensions and expects to make further investments in South America. In 1995,
HLRE expanded its activity into Argentina by providing reinsurance to a
developing life insurance market.
Additionally, Hartford Life and HLA have an Employee Benefits division
("EBD") which markets group life, group short and long-term managed
disability, stop loss and supplementary medical coverage to employers and
employer-sponsored plans. It also offers voluntary accidental death and
dismemberment, travel and special risk coverage primarily to associations.
EBD also offers disability underwriting administration and claims processing
services to other insurers and self-insured employer plans. These products
are sold through brokers, licensed agents and Third Party Administrators
through an internal sales force. The markets for group life and disability
are highly competitive based on price and quality of services. All of this
business is reinsured to HLA.
REGULATION
The insurance business of Hartford Life is subject to comprehensive and
detailed regulation and supervision throughout the United States. The laws
of the various jurisdictions establish supervisory agencies with broad
administrative powers with respect to licensing to transact business,
overseeing trade practices, licensing agents, approving policy forms,
establishing reserve requirements, fixing maximum interest rates on life
insurance policy loans and minimum rates for accumulation of surrender
values, and regulating the type and amounts of investments permitted. In
addition, several states, including Connecticut, regulate affiliated groups
of insurers, such as Hartford Life, under insurance holding company
legislation. Under such laws, intercompany transfers of assets and dividend
payments from insurance subsidiaries may be subject to prior notice or
approval, depending on the size of such transfers and payments in relation to
the financial positions of the companies.
The National Association of Insurance Commissioners ("NAIC") has established
solvency laws that relate an insurance company's capital requirements to the
risks inherent in its overall operations. These new rules are known as Risk
Based Capital ("RBC"). As of December 31, 1995, Hartford Life's risk based
capital result was better than the NAIC requirements.
Although the Federal government does not directly regulate the business of
insurance, Federal initiatives often have an impact on the business in a
variety of ways. Current and proposed Federal measures which may
significantly affect the insurance business include: removal of barriers
preventing banks from engaging in the insurance business, limits to medical
testing for insurability, changes in Medicare coverage, ERISA regulations and
Social Security, tax law changes affecting the taxation of insurance
companies, tax treatment of insurance products and its impact on the relative
desirability of various personal investment vehicles and proposed legislation
to prohibit the use of gender in determining insurance and pension rates and
benefits. Current legislative proposals would phase out the deductibility of
interest on policy loans under COLI, thus eliminating all future sales of
leveraged COLI; however, the current proposals would not affect variable COLI
product sales or inforce which accounted for approximately 69% of 1995 sales.
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. Hartford Life 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 Hartford Life operates, it is
obligated to carry on its books, as liabilities, actuarially determined
reserves to meet its obligations on its outstanding life insurance contracts
and reserves for its universal life and investment contracts. Reserves for
life insurance contracts are based on mortality and morbidity tables in
general use in the United States modified to reflect 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, will be sufficient to meet Hartford Life's policy obligations
at their maturities or in the event of an insured's death. Reserves for
universal life insurance and investment products represent policy account
balances before applicable surrender charges. In the accompanying financial
statements these life insurance reserves are determined in accordance with
generally accepted accounting principles, which may vary from statutory
requirements.
INVESTMENT OPERATIONS
The investment objective of Hartford Life is to maximize after-tax yields
consistent with acceptable risk and appropriate liquidity while matching the
interest rate sensitivity of invested assets to that of policyholder
obligations. Hartford Life uses various derivatives to modify the
characteristics of its investments. For a further discussion of strategies
including derivative utilization, see the section below, as well as the Notes
to Consolidated Financial Statements.
INVESTED ASSET CHARACTERISTICS AND DERIVATIVE STRATEGIES TO FACILITATE ASSET-
LIABILITY MANAGEMENT
Invested assets totaled approximately $18.3 billion at December 31, 1995 and
were comprised of asset-backed securities including government agency
collateralized mortgage obligations ("CMO") and mortgage backed securities
("MBS") of $5.8 billion, bonds and notes of $7.9 billion, inverse floating
securities of $0.7 billion, and other investments (primarily policy loans) of
$3.9 billion. The estimated maturities of these fixed and variable rate
investments, along with the respective yields at December 31, 1995, are
reflected below. Asset-backed securities (including Government Agency, CMO's
and MBS) are distributed to maturity year based on Hartford Life's estimate of
the rate of future prepayments of principal over the remaining life of the
securities. These estimates are developed using broker consensus prepayment
speeds. Expected maturities differ from contractual maturities due to call or
prepayment provisions.
5
FIXED MATURITY INVESTMENTS
MATURITY SCHEDULE
ESTIMATED MATURITY
-----------------------------------------------------------------
1996 1997 1998 1999 2000 THEREAFTER TOTAL
------ ------ ------ ------ ----- ---------- -----
ASSET-BACKED SECURITIES
VARIABLE RATE*
Amortized Cost $156 $159 $85 $81 $113 $444 $1,038
Market Value $153 $156 $83 $79 $114 $415 $1,000
Taxable Equivalent Yield** 6.34% 6.25% 6.12% 6.77% 6.64% 9.07% 7.57%
FIXED RATE
Amortized Cost $1,005 $611 $554 $670 $628 $1,408 $4,876
Market Value $998 $620 $493 $673 $633 $1,434 $4,851
Taxable Equivalent Yield** 6.70% 6.84% 6.80% 6.50% 6.77% 6.76% 6.73%
BONDS AND NOTES
VARIABLE RATES*
Amortized Cost $114 $114 $56 $112 $63 $370 $829
Market Value $104 $113 $54 $85 $57 $387 $800
Taxable Equivalent Yield** 5.09% 5.87% 6.26% 6.31% 6.38% 7.39% 6.57%
FIXED RATE
Amortized Cost $1,835 $1,028 $541 $648 $668 $2,173 $6,893
Market Value $1,838 $1,033 $549 $662 $691 $2,264 $7,037
Taxable Equivalent Yield** 5.88% 7.07% 6.44% 6.62% 6.82% 7.24% 6.69%
INVERSE FLOATING
Amortized Cost $36 $116 $24 $52 $50 $526 $804
Market Value $40 $115 $25 $23 $58 $451 $712
Taxable Equivalent Yield** 11.19% 7.67% 12.01% 10.34% 12.26% 11.17% 10.67%
TOTAL FIXED MATURITIES
Amortized Cost $3,146 $2,028 $1,260 $1,563 $1,522 $4,921 $14,440
Market Value $3,133 $2,037 $1.204 $1,522 $1,553 $4,951 $14,400
Taxable Equivalent Yield** 6.71% 6.39% 6.51% 6.67% 6.88% 7.23% 6.85%
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
(*) VARIABLE RATE SECURITIES ARE INSTRUMENTS FOR WHICH THE COUPON RATES MOVE
DIRECTLY WITH AN INDEX RATE. INCLUDED IN THE CAPTION ARE HARTFORD LIFE'S
HOLDINGS FOR RESIDUALS AND INTEREST ONLY SECURITIES WHICH REPRESENT LESS THAN 1%
OF INVESTED ASSETS. RESIDUALS, FOR WHICH COST APPROXIMATES MARKET, HAVE AN
AVERAGE LIFE OF 3.5 YEARS AND EARN AN AVERAGE YIELD OF 12.7%. INTEREST-ONLY
SECURITIES, FOR WHICH COST APPROXIMATES MARKET, HAVE AN AVERAGE LIFE OF 3 YEARS
AND EARN AN AVERAGE YIELD OF 19.6%. AVERAGE YIELDS ARE BASED UPON ESTIMATED
CASH FLOWS USING CURRENT BROKER CONCENSUS PREPAYMENT SPEED ASSUMPTIONS.
(**) TAXABLE EQUIVALENT YIELDS DO NOT REFLECT YIELDS ON DERIVATIVE INSTRUMENTS
ALTHOUGH DERIVATIVE ADJUSTMENTS ARE INCLUDED IN FIXED MATURITY AMORTIZED COST
AND MARKET VALUE.
In addition, other investments, comprised primarily of policy loans, totaled
$3.9 billion at December 31, 1995. These loans, which carry a current weighted
average interest rate of 11.5%, are secured by the cash value of the life
policy. These loans do not mature in a conventional sense but expire in
conjunction with the related policy liabilities.
Derivatives play an important role in facilitating the management of interest
rate risk, in creating opportunities to develop asset packages which
efficiently fund product obligations, in hedging against indexation risks
which affect the value of certain liabilities, and in adjusting broad
investment risk characteristics when dictated by significant changes in
market risks. As an end user of derivatives, Hartford Life uses a variety of
derivative financial instruments, including swaps, caps, floors and exchange
traded financial futures and options, as a means of prudently hedging
exposure to price, foreign currency and/or interest rate risk on anticipated
investment purchases or existing assets and liabilities. The notional amounts
of derivative contracts represent the
6
basis upon which pay and receive amounts are calculated and are not reflective
of credit risk. Credit risk is limited to the amounts calculated to be due to
Hartford Life on such contracts. Payment obligations between Hartford Life
and its counterparties are typically netted on a quarterly basis. Hartford
Life has strict policies regarding the financial stability and credit standing
of its major counterparties and typically requires credit enhancement
requirements to further limit its credit risk. Notional amounts pertaining to
derivative financial instruments totaled $8.8 billion at December 31, 1995
($7.1 billion related to life investments and $1.7 billion on the
liabilities). The following strategies are used to manage the aforementioned
risks associated with the Hartford Life's obligations:
ANTICIPATORY HEDGING
For certain liabilities, Hartford Life commits to the price of the product
prior to receipt of the associated premium or deposit. Hartford Life routinely
executes anticipatory hedges to offset the impact of changes in asset prices
arising from interest rate changes, pending the premium or deposit payment and
the resulting purchase of the assets. These hedges involve taking a long
position in an interest rate futures position or entering into an interest
rate swap with duration characteristics equivalent to the associated
liabilities and anticipated investments. The notional amount of derivatives
used for anticipatory hedges totaled $0.2 and $0.8 billion at December 31,
1995 and 1994, respectively.
