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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
For the fiscal year ended December 31, 1997
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to ______________
Commission file number 1-12749
HARTFORD LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
CONNECTICUT 06-0974148
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
200 HOPMEADOW STREET, SIMSBURY, CONNECTICUT 06089
(Address of principal executive offices)
(860) 843-7716
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No[ ]
As of March 30, 1998, 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 I (1)
(a) and (b) of Form 10-K and is therefore filing this form with the reduced
disclosure format.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT FOR 1997 ON FORM 10-K
CONTENTS
ITEM DESCRIPTION PAGE
PART I 1 Business of Hartford Life Insurance Company* 2
2 Properties* 9
3 Legal Proceedings 9
4 **
PART II 5 Market for Hartford Life Insurance Company's Common Stock and
Related Stockholder Matters 9
6 **
7 Management's Discussion and Analysis of Financial Condition and
Results of Operations* 10
7A Quantitative and Qualitative Disclosures About Market Risk 20
8 Financial Statements and Supplementary Data 20
9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 20
PART III 10 **
11 **
12 **
13 **
PART IV 14 Exhibits, Financial Statements, Schedules and Reports on Form 8-K 21
Signatures II-1
Exhibits Index II-2
* Item prepared in accordance with General Instruction I(2) of Form 10-K
** Item omitted in accordance with General Instruction I(2) of Form 10-K
PART I
ITEM 1. BUSINESS OF HARTFORD LIFE INSURANCE COMPANY
(DOLLAR AMOUNTS IN MILLIONS EXCEPT FOR SHARE DATA UNLESS OTHERWISE STATED)
GENERAL
Hartford Life Insurance Company (the "Company") was organized in 1902 and is
incorporated under the laws of the State of Connecticut. The Company is a
direct subsidiary of Hartford Life and Accident Insurance Company ("HLA"), a
wholly-owned subsidiary of Hartford Life, Inc. ("Hartford Life"). The
Company and its subsidiaries, together with HLA, provide (i) annuity
products, such as individual variable annuities and fixed market value
adjusted ("MVA") annuities, deferred compensation and retirement plan
services and mutual funds for savings and retirement needs to over 1 million
customers, (ii) life insurance for income protection and estate planning to
approximately 500,000 customers and, together with HLA, (iii) employee
benefits products such as group life and group disability insurance for the
benefit of over 15 million individuals. According to the latest publicly
available data, with respect to the United States, the Company is the largest
writer of both total individual annuities and individual variable annuities
based on sales for the year ended December 31, 1997. The Company's strong
position in each of its core businesses provides an opportunity to increase
the sale of Hartford Life's products and services as individuals increasingly
save and plan for retirement, protect their families against disability or
death and prepare their estates for an efficient transfer of wealth between
generations.
The Company strives to maintain and enhance its position as a market leader
within the financial services industry. The Company has pursued a strategy
of selling diverse and innovative products through multiple distribution
channels, achieving cost efficiencies through economies of scale and improved
technology, maintaining effective risk management and prudent underwriting
techniques and capitalizing on its brand name and customer recognition of The
Hartford Stag Logo, one of the most recognized symbols in the financial
services industry. In the past year, the Company's total assets increased
26% to $98 billion and stockholder's equity was $2.3 billion as of December
31, 1997. In addition, the Company generated $3 billion in revenues and $302
in net income in 1997.
DISTRIBUTION
The Company utilizes a multiple channel distribution network which provides a
distinct competitive advantage in selling products and services to a broad
cross-section of customers throughout varying economic and market cycles. In
particular, the Company has developed an extensive network of banks and broker-
dealers, which is one of the largest in the industry, including over 1,350
national and regional broker-dealers and approximately 450 banks. This broad
network has enabled the Company to introduce new products and services in an
effective manner and allows the Company significant opportunity to access its
customer base. The Company sells fixed MVA annuities, variable annuities,
mutual funds, single premium variable life insurance, and retirement plan
services through its broker-dealer and bank distribution systems.
PRODUCTS
The Company provides its customers an innovative and diverse mix of products
and services directed at serving people's needs throughout the different
stages of their lives and during varying economic cycles. The Company offers
a variety of variable and fixed MVA annuity products with funds managed both
internally and by several outside money managers including Wellington
Management Co., LLP ("Wellington") and Putnam Financial Services, Inc.
("Putnam"). The Company regularly introduces new and innovative products and
services to the market. For example, the Company was the leader in
developing and marketing fixed annuities with an MVA feature which protects
the Company from losses due to higher interest rates in the event of early
surrender.