LIABILITY HEDGING
Several products obligate Hartford Life to credit a return to the
contractholder which is indexed to a market rate. The Company typically enters
into interest rate swaps to convert the referenced rate into a rate, such as
LIBOR, that trades in a more liquid and efficient market. This hedging
strategy enables the Company to customize contract terms and conditions to
customer objectives and satisfies the Company's asset/liability matching
policy. The notional amount of derivatives used for liability risk adjustment
totaled $1.7 billion at December 31, 1995 and 1994.
ASSET HEDGING
The characteristics of the liabilities drive the asset selection process. To
meet the various policyholder obligations and to provide prudent investment
risk diversification, Hartford Life may elect to combine two or more financial
instruments to achieve the investment characteristics that match the
associated liability. The non-speculative use of derivatives effectively
transfers unwanted investment risks or attributes to others. The selection of
the appropriate derivatives depends on the investment risk, the liquidity and
efficiency of the market, and the asset and liability characteristics. The
notional amount of asset hedges totaled $3.0 billion at December 31, 1995
and 1994.
PORTFOLIO HEDGING
Hartford Life periodically compares the duration and the convexity of its
portfolios of assets to their corresponding liabilities, and enters into
portfolio hedges to reduce any difference to acceptable levels. Portfolio
hedges reduce the mismatch between assets and liabilities and offset the
potential cash flow impact caused by interest rate changes. The notional
amount of portfolio hedging totaled $3.9 billion and $3.3 billion as of
December 31, 1995 and 1994, respectively.
Hartford Life is committed to maintaining an effective risk management
discipline. Approved derivatives usage must support at least one of the
following objectives: to manage the risk to the operation arising from price,
interest rate and foreign currency volatility, to manage liquidity and/or to
control transaction costs. All investment activity is subject to regular
review and approval by ITT Hartford Group's Insurance Operations Finance
Committee. Credit limits, diversification standards and review procedures
for all credit risk whether borrower, issuer, or counterparty have been
established. Hartford Life analyzes the aggregate interest rate risk through
the use of a proprietary, multi-scenario cash flow projection model which
encompasses all liabilities and their associated investments, including
derivatives.
For a discussion of (i) the investments of Hartford Life segregated by major
category, (ii) the types of derivatives related to the type of investment and
their respective notional amounts and (iii) the accounting policies utilized
by Hartford Life for derivative financial instruments, see Notes to
Consolidated Financial Statements contained herein.
POLICY LIABILITY CHARACTERISTICS
Policy liabilities totaled $18.8 billion (net of ceded reinsurance) at
December 31, 1995 which were backed by $27.9 billion in total assets
(including investments of $18.3 billion). Matching of the duration of the
investments with respective policyholder obligations is an explicit objective
of Hartford Life's management strategy. Hartford Life's policy liabilities,
along with estimated duration periods, can be summarized based on investment
needs in the following five categories at December 31, 1995 (in billions):
7
ESTIMATED DURATION (YEARS)
BALANCE LESS OVER
DESCRIPTION 12/31/95 THAN 1 1 - 5 6 - 10 10
- ------------------------------------------------- --------- ------- ------- ------- -------
Fixed rate asset accumulation vehicles $5.8 $1.7 $4.0 $0.1 $0.0
Indexed asset accumulation vehicles 0.3 0.3 0.0 0.0 0.0
Interest credited asset accumulation vehicles 11.1 1.2 5.3 3.3 1.3
Long-term pay out liabilities 1.1 0.0 0.2 0.5 0.4
Short-term pay out liabilities 0.5 0.5 0.0 0.0 0.0
--------- ------- ------- ------- -------
TOTAL $18.8 $3.7 $9.5 $3.9 $1.7
--------- ------- ------- ------- -------
--------- ------- ------- ------- -------
THE DURATION OF LIABILITIES REFLECTS MANAGEMENT'S ASSESSMENT OF THE MARKET PRICE SENSITIVITY OF THE LIABILITIES
TO CHANGES IN MARKET INTEREST RATES, AND IS NOT NECESSARILY REFLECTIVE OF THE PROJECTED LIABILITIES' CASH FLOWS
UNDER ANY SPECIFIC SCENARIO.
FIXED RATE ASSET ACCUMULATION VEHICLES
Products in this category require Hartford Life to pay a fixed rate for a
certain period of time. The cash flows are not interest sensitive, because
the products are written with a market value adjustment, and the liabilities
have protection against the early withdrawal of funds through surrender
charges. The primary risk associated with these products is that the spread
between investment return and credited rate is not sufficient to earn the
desired return. Product examples include fixed rate annuities with a market
rate adjustment and fixed rate guaranteed investment contracts. Contract
duration is reflected above and is dependent on the policyholder's choice of
guarantee period. The weighted average credited policyholder rate for these
policyholder liabilities was 7.15% at December 31, 1995.
INDEXED ASSET ACCUMULATION VEHICLES
Products in this category are similar to the fixed rate asset accumulation
vehicles, but require Hartford Life to pay a rate that is determined by an
external index. The amount and/or timing of cash flows will therefore vary
based on the level of the particular index. The risks inherent in these
products are similar to the fixed rate asset accumulation vehicles, with an
additional risk of changes in the index adversely affecting profitability.
Product examples include indexed guaranteed investment contracts with an
estimated duration of up to two years. The weighted average credited rate for
these contracts was 6.62% at December 31, 1995.
INTEREST CREDITED ASSET ACCUMULATION VEHICLES
Products in this category credit interest to policyholders, subject to market
conditions and minimum guarantees. Policyholders may surrender at book value,
but are subject to surrender charges for an initial period. The risks vary
depending on the degree of insurance element contained in the product.
Product examples include universal life contracts and fixed option of the
group and variable annuity contracts. Liability duration is short to
intermediate-term and is reflected in the table above. The average credited
rate for these liabilities was 6.50% at December 31, 1995.
LONG-TERM PAYOUT LIABILITIES
Products in this category are long-term in nature and contain significant
actuarial (mortality, morbidity) pricing risks. The cash flows are not
interest sensitive, but do vary based on the timing and amount of benefit
payments. The risks associated with these products are that the benefits
will exceed expected actuarial pricing and/or the investment return is lower
than assumed in pricing. Product examples include structured settlement
contracts, on-benefit annuities and long-term disability contracts. Contract
duration is generally 6 to 10 years but, at times, exceeds 30 years. Policy
liabilities under these contracts are not interest sensitive.
SHORT-TERM PAYOUT LIABILITIES
These liabilities are short-term in nature with a duration less than one year.
Substantially all risks associated with these products are determined by the
non-investment contingencies such as mortality or morbidity. Liquidity is of
greater concern than for the long-term payout liabilities. Products include
individual and group-term contracts and short-term disability contracts.
SEPARATE ACCOUNT PRODUCTS
Separate account products are those for which a separate investment and
liability account is maintained on behalf of the policyholder. Separate
accounts reflect two categories of risk assumption: non-guaranteed separate
accounts totaling $25.9
8
billion, wherein the policyholder assumes the investment risk, and guaranteed
separate accounts totaling $10.4 billion, wherein Hartford Life contractually
guarantees either a minimum return or account value to the policyholder.
Investment strategy varies by fund choice, as outlined in the fund prospectus
or separate account plan of operations. Non-guaranteed products include
variable annuities and variable life contracts. Guaranteed separate account
products primarily consist of modified guaranteed individual annuity and
modified guaranteed life insurance, and generally include market value
adjustment provisions to mitigate the risk of early surrenders. Additional
investment risk is hedged using a variety of derivatives which total $133
million in carrying value and $2.7 billion in notional amounts at December 31,
1995.
OTHER MATTERS
As of December 31, 1995, Hartford Life and its parent, HLA, have 3,045 direct
employees, 1,741 of whom are employed at the home office in Simsbury,
Connecticut, and 1,304 of whom are employed at various branch offices
throughout the United States, Canada and elsewhere. ILA employs 381 people in
Minneapolis, Minnesota, and HLRe has 19 employees in Westport, Connecticut.
ITEM 2. PROPERTIES
Hartford Life occupies office space leased by Hartford Fire. Expenses
associated with these offices are allocated on a direct and indirect basis to
the Life subsidiaries by Hartford Fire.
ITEM 3. LEGAL PROCEEDINGS
Hartford Life is involved in pending and threatened litigation in which claims
for monetary damages are asserted. Management, after consultation with legal
counsel, does not anticipate that the ultimate liability arising from such
pending or threatened litigation which arises in the normal course of business
would have a material effect on the financial position or future operating
results of Hartford Life.
9
PART II
ITEM 5. MARKET FOR HARTFORD LIFE'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
All of Hartford Life's outstanding shares are ultimately owned by Hartford
Fire which is ultimately a subsidiary of ITT Hartford Group. As of March 1,
1996, Hartford Life had issued and outstanding 1,000 shares of common stock
at a par value of $5,690 per share.
ITEM 7.
MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
(DOLLAR AMOUNTS IN MILLIONS)
ILAD AMS SPECIALTY TOTAL
--------------- --------------- ---------------- ----------------
1995 1994 1995 1994 1995 1994 1995 1994
----- ----- ----- ----- ------ ----- ------ ------
Revenue $797 $691 $734 $789 $1,273 $919 $2,804 $2,399
Benefits, claims, expenses and taxes 642 595 786 765 1,247 901 2,675 2,261
----- ----- ----- ----- ------ ----- ------ ------
NET INCOME(LOSS) $155 $96 ($52) $24 $26 $18 $129 $138
----- ----- ----- ----- ------ ----- ------ ------
----- ----- ----- ----- ------ ----- ------ ------
INDIVIDUAL LIFE & ANNUITY ("ILAD")
Revenues of $797 in 1995 increased by $106, or 15%, over 1994 as a result of
several factors. In the Individual Annuity line of business, deposits on
fixed and variable annuity contracts (which are not recorded as revenues) and
strong market value appreciation in policyholder accounts increased the assets
in this line of business 52% to $31 billion. Asset growth resulted in a
corresponding increase in policy charges which are based primarily as a
percentage of assets. This division has been the market leader in sales of
individual variable annuity contracts in each of the last three years. In the
Individual Life line of business, the full year benefits of the Pacific
Standard assumption reinsurance agreement (described below), in conjunction
with new business sales, have enabled premiums and other considerations (net
of reinsurance and acquisitions) to grow 15% over 1994. In addition,
significant expense savings have resulted from the consolidation of several
functions in the Minneapolis and Simsbury locations. The combination of the
above items resulted in earnings growth of 61% for the total reportable
division.
In 1994, the division assumed life and annuity policies from Pacific Standard
Life Insurance Company, adding $219 million of life and $181 million of
annuity assets. In 1993, ILAD assumed $3.2 billion in fixed and variable
annuity assets and $0.9 billion of modified guaranteed life insurance from
Fidelity Bankers Life Insurance Company. The significant growth from these
assumptions along with new deposits from fixed and variable annuity sales of
$7.0 billion in 1994 and $4.2 billion in 1993 increased assets under
management. The management and maintenance fees and cost of insurance
associated with this growing policyholder base were the source of ILAD's
increased revenues and net income.
ASSET MANAGEMENT SERVICES ("AMS")
With revenues down 7% and a net loss, after-tax, of $52, AMS's 1995 results
were significantly below that of the prior year. This operating decline was
primarily due to the results of the GRC line of business, which offers fixed
or indexed rates that are guaranteed for a specific period. The GRC line of
business results have been negatively impacted by lower investment earnings
on mortgage-backed securities because of prepayments experienced in excess of
assumed levels. The GRC line of business results were also affected by the
interest rate rise in 1994 when the duration of assets lengthened relative to
that of the liabilities. The impact of these factors, which resulted in a $68
loss in 1995, is expected to decline 10% to 25% per year over the next two
years and will run out in its entirety by the end of the year 2000. Hedging
and other funding strategies have been developed to address potential future
liquidity needs.
Excluding the losses described above, AMS net income was $16 in 1995 as
compared with $23 in 1994. Although 1995 results were below the historic
high of 1994, management does not expect this trend to continue.
SPECIALTY INSURANCE OPERATIONS
Specialty Operations reported net income of $26 in 1995 representing a
44% increase over its 1994 net income of $18 and represents over 20% of the
Company's total 1995 net income. The increase in 1995 net income was
primarily due to substantial growth in the existing COLI line of business.
10
Total division revenues of $1,273 in 1995 increased by $354 to 39% over 1994
levels and were driven by substantial increases in COLI sales. In 1994, this
reportable division began to offer a variable COLI product which accounted for
nearly 69% of all new 1995 sales.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements and Schedules.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents Filed:
(1) See Index to Consolidated Financial Statements and Schedules.
(2) See Exhibit Index.
(b) No reports on Form 8-K have been filed during the last quarter of
1995.
11
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Report of Management F-1
Report of Independent Public Accountants F-2
Consolidated Statements of Income for the three years ended December 31, 1995 F-3
Consolidated Balance Sheets as of December 31, 1995 and 1994 F-4
Consolidated Statements of Stockholder's Equity for the three years ended December 31, 1995 F-5
Consolidated Statements of Cash Flows for the three years ended December 31, 1995 F-6
Notes to Consolidated Financial Statements F-7 thru F-18
Summary of Investments (Other than Investments in Affiliates) S-1
Supplemental Insurance Information S-2
Reinsurance S-3
All schedules not listed above have been omitted because they are not
applicable or the amounts are insignificant, immaterial or the information has
been otherwise supplied in the financial statements or notes thereto.
REPORT OF MANAGEMENT
The management of Hartford Life Insurance Company and subsidiaries 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 Hartford
Life'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 Hartford Life's financial records to
Arthur Andersen LLP, independent public accountants, in order for them to
perform an audit of Hartford Life's consolidated financial statements. Their
report appears on Page F-2.
An essential element in meeting management's responsibilities is Hartford
Life'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 Hartford Life's internal auditors
independently assess the effectiveness of the controls and make
recommendations for improvement. Also, Arthur Andersen LLP took into
consideration Hartford Life's system of internal controls in determining the
nature, timing, and extent of its audit and tests.
Another important element is management's recognition of its responsibility
for fostering a strong, ethical climate, thereby ensuring that Hartford
Life's affairs are transacted according to the highest standards of personal
and professional conduct. Hartford Life 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 ITT Hartford, composed of
non-employee directors, meets periodically with the external and internal
auditors to evaluate the effectiveness of the work performed by them in
discharging their respective responsibilities and to ensure their
independence and free access to the Committee.
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Hartford Life Insurance Company and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Hartford Life
Insurance Company (a Connecticut corporation and wholly-owned subsidiary of
Hartford Life and Accident Insurance Company) and subsidiaries as of December
31, 1995 and 1994, 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, 1995. These consolidated financial statements and the
schedules referred to below are the responsibility of Hartford Life Insurance
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Hartford Life Insurance Company and subsidiaries as of December 31, 1995 and
1994, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.
As discussed in Note 1 in Notes to Consolidated Financial Statements, Hartford
Life Insurance Company adopted new accounting standards promulgated by the
Financial Accounting Standards Board, changing its methods of accounting, as of
January 1, 1994, for debt and equity securities.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedules listed in
the Index to Consolidated Financial Statements and Schedules are presented for
purposes of complying with the Securities and Exchange Commission's rules and
are not a required part of the basic consolidated financial statements. These
schedules have been subjected to the auditing procedures applied in the audits
of the basic consolidated financial statements and, in our opinion, fairly
state in all material respects the financial data required to be set forth
therein in relation to the basic consolidated financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Hartford, Connecticut
January 24, 1996
F-2
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS)
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1994 1993
------- ------- ------
REVENUES
Premiums and other considerations $1,487 $1,100 $747
Net investment income 1,328 1,292 1,051
Net realized (losses) gains (11) 7 16
------ ------ -----
TOTAL REVENUES 2,804 2,399 1,814
------ ------ -----
BENEFITS, CLAIMS AND EXPENSES
Benefits, claims and claim
adjustment expenses 1,422 1,405 1,046
Dividends to policyholders 675 419 227
Amortization of deferred policy
acquisition costs 199 145 113
Other insurance expense 317 227 210
------ ------ -----
TOTAL BENEFITS, CLAIMS AND EXPENSES 2,613 2,196 1,596
------ ------ -----
INCOME BEFORE INCOME TAX EXPENSE 191 203 218
Income tax expense 62 65 75
------ ------ -----
NET INCOME $129 $138 $143
------ ------ -----
------ ------ -----
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
F-3
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS EXCEPT SHARE DATA)
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
AS OF DECEMBER 31,
------------------
1995 1994
------- --------
ASSETS
Investments
Fixed maturities
available for sale, at market value
(amortized cost of $14,440 and $14,464) $14,400 $13,429
Equity securities, at market value
(cost of $61 and $76) 63 68
Mortgage loans, at outstanding balance 265 316
Policy loans, at outstanding balance 3,381 2,614
Other investments, at cost 156 107
------- -------
TOTAL INVESTMENTS 18,265 16,534
Cash 46 20
Premiums and amounts receivable 165 160
Reinsurance recoverable 6,221 5,466
Accrued investment income 394 378
Deferred policy acquisition costs 2,188 1,809
Deferred income tax 420 590
Other assets 234 83
Separate account assets 36,264 22,809
------- -------
TOTAL ASSETS $64,197 $47,849
------- -------
------- -------
LIABILITIES
Future policy benefits $2,373 $1,890
Other policyholder funds 22,598 21,328
Other liabilities 1,233 1,000
Separate account liabilities 36,264 22,809
------- -------
TOTAL LIABILITIES 62,468 47,027
------- -------
Commitments and contingencies (Note 9)
STOCKHOLDER'S EQUITY
Common stock
Authorized 1,000 shares, $5,690 par value
Issued and outstanding 1,000 shares 6 6
Additional paid-in capital 1,007 826
Retained earnings 773 644
Unrealized loss on investments, net of tax (57) (654)
------- -------
TOTAL STOCKHOLDER'S EQUITY 1,729 822
------- -------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $64,197 $47,849
------- -------
------- -------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
F-4
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(IN MILLIONS)
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
UNREALIZED LOSS TOTAL
COMMON ADDITIONAL RETAINED ON INVESTMENTS, STOCKHOLDER'S
STOCK PAID-IN-CAPITAL EARNINGS NET OF TAX EQUITY
------ --------------- -------- --------------- -------------
BALANCE, DECEMBER 31, 1992 $6 $498 $373 $0 $877
Net income - - 143 - 143
Capital contribution - 180 - - 180
Excess of assets over liabilities
on reinsurance assumed from affiliate - (2) - - (2)
Change in unrealized loss on investments, net of tax - - - (5) (5)
------ --------------- -------- --------------- -------------
BALANCE, DECEMBER 31, 1993 6 676 516 (5) 1,193
------ --------------- -------- --------------- -------------
Net income - - 138 - 138
Capital contribution - 150 - - 150
Dividend paid - - (10) - (10)
Change in unrealized loss on investments, net of tax* - - - (649) (649)
------ --------------- -------- --------------- -------------
BALANCE, DECEMBER 31, 1994 6 826 644 (654) 822
------ --------------- -------- --------------- -------------
Net income - - 129 - 129
Capital contribution - 181 - - 181
Change in unrealized loss on investments, net of tax - - - 597 597
------ --------------- -------- --------------- -------------
BALANCE, DECEMBER 31, 1995 $6 $1,007 $773 ($57) $1,729
------ --------------- -------- --------------- -------------
------ --------------- -------- --------------- -------------
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
(*) The 1994 change in unrealized loss on investments, net of tax, included an
unrealized gain of $91 due to adoption of SFAS No. 115 as discussed in Note 1(b)
of Notes to Consolidated Financial Statements.
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
F-5
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------
1995 1994 1993
------------- -------------- -------------
OPERATING ACTIVITIES
Net income $129 $138 $143
Adjustments to net income:
Net realized (losses) gains 11 (7) (16)
(Decrease) increase in liability to policyholders for realized gains (3) 5 (15)
Net amortization of premium on fixed maturities 21 41 2
Provision for deferred income taxes (172) (128) (121)
Increase in deferred policy acquisition costs (379) (441) (292)
(Increase) decrease in premiums and amounts receivable (81) 10 (28)
Increase in accrued investment income (16) (106) (4)
(Increase) decrease in other assets (177) 101 (36)
(Increase) decrease in reinsurance recoverable (35) 75 (121)
Increase in liability for future policy benefits 483 224 360
Increase in other liabilities 281 191 176
------------- -------------- -------------
CASH PROVIDED BY OPERATING ACTIVITIES 62 103 48
------------- -------------- -------------
INVESTING ACTIVITIES
Purchases of fixed maturities investments (6,228) (9,127) (12,406)
Proceeds from sales of fixed maturities investments 4,848 5,708 8,813
Maturities and principal paydowns of fixed maturities investments 1,741 1,931 2,596
Net purchases of other investments (871) (1,338) (206)
Net (purchases)/sales of short-term investments (24) 135 (564)
------------- -------------- -------------
CASH USED FOR INVESTING ACTIVITIES (534) (2,691) (1,767)
------------- -------------- -------------
FINANCING ACTIVITIES
Net receipts from investment and UL-type contracts credited to
policyholder account balances 498 2,467 1,513
Capital contribution 0 150 180
Dividends paid 0 (10) 0
------------- -------------- -------------
CASH PROVIDED BY FINANCING ACTIVITIES 498 2,607 1,693
------------- -------------- -------------
NET INCREASE (DECREASE) IN CASH 26 19 (26)
Cash at beginning of year 20 1 27
------------- -------------- -------------
CASH AT END OF YEAR $46 $20 $1
------------- -------------- -------------
------------- -------------- -------------
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
F-6
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN MILLIONS)
1. SIGNIFICANT ACCOUNTING POLICIES
(A) BASIS OF PRESENTATION
These consolidated financial statements include Hartford Life Insurance Company
and its wholly-owned subsidiaries ("Hartford Life" or the "Company"), ITT
Hartford Life and Annuity Insurance Company ("ILA") and ITT Hartford
International Life Reassurance Corporation ("HLRe"), formerly American Skandia
Life Reinsurance Corporation. Hartford Life is a wholly-owned subsidiary of
Hartford Life and Accident Insurance Company ("HLA"). Hartford Life is
ultimately owned by Hartford Fire Insurance Company ("Hartford Fire"), which is
ultimately owned by ITT Hartford Group, Inc. ("ITT Hartford"), formerly a
subsidiary of ITT Corporation ("ITT"). On December 19, 1995, ITT Corporation
distributed all of the outstanding shares of ITT Hartford Group to ITT
Corporation Shareholders of record in an action known herein as the
"Distribution". As a result of the Distribution, ITT Hartford became an
independent publicly traded company.
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
Company offers life, annuity, pension, and disability insurance products.
These products are distributed and marketed by multiple distribution channels
which include broker-dealers, agents and banks, as well as a captive sales
force. Hartford Life conducts business primarily in the United States and is
licensed to write business in all 50 states. The Company is headquartered in
Simsbury, Connecticut and has 3,045 direct employees.
The consolidated financial statements are prepared in conformity with generally
accepted accounting principles which differ in certain material respects from
the accounting practices prescribed or permitted by various insurance
regulatory authorities.
(B) CHANGES IN ACCOUNTING PRINCIPLES
Effective January 1, 1994, Hartford Life adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities". The new standard requires, among other things,
that securities be classified as "held-to-maturity", "available-for-sale" or
"trading" based on Hartford Life's intentions with respect to the ultimate
disposition of the security and its ability to effect those intentions. The
classification determines the appropriate accounting carrying value (cost basis
or fair value) and, in the case of fair value, whether the adjustment impacts
Stockholder's Equity directly or is reflected in the Consolidated Statements of
Income. Investments in equity securities had previously been and continue to
be recorded at fair value with the corresponding impact included in
Stockholder's Equity. Under SFAS No. 115, Hartford Life's fixed maturities
are classified as "available-for-sale" and accordingly, these investments are
reflected at fair value with the corresponding impact included as a component
of Stockholder's Equity designated as "Unrealized loss on investments, net of
tax." As with the underlying investment security, unrealized gains and losses
on derivative financial instruments are considered in determining the fair
value of the portfolios. The impact of adoption was an increase to
Stockholder's Equity of $91. Hartford Life's cash flows were not impacted by
this change in accounting principle.
(C) REVENUE RECOGNITION
Revenues for universal life policies and investment products consist of policy
charges for the cost of insurance, policy administration and surrender charges
assessed to policy account balances. Premiums for traditional life insurance
policies are recognized as revenues when they are due from policyholders.
Deferred acquisition costs are amortized using the retrospective deposit method
for universal life and other types of contracts where the payment pattern is
irregular or surrender charges are a significant source of profit and the
prospective deposit method is used where investment margins are the primary
source of profit.
F-7
(D) FUTURE POLICY BENEFITS AND OTHER POLICYHOLDER FUNDS
Liabilities for future policy benefits are computed by the net level premium
method using interest rate assumptions varying from 3% to 11% and withdrawal,
mortality and morbidity assumptions which vary by plan, year of issue and
policy durations and include a provision for adverse deviation. Other
policyholder funds which represent liabilities for universal life insurance and
investment products reflect policy account balances before applicable surrender
charges.
(E) POLICYHOLDER REALIZED GAINS AND LOSSES
Realized gains and losses on security transactions associated with Hartford
Life's immediate participation guaranteed contracts are excluded from
revenues, since under the terms of the contracts the realized gains and losses
will be credited to policyholders in future years as they are entitled to
receive them.
(F) DEFERRED POLICY ACQUISITION COSTS
Policy acquisition costs, including commissions and certain underwriting
expenses associated with acquiring traditional life insurance products, are
deferred and amortized over the lesser of the estimated or actual contract
life. For universal life insurance and investment products, acquisition costs
are being amortized generally in proportion to the present value of expected
gross profits from surrender charges, investment, mortality and expense
margins.
(G) INVESTMENTS
Hartford Life's investments in fixed maturities include bonds, redeemable
preferred stock and commercial paper which are classified as "available-for-
sale" and accordingly are carried at market value with the after-tax difference
from cost reflected as a component of Stockholder's Equity designated
"Unrealized loss on investments, net of tax". Equity securities, which include
common and non-redeemable preferred stocks, are carried at market value with
the after-tax difference from cost reflected in Stockholder's Equity. Realized
investment gains and losses, after deducting life and pension policyholders'
share, are reported as a component of revenue and are determined on a specific
identification basis.
(H) DERIVATIVE FINANCIAL INSTRUMENTS
Hartford Life uses a variety of derivative financial instruments including,
swaps, caps, floors, options, forwards and exchange traded financial futures 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. Hartford
Life does not hold or issue derivative financial instruments for trading
purposes. Hartford Life's accounting for derivative financial instruments used
to manage risk is in accordance with the concepts established in SFAS No. 80,
"Accounting for Futures Contracts," SFAS No. 52 , "Foreign Currency
Translation", American Institute of Certified Public Accountants Statement of
Position 86-2, "Accounting for Options" and various Emerging Issues Task Force
pronouncements. Written options are in all cases used in conjunction with other
assets and derivatives as part of an overall risk management strategy.
Derivative instruments are carried at values consistent with the asset or
liability being hedged. Derivatives used to hedge fixed maturities or equities
are carried at fair value with the after-tax difference from cost reflected in
Stockholder's Equity. Derivatives used to hedge other invested assets or
liabilities are carried at cost.
Derivatives, used as part of a risk management strategy, must be designated at
inception as a hedge and measured for effectiveness both at inception and on an
ongoing basis. Hartford Life's minimum correlation threshold for hedge
designation is 80%. If correlation, which is assessed monthly and measured
based on a rolling three month average, falls below 80%, hedge accounting will
be terminated. Derivatives used to create a synthetic asset must meet synthetic
accounting criteria including designation at inception and consistency of terms
between the synthetic and the instrument being replicated. Synthetic
instrument accounting, consistent with industry practice, provides that the
synthetic asset is accounted for like the financial instrument it is intended
to replicate. Derivatives which fail to meet risk management criteria are
marked to market with the impact reflected in the Consolidated Statements
of Income.