CUSTOMER SERVICE, TECHNOLOGY AND ECONOMIES OF SCALE
The Company has achieved advantageous economies of scale and operating
efficiencies due to its growth, attention to expense management and
commitment to customer service and technology. These advantages allow the
Company to competitively price its products for its distribution network and
policyholders. The Company has been able to reduce its individual annuity
operating expenses as a percentage of total individual annuity account value
to 25 basis points in 1997 from 28 basis points in 1996 and 31 basis points
in 1995. In addition, the Company utilizes computer technology to enhance
communications within the Company and throughout its distribution network in
order to improve the Company's efficiency in marketing, selling, and
servicing its products and as a result provides high-quality customer
service. The Company was recently awarded, for the second consecutive year,
one of the six Quality Tested Service Seals given by DALBAR Inc., a
recognized independent research organization. This award was also given to
one of the Company's strategic partners, Putnam, for the Putnam Capital
Manager Variable Annuity, which is also administered through the Company. The
DALBAR award is given in recognition of those organizations who achieve the
highest tier of customer service in the variable annuity industry.
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RISK MANAGEMENT
The Company's product designs, prudent underwriting standards, and risk
management techniques protect it against disintermediation risk and greater
than expected mortality and morbidity. As of December 31, 1997, the Company
minimized its exposure to risks associated with early surrender through
liabilities which were non-guaranteed, supported by policy loans, possessed
market value adjustments or surrender charges, or contained
non-surrenderability provisions. As a result, 99% of the Company's insurance
liabilities were protected and 97% of the Company's individual annuity
account value was subject to surrender charges. The Company also enforces
disciplined claims management to protect against greater than expected
mortality and morbidity experience and regularly monitors its underwriting,
mortality and morbidity assumptions to determine if experience remains
consistent with assumptions and pricing.
BRAND NAME AND FINANCIAL STRENGTH
The Hartford Stag Logo is one of the most recognized symbols in the insurance
and financial services industry. This brand recognition, coupled with a
strong balance sheet and sound ratings, has enabled the Company to establish
the reputation and financial strength necessary to maintain distribution
relationships, enhance strategic alliances, and generate new customer sales.
Pursuant to a Master Intercompany Agreement with The Hartford Financial
Services Group, Inc. ("The Hartford"), the Company has been granted a
perpetual non-exclusive license to use the Stag Logo in connection with the
sale of Hartford Life's products and services. However, in the event that
The Hartford reduces its beneficial ownership below 50% of the combined
voting power of Hartford Life's then outstanding securities, the license may
be revoked upon the later of the fifth anniversary of the date of
consummation of the Hartford Life's Initial Public Offering ("IPO") (May 22,
1997) of its Class A Common Stock or one year after receipt by Hartford Life
of written notice of The Hartford's intention to revoke the license.
BUSINESS SEGMENTS
The Company operates in three principal business segments: Annuity,
Individual Life Insurance and Employee Benefits. The Company also maintains
a Guaranteed Investment Contracts segment, which is primarily comprised of
guaranteed rate contract business written prior to 1995 ("Closed Book GRC")
and a Corporate Operation through which it reports net investment income on
assets representing surplus not assigned to any of its business segments and
certain other revenues and expenses not specifically allocable to any of its
business segments. The following is a description of each segment, including
a discussion of principal products, methods of distribution, and competitive
environments. Additional information on the Company's business segments may
be found in the Management's Discussion and Analysis of Financial Condition
and Results of Operations ("MD&A") on pages 10 to 14 and Note 14 of Notes to
Consolidated Financial Statements.
ANNUITY
The Annuity segment focuses on the savings and retirement needs of the
growing number of individuals who are preparing for retirement or have
already retired. The Company offers a variety of products within this
segment, reflecting the diverse nature of the market. These products include
fixed and variable annuities, certain deferred compensation and retirement
plan services for municipal governments and corporations, structured
settlements, mutual funds, investment management services and certain other
financial products. The Annuity segment distributes its products primarily
through broker-dealers and financial institutions for individual sales, and
primarily through internal personnel of the Company for institutional sales.
Growth in the Company's assets over the last several years has been driven
primarily by its sales of variable annuities. New sales and market
appreciation, net of surrenders, have increased the Annuity segment account
value to $67.0 billion at December 31, 1997 from $50.8 billion at December
31, 1996. The Annuity segment generated revenues of $1.3 billion and $1.0
billion and net income of $206 and $148 in 1997 and 1996, respectively.
INDIVIDUAL ANNUITY
The Company is the market leader in the annuity industry and was the number
one writer of individual variable annuities for the years ended December 31,
1997 and 1996, with total individual annuity sales of $10.2 billion and $9.8
billion, respectively. The Company sells both variable and fixed annuity
products, with single and flexible premium payment options, through a wide
distribution network of broker-dealers and other financial institutions.
Individual variable annuity sales were $9.7 billion and $9.3 billion in 1997
and 1996, respectively, and the Company held an 11% market share as of
December 31, 1997, according to information compiled by Variable Annuity
Research and Data Service ("VARDS"). In each of the last two years, the
Company has sold approximately 66% of its individual annuities through
broker-dealers and 34% of its individual annuities through banks.
Individual annuity account value totaled $56.3 billion, with individual
variable annuity account value representing $46.9 billion which has grown
significantly from $9.7 billion at December 31, 1993. Approximately 92% of
the individual variable annuity account value was held in non-guaranteed
separate accounts at December 31, 1997. The Company earns fees for managing
annuity assets (based on its account value) and maintaining policyholder
accounts, which totaled over 1 million as of December 31, 1997. The Company's
individual annuity products, principally consisting of variable and fixed MVA
annuities, generally are priced to earn an after-tax margin of approximately
35 to 40 basis points on average total account value and the Company has
achieved such earnings in each of the past five years.
3
With respect to variable annuities, the Company uses specified portions of
the periodic premiums of a customer to purchase units in one or more mutual
funds, as directed by the customer, who then assumes the investment
performance risks and rewards. As a result, variable annuities permit
policyholders to choose aggressive or conservative investment strategies as
they deem appropriate without affecting the composition and quality of assets
in the Company's general account. These products offer the policyholder a
variety of equity and fixed income options. Deposits of varying amounts may
be made at regular or irregular intervals and the value of these assets
fluctuates in accordance with the investment performance of the funds
selected by the policyholder. To encourage persistency, the Company's
individual annuities are subject to withdrawal restrictions and surrender
charges ranging initially from 6% to 7% of the contract's face amount which
reduce to zero on a sliding scale, usually within seven policy years. The
growth of the Company's individual variable annuity account value has been
considerable for the past several years, due to strong sales, market
appreciation and low levels of surrenders.
The assets underlying the Company's variable annuities are managed both
internally and by outside money managers, while the Company provides all
policy administration services. The Company utilizes a select group of money
managers, such as Wellington, Putnam, and Dean Witter InterCapital, Inc., who
have an interest in the continued growth in sales of the Company's products
and greatly enhance the marketability of its annuities and the strength of
its product offerings. Two of the industry's four leading variable annuities,
The Director and Putnam Capital Manager Variable Annuity (based on sales for
the year ended 1997) are sponsored by the Company and are managed in part
by Wellington and Putnam, respectively.
Fixed MVA annuities are fixed rate annuity contracts which guarantee a
specific sum of money will be paid in the future, either as a lump sum or as
monthly income. In the event that a policyholder surrenders a policy prior to
the end of the guarantee period, the MVA feature increases or decreases the
cash surrender value of the annuity in respect of any interest rate decreases
or increases, respectively, thereby protecting the Company from losses due to
higher interest rates at the time of surrender. The amount of payment will
not fluctuate due to adverse changes in the Company's investment return,
mortality experience or expenses. The Company's primary fixed MVA annuities
have terms of one, three, five, six, seven, eight, nine, or ten years with an
average term of approximately seven years. Account value of fixed MVA
annuities have remained stable at approximately $9.0 billion at December 31,
1997 and 1996.
In September 1996, the Company launched eight retail mutual funds. Six of
these funds are managed by Wellington and closely resemble the Company's
Director variable annuity equity funds. The other funds are managed by
Hartford Investment Management Company, a wholly owned subsidiary of The
Hartford. The Company has entered into agreements with over 400 financial
services firms to distribute these mutual funds. During 1997, the Company had
mutual fund sales of $869 bringing total mutual fund assets to $972 as of
December 31, 1997. The fund family was recognized as the fastest growing,
non-proprietary mutual fund family in 1997, according to Strategic Insight,
an industry research association. In addition, in January 1998, the fund
family was also recognized as the fastest non-proprietary mutual fund family
to reach $1 billion in assets when it reached that level in less than
eighteen months of existence.
GROUP ANNUITY
The Company is among the top providers of retirement products and services,
including asset management and plan administration, to municipalities
pursuant to Section 457 of the Internal Revenue Code of 1986, as amended (the
"Internal Revenue Code"). The Company also provides products and services to
plans created under Section 401(k) and 403(b) of the Internal Revenue Code.
The Company presently administers approximately 900 Section 457 plans for
governmental entities. Traditionally, Section 457 plans have been held in the
Company's general account, but increasingly plan beneficiaries are
transferring assets into mutual funds held in separate accounts. The Company
offers a number of different funds, both fixed income and equity, to the
employees in Section 457 plans. Generally, the Company manages the fixed
income plans and certain other outside money managers act as advisors to the
equity funds offered in Section 457 plans administered by the Company.
The Company also sells structured settlement contracts, which provide for
periodic payments to an injured person or survivor for a generally
determinable number of years typically in settlement of a claim under a
liability policy in lieu of a lump sum settlement. The Company's structured
settlements are sold through The Hartford's property-casualty insurance
operations as well as specialty brokers. The Company also markets other
annuity contracts for special purposes such as the funding of terminated
defined benefit pension plans.