Gains or losses on financial futures contracts entered into in anticipation
of the future receipt of product cash flows are deferred and, at the time of
the ultimate purchase, reflected as a basis adjustment to the purchased
asset. Gains or losses on futures used in invested asset risk management are
deferred and adjusted into the basis of the hedged asset when the contract
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 investment income over the remaining asset life.
F-8
Open forward commitment contracts are marked to market through Stockholder's
Equity. Such contracts are recorded at settlement by recording the purchase of
the specified securities at the previously committed price. Gains or losses
resulting from the termination of the forward commitment contracts before the
delivery of the securities are recognized immediately in the Consolidated
Statements of Income as a component of net investment income.
The cost of 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 hedge. 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 income. Should the swap be terminated, the gain or loss is
adjusted into the basis of the asset or liability and amortized over the
remaining life. Should the hedged asset be sold or liability terminated without
terminating the swap position, any swap gains or losses are immediately
recognized in earnings. Interest rate swaps purchased in anticipation of an
asset purchase ("anticipatory transaction") are recognized consistent with the
underlying asset components such that the settlement component is recognized in
the Consolidated Statements of Income while the change in market value is
recognized as an unrealized gain or loss.
Premiums paid on purchased floor or cap agreements and the premium received on
issued floor or cap agreements (used for risk management), are adjusted into
the basis of the applicable asset and amortized over the asset life. Gains or
losses on termination of such positions are adjusted into the basis of the
asset or liability and amortized over the remaining asset life. Net payments
are recognized as an adjustment to income or basis adjusted and amortized
depending on the specific hedge strategy.
Forward exchange contracts and foreign currency swaps are accounted for in
accordance with SFAS No. 52.
(I) RELATED PARTY TRANSACTIONS
Transactions of Hartford Life with its parent and affiliates relate principally
to tax settlements, insurance coverage, rental and service fees and payment of
dividends and capital contributions. In addition, certain affiliated insurance
companies purchased group annuity contracts from Hartford Life to fund pension
costs and claim annuities to settle casualty claims.
On June 30, 1995, the assets of Lyndon Insurance Company ("Lyndon") were
contributed to ILA. As a result, ILA received approximately $365 in fixed
maturities, equity securities and cash, $26 in receivables, $187 of current
tax liability, $20 in deferred tax liability, and $3 of other liabilities.
The excess of assets over liabilities of $181 were recorded as an increase to
paid-in capital.
Substantially all general insurance expenses related to Hartford Life,
including rent expenses, are initially paid by Hartford Fire. Direct expenses
are allocated to Hartford Life using specific identification and indirect
expenses are allocated using other applicable methods.
The rent paid to Hartford Fire for the space occupied by Hartford Life was $3
in 1995, 1994, and 1993 respectively. Hartford Life expects to pay rent of $3
in 1996, 1997, 1998, 1999, and 2000, respectively and $57 thereafter, over the
contract life of the lease.
(J) DIVIDEND TO POLICYHOLDERS
Dividends to policyholders primarily represent those amounts paid to corporate
owned life insurance ("COLI") policyholders. These dividend liabilities, which
appear as other policyholder funds on the Consolidated Balance Sheets, are
recorded when approved by the board of directors.
See Note (4) for the related party coinsurance agreements.
F-9
2. INVESTMENTS
(a) COMPONENTS OF NET INVESTMENT INCOME
YEAR ENDED DECEMBER 31,
--------------------------
1995 1994 1993
------ ------ ------
Interest income $1,338 $1,247 $1,007
Income from other investments 1 54 53
------ ------ ------
GROSS INVESTMENT INCOME 1,339 1,301 1,060
Less: Investment expenses 11 9 9
------ ------ ------
NET INVESTMENT INCOME $1,328 $1,292 $1,051
------ ------ ------
------ ------ ------
(b) UNREALIZED GAINS/(LOSSES) ON EQUITY SECURITIES
As of December 31,
--------------------------
1995 1994 1993
------ ------ ------
Gross unrealized gains $4 $2 $3
Gross unrealized losses (2) (11) (11)
Deferred income tax expenses/(benefit) 1 (3) (3)
------ ------ ------
NET UNREALIZED GAINS (LOSSES) AFTER TAX 1 (6) (5)
Balance at the beginning of the year (6) (5) (0)
------ ------ ------
CHANGE IN NET UNREALIZED GAINS (LOSSES) ON EQUITY SECURITIES $7 ($1) ($5)
------ ------ ------
------ ------ ------
(c) UNREALIZED GAINS/(LOSSES) IN FIXED SECURITIES
As of December 31,
--------------------------
1995 1994 1993
------ ------ ------
Gross unrealized gains $529 $150 $538
Gross unrealized losses (569) (1,185) (290)
Unrealized (losses)/gains credited to policyholder (52) 37 0
Deferred income tax (benefit)/expense (34) (350) 87
------ ------ ------
NET UNREALIZED (LOSSES) GAINS AFTER TAX (58) (648) 161
Balance at the beginning of the year (648) 161 144
------ ------ ------
CHANGE IN NET UNREALIZED GAINS(LOSES)
ON FIXED MATURITIES $590 ($809) $17
------ ------ ------
------ ------ ------
(d) COMPONENTS OF NET REALIZED GAINS/(LOSSES)
Year ended December 31,
--------------------------
1995 1994 1993
------ ------ ------
Fixed maturities $23 ($34) ($12)
Equity securities (6) (11) 0
Real estate and other (25) 47 43
Less: (decrease)/increase in liability to policyholders
for realized gains (3) 5 (15)
------ ------ ------
NET REALIZED (LOSSES) GAINS ($11) $7 $16
------ ------ ------
------ ------ ------
F-10
(e) DERIVATIVE INVESTMENTS
A summary of investments, segregated by major category along with the types of
derivatives and their respective notional amounts, are as follows as of
December 31, 1995 :
SUMMARY OF INVESTMENTS
AS OF DECEMBER 31, 1995
(CARRYING AMOUNT)
Caps, Floors & Options Foreign
Carrying ----------------------- Currency
Value Non-Derivative Issued(b) Purchased(c) Futures(d) Swaps(f) Swaps
-------- ----------- -------- ----------- --------- -------- -------
Asset-backed securities $5,764 $5,752 ($1) $30 $0 ($17) $0
Inverse floaters(a) 711 794 (30) 16 0 (69) 0
Anticipatory(e) 0 0 0 0 0 0 0
-------- ----------- -------- ----------- --------- -------- -------
TOTAL ASSET-BACKED SECURITIES 6,475 6,546 (31) 46 0 (86) 0
Other bonds and notes 7,118 7,165 (1) 0 0 (22) (24)
Short-term investments 807 807 0 0 0 0 0
-------- ----------- -------- ----------- --------- -------- -------
TOTAL FIXED MATURITIES 14,400 14,518 (32) 46 0 (108) (24)
Other investments 3,865 3,865 0 0 0 0 0
-------- ----------- -------- ----------- --------- -------- -------
TOTAL INVESTMENTS $18,265 $18,383 ($32) $46 $0 ($108) ($24)
-------- ----------- -------- ----------- --------- -------- -------
-------- ----------- -------- ----------- --------- -------- -------
SUMMARY OF INVESTMENTS
AS OF DECEMBER 31, 1995
(NOTIONAL AMOUNT)
(EXCLUDING LIABILITY HEDGES)
Caps, Floors & Options Foreign
Notional ---------------------- Currency
Amount Issued(b) Purchased(c) Futures(d) Swaps(f) Swaps
-------- --------- --------- ---------- --------- ---------
Asset-backed securities $3,863 $118 $3,133 $322 $290 $0
Inverse floaters(a) 1,601 560 354 6 681 0
Anticipatory(e) 238 0 0 213 25 0
-------- --------- --------- ---------- --------- ---------
TOTAL ASSET-BACKED SECURITIES 5,702 678 3,487 541 996 0
Other bonds and notes 1,365 33 66 322 757 187
Short-term investments 0 0 0 0 0 0
-------- --------- --------- ---------- --------- ---------
TOTAL FIXED MATURITIES 7,067 711 3,553 863 1,753 187
Other investments 18 0 0 0 18 0
-------- --------- --------- ---------- --------- ---------
TOTAL INVESTMENTS $7,085 $711 $3,553 $863 $1,771 $187
-------- --------- --------- ---------- --------- ---------
-------- --------- --------- ---------- --------- ---------
(a) Inverse floaters are variations of CMO's for which the coupon rates
move inversely with an index rate (e.g. LIBOR). The risk to principal is
considered negligible as the underlying collateral for the securities is
guaranteed or sponsored by government agencies. To address the volatility
risk created by the coupon variability, Hartford Life uses a variety of
derivative instruments, primarily interest rate swaps and issued floors.
(b) Includes issued caps $475 with a weighted average strike rate of 8.5%
(ranging from 7.0% to 10.4%) and over 85% mature in 2000 through 2004. Issued
floors totaled $236, have a weighted average strike rate of 8.1% (ranging
from 5.3% to 10.9%) and mature through 2007 with 76% maturing by 2004.
(c) Comprised of purchased floors of $1.8 billion and purchased caps of $1.7
billion. The floors have a weighted average strike price of 5.8% (ranging from
3.7% to 6.8%) and over 85% mature in 1997 through 1999. The caps have a
weighted average strike price of 7.5% (ranging from 4.5% and 10.1%) and over
82% mature in 1997 through 1999.