Total sales in the Group Annuity area were $820 in 1997, and were primarily
responsible for the increase in account value to $10.7 billion as of December
31, 1997. Sales of Section 457 products were $151 in 1997 increasing Section
457 account value to $5.7 billion as of December 31, 1997. In addition, sales
of structured settlements and terminal funding products were $287 and $239 in
1997, respectively.
4
MARKETING AND DISTRIBUTION
The Company's individual annuity distribution network has been developed
based on management's strategy of utilizing multiple and competing
distribution channels in an effort to achieve the broadest distribution
possible while maintaining a variable cost structure. The success of the
Company's marketing and distribution system depends on its product offerings,
fund performance, successful utilization of external wholesaling
organizations, relationships with broker-dealers and banks (through which the
sale of the Company's individual annuities to customers is consummated) and
quality of customer service.
The Company maintains a network of approximately 1,350 broker-dealers and
approximately 450 banks (including 23 of the 25 largest banks in the United
States) through the use of wholesaling organizations and strategic alliances.
The agreements covering these relationships have varying renewal and
termination provisions but generally provide for ongoing continuation unless
one of the parties elects otherwise or fails to reaffirm continuation on a
periodic basis.
The Company also uses this distribution network to sell products other than
individual annuities, including single premium variable life products,
Section 401(k) plan services and mutual funds. The Company also uses internal
personnel with extensive experience in the Section 457 market as well as
access to the Section 401(k) market, to sell its products and services in the
deferred compensation and retirement plan market.
COMPETITION
The Annuity segment competes with numerous other insurance companies as well
as certain banks, securities brokerage firms, investments advisors and other
financial intermediaries marketing annuities, mutual funds and other
retirement-oriented products. Some of these companies have greater financial
strength and resources than Hartford Life Insurance Company. In particular,
national banks may become more significant competitors in the future for
insurers who sell annuities as a result of recent court decisions and
regulatory actions. Product sales are affected by competitive factors such
as investment performance ratings, product design, visibility in the
marketplace, financial strength ratings, distribution capabilities, levels of
charges and credited rates, reputation, and customer service. Also, since
the Company does not have a career agency force, competition also exists for
distributors of its products. This competition is primarily based on the
variety and quality of products offered, compensation, services provided to
and relationships developed with broker-dealers and other distributors.
INDIVIDUAL LIFE INSURANCE
The Individual Life Insurance segment sells a variety of products and the
Company's in force business primarily consists of variable life, universal
life, interest-sensitive whole life, and term life insurance products. The
Company's in force block also includes whole life, which was sold in prior
years, and modified guaranteed whole life, which was acquired from Fidelity
Bankers Life Insurance Company in 1993 and Pacific Standard Life Insurance
Company in 1994. In this segment, the Company focuses particularly on the
high-end estate and business planning markets and is among the top five
writers of individual life insurance based on average face value per policy.
In addition, the Company is among the top five writers of individual variable
life for the nine months ended September 30, 1997, based on the Tillinghast
Value Variable Life Survey. Life insurance in force increased to $55.4
billion from $52.1 billion at December 31, 1997 and 1996, respectively. New
annualized weighted premiums were $140 in 1997, an increase of $10, or 8%
over prior year. Growth in sales was primarily attributable to the Company's
variable life product, which increased $23, or 31%, to $98 in 1997. The
Individual Life segment generated revenues of $487, an increase of $47, or
11%, over prior year and net income of $55 in 1997 as compared to $44 in
1996. In addition, account values in this segment grew $555, or 17%, to $3.8
billion as of December 31, 1997 due to strong sales of the variable life
product.
In 1997, variable life products represented 70% of new annualized weighted
premium for this segment. Variable life insurance provides a return linked to
an underlying portfolio and the Company allows policyholders to determine
their desired asset mix among a variety of underlying mutual funds. As the
return on the investment portfolio increases or decreases, as the case may
be, the death benefit or surrender value of the variable life policy may
increase or decrease. The Company's single premium variable life product
provides a death benefit to the policy beneficiary based on a single premium
deposit. The Company's second-to-die products are distinguished from other
products in that two lives are insured rather than one, and the policy
proceeds are paid upon the second death of the two insureds. Second-to-die
policies are used in individual estate planning, often to fund estate taxes
for a married couple.
Universal life and interest-sensitive whole life insurance coverages provide
life insurance with adjustable rates of return based on current interest
rates. The Company offers both flexible and fixed premium policies and
provides policyholders with flexibility in the available coverage, the timing
and amount of premium payments and the amount of the death benefit, provided
there are sufficient policy funds to cover all policy charges for the coming
period. Universal life and interest-sensitive whole life represented 24% of
new annualized premium sales of individual life insurance in 1997. The
Company also sells universal life insurance policies with a second-to-die
feature similar to that of the variable life insurance product offered.
5
The Company also offers individual term life insurance, but has had a limited
presence in that market. During 1997, the Company developed a new term
insurance product to sell through its bank and broker-dealer distribution
channels.
MARKETING AND DISTRIBUTION
The primary Individual Life Insurance distribution system is focused on
products designed for high-end estate and business planning. The high-end
estate and business planning organization is managed through a sales office
system of qualified life insurance professionals with specialized training in
sophisticated life insurance sales. These employees have access to an
extensive network of licensed life insurance agents. High-end sales also
occur, in certain regions, through a group of independent life insurance
marketing organizations, each of which maintains a separate marketing
agreement with the Company. In addition, other distribution relationships
exist to provide incremental sales of life insurance products for both estate
planning and basic protection against lost income from death. Furthermore,
sales of single premium variable life are generated through the individual
annuity distribution system. Along with HLA, 61% of total sales were produced
by the sales office system, 11% resulted from the individual annuity
distribution system with the remaining 28% of sales generated by other life
insurance distribution relationships during 1997.
COMPETITION
The Individual Life Insurance segment competes with over 2,000 life insurance
companies in the United States, as well as other financial intermediaries
marketing insurance products. Competitive factors related to this segment are
primarily the breadth and quality of life insurance products offered,
competitiveness of pricing, relationships with third-party distributors and
the quality of underwriting and customer service.
EMPLOYEE BENEFITS
The Employee Benefits segment consists of two areas of operation: (a) Group
Insurance and (b) Specialty Insurance Operations. The Company markets group
insurance products, including group life insurance, group short- and
long-term managed disability, stop loss and supplementary medical coverage to
employers and employer sponsored plans and accidental death and
dismemberment, travel accident and other special risk coverages to employers
and associations. Substantially all of the Group Insurance business directly
written by the Company is ceded to its parent, HLA. The Company also offers
disability underwriting, administration, claims processing services and
reinsurance to other insurers and self-funded employer plans. The Specialty
Insurance Operations unit consists of the Company's corporate owned life
insurance ("COLI") business.
GROUP INSURANCE
Along with HLA, the Company provides life, disability, and other group
insurance coverage to large and small employers across the United States.
The Company sells its product line to employers through brokers and
consultants and to multiple employer groups through its relationships with
trade associations. In the disability market, the Company focuses on strong
underwriting and claims management to derive a competitive advantage. In the
group insurance market, all policies sold are term insurance, generally with
one- or two-year rate guarantees. This allows the Company to make adjustments
in rate or terms of its policies in order to minimize the adverse effect of
various market trends. Substantially all of the Group Insurance business
written by the Company is ceded to HLA.
The Company is one of the largest participants in the "large case" market of
the group disability insurance business. The large case market, as defined by
the Company, generally consists of group disability policies covering over
1,000 employees in a particular company. The Company is continuing to expand
its operations in the "small" and "medium case" group markets emphasizing
name recognition and reputation as well as the Company's managed disability
approach to claims and administration. The Company's efforts in the group
disability market focus on early intervention, return-to-work programs,
reduction of long-term disability claims, and successful rehabilitation. The
Company also works with disability claimants to improve the receipt rate of
Social Security offsets (i.e. reducing payment of benefits by the amount of
Social Security payments received).
The Company has concentrated on a managed disability approach, which
emphasizes early claimant intervention in an effort to facilitate a disabled
claimant's return to work and thereby contain costs. This approach, coupled
with an individualized approach to claim servicing, and an incentive to
contain costs, leads to an overall reduction in the cost of disability
coverage for employers. The Company's short-term disability benefit plans
provide a weekly benefit amount (typically 60% to 70% of the employee's
earned income up to a specified maximum benefit) to insured employees when
they are unable to work due to an accident or illness. Long-term disability
insurance provides a monthly benefit for those periods of time not covered by
a short-term disability benefits plan when insured employees are unable to
work due to disability. Employees may receive total or partial disability
benefits. Most of these policies usually begin providing benefits following a
90- or 180-day waiting period and continue providing benefits until the
6
employee reaches age 65-70. Long-term disability benefits are paid monthly
and are limited to a portion, generally 50-70%, of the employee's earned
income up to a specified maximum benefit.
Group term life insurance provides term coverage to employees and their
dependents for a specified period and has no accumulation of cash values. The
Company offers innovative options for its basic group life insurance
coverage, including portability of coverage and a living benefit option,
whereby terminally ill policyholders can receive death benefits prior to
their death.
The Company also provides term life insurance, accidental death and
dismemberment, travel accident, hospital indemnity, Medicare Supplement and
other coverages primarily to individual members of various associations as
well as employee groups. The Company provides excess of loss medical coverage
(known as "stop loss" insurance) to employers who self-fund their medical
plans and pay claims using the services of a third party administrator.