(d) Over 95% of futures contracts expire before December 31, 1996.
(e) Deferred gains and losses on anticipatory transactions are included in the
carrying value of bond investments in the consolidated balance sheets. At the
time of the ultimate purchase, they are reflected as a basis adjustment to the
purchased asset. At December 31, 1995, there were $5.3 in net deferred losses
for futures, interest rate swaps and purchased options.
(f) The following table summarizes the maturities by notional value of interest
rate swaps outstanding at December 31, 1995 and the related weighted average
interest pay rate or receive rate assuming current market conditions:
F-11
MATURITY OF SWAPS ON INVESTMENTS
AS OF DECEMBER 31, 1995
LAST
1996 1997 1998 1999 2000 THEREAFTER TOTAL MATURITY
---- ---- ---- ---- ---- ---------- ----- --------
INTEREST RATE SWAPS
PAY FIXED/RECEIVE VARIABLE
Notional Value $15 $50 $0 $453 $31 $229 $778 2004
Weighted Average Pay Rate 5.0% 7.2% 0.0% 8.1% 7.1% 7.8% 7.8%
Weighted Average Receive Rate 5.8% 5.9% 0.0% 5.8% 5.7% 5.9% 5.9%
PAY VARIABLE/RECEIVE FIXED
Notional Value $100 $68 $25 $25 $35 $190 $443 2007
Weighted Average Pay Rate 5.9% 8.6% 5.9% 0.0% 5.9% 5.4% 5.4%
Weighted Average Receive Rate 2.4% 7.9% 4.0% 0.0% 6.5% 6.9% 6.9%
PAY VARIABLE/RECEIVE DIFFERENT VARIABLE
Notional Value $50 $18 $36 $12 $200 $234 $550 2004
Weighted Average Pay Rate 5.8% 0.0% 3.7% 3.5% 4.5% 16.3% 5.7%
Weighted Average Receive Rate 5.4% 0.0% 5.6% 5.2% 6.8% 5.9% 6.4%
TOTAL INTEREST RATE SWAPS $165 $136 $61 $490 $266 $653 $1,771 2007
WEIGHTED AVERAGE PAY RATE 5.8% 7.8% 4.6% 7.6% 5.0% 7.3% 6.9%
WEIGHTED AVERAGE RECEIVE RATE 3.6% 7.2% 4.9% 5.4% 6.6% 6.3% 5.8%
(g) The following table reconciles the derivative notional amounts by derivative
type and by strategy:
BY DERIVATIVE TYPE
----------------------------------------------------------------------
12/31/94 MATURITIES/ 12/31/95
NOTIONAL AMOUNT ADDITIONS TERMINATIONS NOTIONAL AMOUNT
--------------- --------- ------------ ---------------
Caps $1,861 $2,666 $2,343 $2,184
Floors 2,131 237 188 2,180
Swaps/Collars/Forwards/Options 4,374 1,355 2,163 3,566
Futures 253 6,125 5,515 863
--------------- --------- ------------ ---------------
TOTAL $8,619 $10,383 $10,209 $8,793
--------------- --------- ------------ ---------------
--------------- --------- ------------ ---------------
BY STRATEGY
----------------------------------------------------------------------
12/31/94 MATURITIES/ 12/31/95
NOTIONAL AMOUNT ADDITIONS TERMINATIONS NOTIONAL AMOUNT
--------------- ---------- ------------ ---------------
Liability $1,725 $729 $746 $1,708
Anticipatory 626 1,564 1,952 238
Asset 3,048 3,153 3,217 2,984
Portfolio 3,220 4,937 4,294 3,863
--------------- ---------- ------------ --------------
TOTAL $8,619 $10,383 $10,209 $8,793
--------------- ---------- ------------ --------------
--------------- ---------- ------------ --------------
In addition to risk management through derivative financial instruments
pertaining to the investment portfolio, interest rate sensitivity related to
certain Company liabilities was altered primarily through interest rate swap
agreements. The notional
F-12
amount of the liability agreements in which Hartford Life generally pays one
variable rate in exchange for another, was $1.7 billion at December 31, 1995 and
1994 respectively. The weighted average pay rate is 5.9%; the weighted average
receive rate is 6.0% , and these agreements mature at various times through
2001.
(F) CONCENTRATION OF CREDIT RISK
Hartford Life has a reinsurance recoverable of $5.6 billion from Mutual Benefit
Life Assurance Corporation (Mutual Benefit). The risk of Mutual Benefit
becoming insolvent is mitigated by the reinsurance agreement's requirement that
the assets be kept in a security trust with Hartford Life as sole beneficiary.
Excluding investments in U.S. government and agencies, Hartford Life has no
other significant concentrations of credit risk.
Included in fixed maturity investments at December 31, 1995 were $39 of
Orange County, California Pension Obligation Bonds, $17 of which were carried
in the general account and $22 which were included in Hartford Life's
guaranteed separate accounts. During 1995 all interest payments due were
received. While Orange County is currently operating under Protection of
Chapter 9 of the Federal Bankruptcy Laws, Hartford Life believes the bonds
are not impaired other than on a temporary basis.
(G) FIXED MATURITIES
The schedule below details the amortized cost and fair values of Hartford Life's
fixed maturities by component, along with the gross unrealized gains and losses:
AS OF DECEMBER 31,1995
--------------------------------------------------
GROSS UNREALIZED
AMORTIZED --------------------- MARKET
COST GAINS LOSSES VALUE
---------- ------- ------ -----
U.S. Government and government agencies and
authorities;
Guaranteed and sponsored $502 $4 ($9) $497
Guaranteed and sponsored-asset backed 3,568 210 (387) 3,391
State, municipalities and political subdivisions 201 4 (3) 202
International governments 291 19 (4) 306
Public utilities 949 29 (2) 976
All other corporate-asset backed 3,065 76 (55) 3,086
All other corporate 5,056 187 (109) 5,134
Short-term investments 808 0 0 808
---------- ------- ----- -----
TOTAL INVESTMENTS $14,440 $529 ($569) $14,440
---------- ------- ----- -----
---------- ------- ----- -----
AS OF DECEMBER 31,1994
--------------------------------------------------
GROSS UNREALIZED
AMORTIZED --------------------- MARKET
COST GAINS LOSSES VALUE
---------- ------- ------ -----
U.S. Government and government agencies
and authorities;
Guaranteed and sponsored $1,516 $1 ($87) $1,430
Guaranteed and sponsored-asset backed 4,256 78 (571) 3,763
State, municipalities and political subdivisions 148 1 (12) 137
International governments 189 1 (14) 176
Public utilities 531 1 (32) 500
All other corporate-asset backed 2,442 30 (121) 2,351
All other corporate 3,717 38 (297) 3,458
Short-term investments 1,665 0 (51) 1,614
--------- ------- -------- -------
TOTAL INVESTMENTS $14,464 $150 ($1,185) $13,429
--------- ------- -------- -------
--------- ------- -------- -------
F-13
The amortized cost and estimated fair value of fixed maturities at December 31,
1995, by maturity, are shown below. Asset 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. Expected maturities differ from
contractual maturities reflecting the borrowers' rights to call or prepay their
obligations.
AMORTIZED MARKET
COST VALUE
---------- ---------
Due in one year or less $3,146 $3,133
Due after one year through five years 6,373 6,316
Due after five years through ten years 3,609 3,644
Due after ten years 1,312 1,307
---------- ---------
TOTAL $14,440 $14,400
---------- ---------
---------- ---------
Sales of fixed maturities excluding short-term fixed maturities for the years
ended December 31, 1995, 1994, and 1993 resulted in proceeds of $4,848, $5,708,
and $8,813, respectively, resulting in gross realized gains of $91, $71, and
$192, respectively, and gross realized losses of $72, $100, and $219,
respectively, not including policyholder gains and losses. Sales of equity
securities and other investments for the years ended December 31, 1995, 1994,
and 1993 resulted in proceeds of $64, $159, and $127, respectively, resulting in
gross realized gains of $28, $3, and $0, respectively, and gross realized losses
of $59, $14, $0, respectively, not including policyholder gains and losses.
(H) FAIR VALUE OF FINANCIAL INSTRUMENTS
AS OF DECEMBER 31, 1995 AS OF DECEMBER 31, 1994
----------------------- -----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
ASSETS
Fixed maturities $14,400 $14,400 $13,429 $13,429
Equity securities 63 63 68 68
Policy loans 3,381 3,381 2,614 2,614
Mortgage loans 265 265 316 316
Investments in partnerships and trusts 94 97 36 42
Miscellaneous 62 62 67 67
LIABILITIES
Other policy claims and benefits $12,727 $12,767 $13,001 $12,374
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument: fair value for fixed maturities and equity
securities approximate those quotations published by applicable stock exchanges
or are received from other reliable sources; policy and mortgage loan carrying
amounts approximate fair value; investments in partnerships and trusts are based
on external market valuations from partnership and trust management; and other
policy claims and benefits payable are determined by estimating future cash
flows discounted at the current market rate.
3. INCOME TAX
Hartford Life is included in ITT Hartford Group's consolidated U.S. Federal
income tax return and remits to (receives from) ITT Hartford Group, Inc. a
current income tax provision (benefit) computed in accordance with the tax
sharing arrangements between its insurance subsidiaries. The effective tax
rate was 32% in 1995 and 1994, and approximates the U.S. statutory tax rate
of 35% in 1993.