SPECIALTY INSURANCE OPERATIONS
The Company is a leader in the COLI market, which is life insurance purchased
by a company on the lives of its employees, with the company named as the
beneficiary under the policy. Until the Health Insurance Portability Act of
1996 ("HIPA Act of 1996"), the Company sold two principal types of COLI,
leveraged and variable products. Leveraged COLI is a fixed premium life
insurance policy owned by a company or a trust sponsored by a company. The
HIPA Act of 1996 phases out the deductibility of interest on policy loans
under COLI by the end of 1998, thus eliminating all future sales of leveraged
COLI. Variable COLI continues to be a product used by employers to fund
non-qualified benefits or offset other post-employment benefits liabilities,
but does not provide the same cash flow or tax advantages generated by
leveraged COLI. During 1997, the Company recorded $3.6 billion of deposits of
new variable COLI business, increasing total account value to $12.3 billion
at December 31, 1997 compared to $8.5 billion at December 31, 1996. The
Specialty Insurance Operation generated revenues of $972 and $1.4 billion and
net income of $32 and $29 in 1997 and 1996, respectively. The decline in
revenues is primarily related to the impact of the HIPA Act of 1996 on
leveraged COLI sales.
In addition, the Company acquired the leveraged COLI business of Mutual
Benefit Life Insurance Company ("MBL") in 1992, and currently cedes
approximately $5.0 billion of leveraged COLI business to MBL Assurance
Company, the successor-in-interest to MBL ("MBLAC"). Pursuant to the original
reinsurance agreements, MBLAC is required to secure 100% of the coinsurance
liabilities in certain trust accounts held for the benefit of the Company.
COMPETITION
Competitive factors in the group and specialty insurance markets primarily
are the variety and quality of products offered, the Company's relationships
with its third-party distributors and the quality of customer service. The
Employee Benefits segment competes with numerous other insurance companies
and other financial intermediaries marketing insurance products.
GUARANTEED INVESTMENT CONTRACTS
The Guaranteed Investment Contracts segment consists of guaranteed rate
contract ("GRC") business that is supported by assets held in either the
Company's general account or a guaranteed separate account. Historically, a
significant majority of these contracts were sold as general account
contracts with fixed rate maturities. The Company decided in 1995, after a
thorough review of its GRC business, that it would significantly de-emphasize
general account GRC, choosing to focus its distribution efforts on other
products sold through other segments. The Company internally segregates the
GRC segment into distinct blocks of business which are separately managed.
The Company's GRC business written prior to 1995 is referred to as Closed
Book GRC. Management expects no material income or loss from the Guaranteed
Investment Contracts segment in the future.
OTHER MATTERS
ORGANIZATION
Hartford Life Insurance Company is a wholly-owned subsidiary of HLA, a
wholly-owned subsidiary of Hartford Life. Hartford Life is a direct
subsidiary of Hartford Accident and Indemnity Company ("HA&I"), an indirect
subsidiary of The Hartford Financial Services Group, Inc. ("The Hartford").
On February 10, 1997, Hartford Life filed a registration statement, as
amended, with the Securities and Exchange Commission relating to an IPO of
Hartford Life's Class A Common Stock. Pursuant to the IPO on May 22, 1997,
Hartford Life sold to the public 26 million shares at $28.25 per share and
received net proceeds of $687. Of the proceeds, $527 was used to retire debt
related to Hartford Life's promissory notes outstanding and line of credit.
The remaining $160 was contributed by Hartford Life to HLA to support growth
in its core businesses.
7
The 26 million shares sold in the IPO represent approximately 18.6% of the
equity ownership in Hartford Life and approximately 4.4% of the combined
voting power of Hartford Life's Class A and Class B Common Stock. The
Hartford owns all of the 114 million outstanding shares of Class B Common
Stock of Hartford Life, representing approximately 81.4% of the equity
ownership in Hartford Life and approximately 95.6% of the combined voting
power of Hartford Life's Class A and Class B Common Stock. Holders of Class
A Common Stock generally have identical rights to the holders of Class B
Common Stock except that the holders of Class A Common Stock are entitled to
one vote per share while holders of Class B Common Stock are entitled to five
votes per share on all matters submitted to a vote of Hartford Life
stockholders.
LIFE RESERVES
In accordance with applicable insurance regulations under which the Company
operates, life insurance subsidiaries of the Company establish and carry as
liabilities actuarially determined reserves which are calculated to meet the
Company's future obligations. Reserves for life insurance and disability
contracts are based on actuarially recognized methods using prescribed
morbidity and mortality tables in general use in the United States, which are
modified to reflect the Company's actual experience when appropriate. These
reserves are computed at amounts that, with additions from premiums to be
received and with interest on such reserves compounded annually at certain
assumed rates, are expected to be sufficient to meet the Company's policy
obligations at their maturities or in the event of an insured's death.
Reserves also include unearned premiums, premium deposits, claims reported
but not yet paid, claims incurred but not reported and claims in the process
of settlement. Reserves for assumed reinsurance are computed on bases
essentially comparable to direct insurance reserves.
For the Company's universal life and interest-sensitive whole life policies,
reserves are set according to premiums collected, plus interest credited,
less charges. Other fixed death benefit and individual life reserves are
based on assumed investment yield, persistency, mortality and morbidity as
per commonly used actuarial tables, expenses and margins for adverse
deviations.
The persistency of the Company's annuity and other interest-sensitive life
insurance reserves is enhanced by policy restrictions on the withdrawal of
funds. Withdrawals in excess of allowable penalty-free amounts are assessed
a surrender charge during a penalty period, which is usually at least seven
years. Such surrender charge is initially a percentage of the accumulation
value, which varies by product, and generally decreases gradually during the
penalty period. Surrender charges are set at levels to protect the Company
from loss on early terminations and to reduce the likelihood of policyholders
terminating their policies during periods of increasing interest rates,
thereby lengthening the effective duration of policy liabilities and
improving the Company's ability to maintain profitability on such policies.
The Company's reserves comply in all material respects with state insurance
department statutory accounting practices; however, in the Company's
consolidated financial statements, life insurance reserves are determined in
accordance with generally accepted accounting principles, which may vary from
statutory accounting practices.
REGULATION AND PREMIUM RATES
Insurance companies are subject to comprehensive and detailed regulation and
supervision throughout the United States. The extent of such regulation
varies, but generally has its source in statutes which delegate regulatory,
supervisory and administrative powers to state insurance departments. Such
powers relate to, among other things, the standards of solvency which must be
met and maintained; the licensing of insurers and their agents; the nature of
and limitations on investments; premium rates; claim handling and trade
practices; restrictions on the size of risks which may be insured under a
single policy; deposits of securities for the benefit of policyholders;
approval of policy forms; periodic examinations of the affairs of companies;
annual and other reports required to be filed on the financial condition of
companies or for other purposes; fixing maximum interest rates on life
insurance policy loans and minimum rates for accumulation of surrender
values; and the adequacy of reserves and other necessary provisions for
unearned premiums, unpaid claims and claim adjustment expenses and other
liabilities, both reported and unreported.
Most states have enacted legislation which regulates insurance holding
company systems such as Hartford Life. This legislation provides that each
insurance company in the system is required to register with the insurance
department of its state of domicile and furnish information concerning the
operations of companies within the holding company system which may
materially affect the operations, management or financial condition of the
insurers within the system. All transactions within a holding company system
affecting insurers must be fair and equitable. Notice to the insurance
departments is required prior to the consummation of transactions affecting
the ownership or control of an insurer and of certain material transactions
between an insurer and any entity in its holding company system. In
addition, certain of such transactions cannot be consummated without the
applicable insurance department's prior approval.
8
EMPLOYEES
The Company, together with its parent, had approximately 4,000 employees at
February 28, 1998, primarily in the United States and Canada.
ITEM 2. PROPERTIES
The Company occupies office space in Simsbury, Connecticut, leased from a
third party by Hartford Fire Insurance Company ("Hartford Fire"), an indirect
subsidiary of The Hartford. Expenses associated with these offices are
allocated on a direct and indirect basis to Hartford Life and its
subsidiaries by Hartford Fire.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in pending and threatened litigation in the normal
course of its business in which claims for monetary and punitive damages have
been asserted. Although there can be no assurances, management, at the
present time, does not anticipate that the ultimate liability arising from
such pending or threatened litigation will have a material effect on the
financial condition or operating results of the Company.
PART II
ITEM 5. MARKET FOR HARTFORD LIFE INSURANCE COMPANY'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
All of the Company's outstanding shares are ultimately owned by Hartford Life
which is ultimately a subsidiary of The Hartford. As of March 30, 1998, the
Company had issued and outstanding 1,000 shares of common stock at a par
value of $5,690 per share.
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE STATED)
MANAGEMENT'S DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES BEGINNING ON PAGE F-1.
Certain statements contained in this discussion, other than statements of
historical fact, are forward-looking statements. These statements are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 and include estimates and assumptions related to economic,
competitive, and legislative developments. These forward-looking statements
are subject to change and uncertainty which are, in many instances, beyond
the Company's control and have been made based upon management's expectations
and beliefs concerning future developments and their potential effect on
Hartford Life Insurance Company and subsidiaries (the "Company"). There can
be no assurance that future developments will be in accordance with
management's expectations or that the effect of future developments on the
Company will be those anticipated by management. Actual results could differ
materially from those expected by the Company, depending on the outcome of
certain factors, including those described in the forward-looking statements.