F-14
The provision for income taxes was as follows:
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1995 1994 1993
------- ------- -------
INCOME TAX EXPENSES
Current $211 $185 $190
Deferred (149) (120) (115)
------- ------- -------
TOTAL $62 $65 $75
------- ------- -------
------- ------- -------
INCOME TAX PROVISION
Tax provision at U.S. statutory rate $67 $71 $76
Tax-exempt income (3) (3) 0
Foreign tax credit (4) (1) 0
Other 2 (2) (1)
------- ------- -------
PROVISION FOR INCOME TAX $62 $65 $75
------- ------- -------
------- ------- -------
Income taxes paid were $162, $244, and $301 in 1995, 1994, and 1993
respectively. The current taxes due from Hartford Fire were $8 and $46 in 1995
and 1994, respectively.
Deferred tax assets(liabilities) include the following:
DECEMBER 31,
--------------------
1995 1994
--------- ---------
Tax deferred acquisition costs $410 $284
Book deferred acquisition costs and reserves 138 (134)
Employee benefits 8 7
Unrealized net loss on investments 32 353
Investments and other (168) 80
--------- ---------
TOTAL DEFERRED TAX ASSET $420 $590
--------- ---------
--------- ---------
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,
1995 was $37.
4. REINSURANCE
Hartford Life cedes insurance to non-affiliated insurers in order to limit its
maximum loss. Such transfer does not relieve Hartford Life of its primary
liability. Hartford Life also assumes insurance from other insurers. Group
life and accident and health insurance business is substantially reinsured to
affiliated companies.
Life insurance net retained premiums were comprised of the following:
YEAR ENDED DECEMBER 31,
---------------------------
1995 1994 1993
------- ------- -------
Gross premiums $1,545 $1,316 $1,135
Insurance assumed 591 299 93
Insurance ceded 649 515 481
------- ------- -------
NET RETAINED PREMIUMS $1,487 $1,100 $747
------- ------- -------
------- ------- -------
F-15
Life reinsurance recoveries, which reduced death and other benefits, for the
years ended December 31, 1995, 1994 and 1993 approximated $220, $164, and $149,
respectively.
In December 1994, Hartford Life assumed from a third party approximately $500
of corporate owned life insurance reserves on a coinsurance basis. In
December 1995, this block of business was reinsured to HLRe utilizing
modified coinsurance, with the assets and policy liabilities placed in a
separate account. In October 1994, HLRe recaptured approximately $500 of
corporate owned life insurance from a third party reinsurer. Subsequent to
this transaction, Hartford Life and HLRe restructured their coinsurance
agreement from coinsurance to modified coinsurance, with the assets and
policy liabilities placed in the separate account. These transactions did not
have a material impact on consolidated net income.
Also in December 1994, ILA ceded to a third party $1.0 billion in individual
fixed and variable annuities on a modified coinsurance basis. In December 1995,
Hartford Life ceded approximately $1.2 billion in individual variable annuities
on a modified coinsurance basis to a third party. These transactions did not
have a material impact on consolidated net income.
In May 1994, Hartford Life assumed the life insurance policies and the
individual annuities of Pacific Standard with reserves and account values of
approximately $400. Hartford Life received cash and investment grade assets
to support the life insurance and individual annuity contract obligations
assumed.
In November 1993, ILA acquired, through an assumption reinsurance
transaction, substantially all of the individual fixed and variable annuity
business of HLA. As a result of this transaction, the assets and liabilities
of Hartford Life increased approximately $1 billion. The excess of
liabilities assumed over assets received, of $2, was recorded as a decrease
to capital surplus. The remaining $41 in assets and liabilities were
transferred in October 1995. The impact on consolidated net income was not
significant.
In August 1993, Hartford Life received assets of $300 for assuming the group
COLI contract obligations of Mutual Benefit Life Insurance Company, through
an assumption reinsurance transaction. Under the terms of the agreement,
Hartford Life coinsured back 75% of the liabilities to Mutual Benefit Life
Insurance Company. All assets supporting Mutual Benefit's reinsurance
liability to Hartford Life are placed in a "security trust", with Hartford
Life as the sole beneficiary. The impact on 1993 consolidated net income was
not significant.
5. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
Hartford Life's employees are included in Hartford Fire's noncontributory
defined benefit pension plans. These plans provide pension benefits that are
based on years of service and the employee's compensation during the last ten
years of employment. Hartford Life's funding policy is to contribute annually
an amount between the minimum funding requirements set forth in the Employee
Retirement Income Security Act of 1974 and the maximum amount that can be
deducted for Federal income tax purposes. Generally, pension costs are funded
through the purchase of Hartford Life's group pension contracts. The cost to
Hartford Life was approximately $2, $2, and $3 in 1995, 1994 and 1993,
respectively.
Hartford Life provides certain health care and life insurance benefits for
eligible retired employees. A substantial portion of Hartford Life's employees
may become eligible for these benefits upon retirement. Hartford Life'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. Hartford Life has prefunded a
portion of the health care and life insurance obligations through trust funds
where such prefunding can be accomplished on a tax effective basis.
Postretirement health care and life insurance benefits expense, allocated by
Hartford Fire were immaterial for 1995, 1994, and 1993 respectively.
The assumed rate of future increases in the per capita cost of health care (the
health care trend rate) was 10.1% for 1995, decreasing ratably to 6.0% in the
year 2001. Increasing the health care trend rates by one percent per year would
have an immaterial impact on the accumulated postretirement benefit obligation
and the annual expense. To the extent that the actual experience differs from
the inherent assumptions, the effect will be amortized over the average future
service of the covered employees.
F-16
6. BUSINESS SEGMENT INFORMATION
YEAR ENDED DECEMBER 31
--------------------------
1995 1994 1993
------ ------ ------
REVENUES
Individual Life and Annuity $797 $691 $595
Asset Management Services 734 789 794
Specialty Insurance Operations 1,273 919 425
------ ------ ------
TOTAL REVENUES $2,804 $2,399 $1,814
------ ------- ------
------ ------- ------
- ---------------------------------------------------------------
- ---------------------------------------------------------------
YEAR ENDED DECEMBER 31
------------------------
1995 1994 1993
------ ------- -----
INCOME BEFORE INCOME TAX EXPENSE
Individual Life and Annuity $236 $139 $129
Asset Management Services (79) 38 71
Specialty Insurance Operations 34 26 18
------ ------ ------
TOTAL INCOME BEFORE INCOME
TAX EXPENSE $191 $203 $218
------ ------ ------
------ ------ ------
- ---------------------------------------------------------------
- ---------------------------------------------------------------
YEAR ENDED DECEMBER 31
---------------------------
1995 1994 1993
------- ------- -------
IDENTIFIABLE ASSETS
Individual Life and Annuity $36,741 $26,668 $19,147
Asset Management Services 13,962 13,334 12,416
Specialty Insurance Operations 13,494 7,847 6,723
------- ------- -------
TOTAL IDENTIFIABLE ASSETS $64,197 $47,849 $38,286
------- ------- -------
------- ------- -------
7. STATUTORY NET INCOME AND SURPLUS
Substantially all of the statutory surplus is permanently reinvested or is
subject to dividend restrictions relating to various state regulations which
limit the payment of dividends without prior approval. Statutory net income
and surplus as of December 31 were:
1995 1994 1993
--------- -------- --------
Statutory net income $112 $58 $63
Statutory surplus $1,125 $941 $812
8. SEPARATE ACCOUNTS
Hartford Life maintains separate account assets and liabilities totaling $36.3
billion and $22.8 billion at December 31, 1995 and 1994, respectively which
are reported at fair value. Separate account assets are segregated from other
investments and investment income and gains and losses accrue directly to the
policyholder. Separate accounts reflect two categories of risk assumption:
non-guaranteed separate accounts totaling $25.9 billion and $14.8 billion at
December 31, 1995 and 1994, respectively, wherein the policyholder assumes the
investment risk, and guaranteed separate account assets totaling $10.4 billion
and $8.0 billion at December 31, 1995 and 1994, respectively, wherein Hartford
Life contractually guarantees either a minimum return or account value to the
policyholder. Included in the non-guaranteed category are policy loans
totaling $1.7 billion and $0.5 billion at December 31, 1995 and 1994,
respectively. Investment income (including investment gains and losses) and
interest credited to policyholders on separate account assets are not
reflected in the Consolidated Statements of Income. Separate account
management fees, net of minimum guarantees, were $387, $256, and $189, in
1995, 1994, and 1993, respectively.
F-17
The guaranteed separate accounts include modified guaranteed individual
annuity, and modified guaranteed life insurance. The average credit interest
rate on these contracts is 6.62%. The assets that support these liabilities
were comprised of $10.4 billion in bonds at December 31, 1995. The portfolios
are segregated from other investments and are managed so as to minimize
liquidity and interest rate risk. In order to minimize the risk of
disintermediation associated with early withdrawals, individual annuity and
modified guaranteed life insurance contracts carry a graded surrender charge
as well as a market value adjustment. Additional investment risk is hedged
using a variety of derivatives which totaled $133 million in carrying value
and $2.7 billion in notional amounts at December 31, 1995.
9. COMMITMENTS AND CONTINGENCIES
In August 1994, Hartford Life renewed a two year note purchase facility
agreement which in certain instances obligates Hartford Life to purchase up to
$100 million in collateralized notes from a third party. Hartford Life is
receiving fees for this commitment. At December 31, 1995, Hartford Life had
not purchased any notes under this agreement.
Under insurance guaranty fund laws in most states, insurers doing business
therein can be assessed up to prescribed limits for policyholder losses
incurred by insolvent companies. The amount of any future assessments on
Hartford Life under these laws cannot be reasonably estimated. Most of these
laws do provide, however, that an assessment may be excused or deferred if it
would threaten an insurer's own financial strength. Additionally, guaranty
fund assessments are used to reduce state premium taxes paid by the Company in
certain states. Hartford Life paid guaranty fund assessments of approximately
$10, $8 and $6 in 1995, 1994, and 1993, respectively.
Hartford Life is involved in various legal actions, some of which involve
claims for substantial amounts. In the opinion of management the ultimate
liability with respect to such lawsuits, as well as other contingencies, is
not considered material in relation to the consolidated financial position of
Hartford Life.
F-18
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE I - SUMMARY OF INVESTMENTS (OTHER THAN INVESTMENTS IN AFFILIATES)
AS OF DECEMBER 31, 1995
(IN MILLIONS)
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
FAIR REPORTED ON
COST VALUE BALANCE SHEET
-------------- ------------- -----------------
FIXED MATURITIES
Bonds
U.S. Government and government agencies and authorities
Guaranteed and sponsored $502 $497 $497
Guaranteed and sponsored - asset backed 3,568 3,391 $3,391
States, municipalities and political subdivisions 201 202 $202
International governments 291 306 $306
Public utilities 949 976 $976
All other corporate 5,056 5,134 $5,134
All other corporate - asset backed 3,065 3,086 $3,086
Short-term investments 808 808 $808
---------- --------- ---------
TOTAL FIXED MATURITIES $14,440 $14,400 $14,400
EQUITY SECURITIES
Common stocks - industrial, miscellaneous and all other 61 63 63
TOTAL FIXED MATURITIES AND EQUITY SECURITIES $14,501 $14,463 $14,463
POLICY LOANS 3,381 3,381 3,381
MORTGAGE LOANS 265 265 265
OTHER INVESTMENTS 156 159 156
--------- -------- -------
TOTAL INVESTMENTS $18,303 $18,268 $18,265
--------- -------- -------
--------- -------- -------
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
Fair value for stocks and bonds approximate those quotations published by
applicable stock exchanges or are received from other reliable sources. The
fair value for short-term investments approximates cost.
Policy and mortgage loans carrying amounts approximate fair value.
S-1
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE III - SUPPLEMENTAL INSURANCE INFORMATION
(in millions)
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Amort. of
Deferred Future Other Premiums and Net Benefits, Claims Deferred Other
Policy Policy Policyholder Other Investment and Claim Adj. Policy Insurance
Acq. Costs Benefits Funds Considerations Income Expenses Acq. Costs Expenses
---------- -------- ------------ -------------- ---------- ---------------- ---------- ---------
As of December 31, 1995 Year ended December 31, 1995
Individual Life and Annuity $2,088 $706 $4,371 $514 $283 $277 $176 $108
Asset Management Services 87 1,169 8,942 51 683 722 23 68
Specialty Insurance
Operations 13 498 9,285 922 351 423 0 816
---------- -------- ------------ -------------- ---------- ---------------- ---------- ---------
TOTAL $2,188 $2,373 $22,598 $1,487 $1,317 $1,422 $199 $992
---------- -------- ------------ -------------- ---------- ---------------- ---------- ---------
---------- -------- ------------ -------------- ---------- ---------------- ---------- ---------
As of December 31, 1994 Year ended December 31, 1994
Individual Life and
Annuity $1,708 $582 $4,257 $492 $199 $334 $137 $80
Asset Management Services 101 845 10,160 39 750 695 8 48
Specialty Insurance
Operations 0 463 6,911 569 350 376 0 518
---------- -------- ------------ -------------- ---------- ---------------- ---------- ---------
TOTAL $1,809 $1,890 $21,328 $1,100 $1,299 $1,405 $145 $646
---------- -------- ------------ -------------- ---------- ---------------- ---------- ---------
---------- -------- ------------ -------------- ---------- ---------------- ---------- ---------
As of December 31, 1993 Year ended December 31, 1993
Individual life and Annuity $1,237 $428 $3,535 $423 $172 $249 $97 $120
Asset Management Services 97 703 9,026 35 759 662 16 45
Specialty Insurance
Operations 0 528 5,673 289 136 135 0 272
---------- -------- ------------ -------------- ---------- ---------------- ---------- ---------
TOTAL $1,334 $1,659 $18,234 $747 $1,067 $1,046 $113 $437
---------- -------- ------------ -------------- ---------- ---------------- ---------- ---------
---------- -------- ------------ -------------- ---------- ---------------- ---------- ---------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Investment income is allocated to the reportable division based on each
division's share of investable funds or on a direct basis, where applicable,
including realized capital gains and losses.
Benefits, claims and claims adjustment expenses include the increase in
liability for future policy benefits and death, disability and other contract
benefits payments.
Other insurance expenses are allocated to the division based upon specific
identification, where possible.
S-2
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE IV - REINSURANCE
(in millions)
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Percentage of
Gross Ceded to Assumed from Net Amount Assumed
Amount Other Companies Other Companies Amount to Net Amount
-------- ----------------- ----------------- -------- ----------------
YEAR ENDED DECEMBER 31, 1995
LIFE INSURANCE IN FORCE $182,716 $112,774 $26,996 $96,938 27.8%
PREMIUMS AND OTHER CONSIDERATIONS
Individual Life and Annuity $549 $163 $122 $508 24.0%
Asset Management Services 51 0 0 51 0.0%
Specialty Insurance Operations 632 162 452 922 49.0%
313 324 17 6 283.3%
-------- ----------------- ----------------- --------
TOTAL $1,545 $649 $591 $1,487 39.7%
-------- ----------------- ----------------- --------
-------- ----------------- ----------------- --------
YEAR ENDED DECEMBER 31, 1994
LIFE INSURANCE IN FORCE $136,929 $87,553 $35,016 $84,392 41.5%
PREMIUMS AND OTHER CONSIDERATIONS
Individual Life and Annuity $448 $71 $106 $483 21.9%
Asset Management Services 39 0 0 39 0.0%
Specialty Insurance Operations 521 140 188 569 33.0%
Accident and Health 308 304 5 9 55.6%
-------- ----------------- ----------------- --------
TOTAL $1,316 $515 $299 $1,100 27.2%
-------- ----------------- ----------------- --------
-------- ----------------- ----------------- --------
YEAR ENDED DECEMBER 31, 1993
LIFE INSURANCE IN FORCE $93,099 $71,415 $27,067 $48,751 55.5%
PREMIUMS AND OTHER CONSIDERATIONS
Individual Life and Annuity $417 $85 $91 $423 21.5%
Asset Management Services 25 0 0 25 0.0%
Specialty Insurance Operations 386 97 0 289 0.0%
Accident and Health 307 299 2 10 20.0%
-------- ----------------- ----------------- --------
TOTAL $1,135 $481 $93 $747 12.4%
-------- ----------------- ----------------- --------
-------- ----------------- ----------------- --------
S-3
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HARTFORD LIFE INSURANCE COMPANY
/s/ Gregory A. Boyko March 15, 1996
- ----------------------------------------------- ---------------------------
Gregory A. Boyko Date
Vice President and Controller
Pursuant to the requirements of the Securities Exchange Act of 1934 this
report has been signed below by the following persons on behalf of the
registrant and on the date identified.
SIGNATURE DATE
- ------------------------------------------------ ---------------------------
PRINCIPAL EXECUTIVE OFFICER
/s/ Lowndes A. Smith March 15, 1996
- ------------------------------------------------- ---------------------------
Lowndes A. Smith Date
President, Chief Operating Officer,
and Director
PRINCIPAL INVESTMENT OFFICER
/s/ David A. Hall March 15, 1996
- -------------------------------------------------- ---------------------------
David A. Hall Date
Senior Vice President, Chief
Investment Officer and Director
PRINCIPAL ACCOUNTING OFFICER
/s/ Gregory A. Boyko March 15, 1996
- -------------------------------------------------- ---------------------------
Gregory A. Boyko Date
Vice President and Controller
/s/ Donald R. Frahm March 15, 1996
- -------------------------------------------------- ---------------------------
Donald R. Frahm Date
Chairman, Chief Executive Officer
and Director
/s/ Thomas M. Marra March 15, 1996
- ------------------------------------------------- ---------------------------
Thomas M. Marra Date
Senior Vice President
and Director
/s/ John P. Ginnetti March 15, 1996
- ------------------------------------------------- ---------------------------
John P. Ginnetti Date
Executive Vice President
and Director
NO ANNUAL REPORT OR PROXY MATERIAL HAS BEEN SENT TO THE STOCKHOLDER.
II-1
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION LOCATION
------- ---------------------------------------------------- ----------------------------------------
2 Plan of acquisition, reorganization, arrangement None
liquidation or succession
3(a) Restated Certificate of Incorporation Incorporated by reference to Hartford
Life 10-K Registration Statement filed
March 1985 (File No. 2-89516)
3(b) By-laws Incorporated by reference to Hartford
Life 10-K Registration Statement filed
March 1985 (File No. 2-89516)
4 Instruments defining the rights of security None
holders, including indentures
9 Voting trust agreement None
10 Material contracts None
11 Statement of computation of per share earnings Not required to be filed
12 Statements of computation of ratios Not required to be filed
13 Annual report to security holder, Form 10-K, None
or quarterly report to security holder
18 Letter regarding change in accounting principles None
19 Previously unfiled documents None
22 Subsidiaries of the Registrant Not required to be filed
23 Published report regarding matters submitted None
to vote of security holder
24 Consents of experts and counsel None
25 Power of attorney Incorporated by reference to Hartford
Life S-1 Registration Statement filed
February 1984 (File No. 2-89516)
28 Additional Exhibits None
29 Information from reports furnished to
state insurance regulatory authorities Not required to be filed
II-2