Certain reclassifications have been made to prior year financial information
to conform to the current year presentation.
INDEX
Consolidated Results of Operations 10 Guaranteed Investment Contracts 13
Annuity 11 Investments 14
Individual Life Insurance 12 Regulatory Initiatives and Contingencies 18
Employee Benefits 13 Other Matters 20
CONSOLIDATED RESULTS OF OPERATIONS
The Company is a leading insurance and financial services organization that
provides pre-retirement savings, estate planning and employee benefit
products. The Company offers variable and fixed annuities, retirement plan
services, mutual funds, and life and disability insurance on both a group and
an individual basis.
The Company derives its revenues principally from: (a) asset management fees
on separate accounts and mortality and expense fees; (b) net investment
income on general account assets; and (c) certain other fees earned by the
Company. Asset management fees and mortality and expense fees are primarily
generated from separate account assets which are deposited with the Company
through the sale of variable annuity and variable life products. The
Company's operating expenses primarily consist of interest credited to
policyholders on general account liabilities, insurance benefits provided,
dividends to policyholders, costs of selling and servicing the various
products offered by the Company and other general business expenses. The
Company's profitability depends largely on the amount of assets under
management, the adequacy of product pricing and underwriting discipline, and
its ability to earn target spreads between earned investment rates on general
account assets and credited rates to customers.
OPERATING SUMMARY
1997 1996
- --------------------------------------------------------------------------
REVENUES $3,009 $2,889
EXPENSES 2,707 2,851
------------------------------------------------------------------
NET INCOME $ 302 $ 38
------------------------------------------------------------------
Revenues increased $120, or 4%, to $3 billion in 1997 from $2.9 billion in
1996. Revenues were impacted by the Health Insurance Portability and
Accountability Act of 1996 ("HIPA Act of 1996"), which phases out the
deductibilty of interest expense on policy loans by the end of 1998,
virtually eliminating all new sales of leveraged corporate owned life
insurance ("COLI"), and by the Guaranteed Investment Contracts segment
("GIC"), which had a loss of $225 in 1996, primarily related to a closed
block of guaranteed rate contract business ("Closed Book GRC"). Excluding
COLI and GIC, revenues increased $293, or 20%, to $1.8 billion in 1997 as
compared to $1.5 billion 1996. This growth was driven by increased Individual
Annuity revenues of $256, or 42%, in 1997 as compared to 1996. This increase
is primarily related to premiums and other considerations where individual
variable annuity fee income grew $198, or 54%, in 1997 as compared to 1996,
primarily resulting from increased average individual variable annuity
account values of $13.1 billion, or 49%, to $39.7 billion in 1997. This solid
growth in average account value was due to strong variable annuity sales of
$9.7 billion and significant stock market appreciation. In addition,
Individual Life Insurance premiums and other considerations grew $36, or 13%,
reflecting the impact of applying cost of insurance charges and variable life
fees to a larger block of business. Individual Life Insurance account values
increased $555, or 17%, to $3.8 billion in 1997 as compared to 1996.
10
Expenses decreased $144 in 1997 as compared to 1996. Excluding COLI and GIC
for the reasons described above, expenses increased $255, or 20%, to $1.5
billion in 1997 as compared to $1.2 billion in 1996. Benefits, claims and
expenses related to the Annuity segment increased $210, or 28%, in 1997 as
compared to 1996. This increase was driven by increased amortization of
deferred policy acquisition costs of $76, or 44%, due to strong sales in both
1997 and 1996, as well as increased operating expenses of $101, or 65%,
reflective of the strong growth in this segment. In addition, Individual
Life Insurance benefits, claims and expenses grew $30, or 8%, primarily
related to amortization of deferred policy acquisition costs associated with
this growing block of business.
Net income totaled $302 in 1997 as compared to $38 in 1996. The 1996 results
include a $225 net loss related to GIC, which when excluded, results in an
increase in 1997 net income of $39, or 15%, over comparable 1996 results.
The improvement in earnings, excluding GIC, for both comparative periods is
primarily related to increased fee income earned on the Annuity segment's
growing block of separate account assets due to strong sales and significant
market appreciation and earnings growth in the Individual Life Insurance
segment. Partially offsetting improved earnings in the principal segments
was a decrease in earnings of $33 in the Corporate Operation due to the
increased capital allocated to the other segments to fund their growth.
Management believes that it has developed and implemented strategies to
maintain and enhance its position as a market leader within the financial
services industry, to continue the Company's asset growth, and to maximize
Hartford Life's shareholder value. Hartford Life's strong market position in
each of its primary businesses, coupled with the growth potential management
believes exists in its markets, provides opportunities to increase sales of
the Company's products and services as individuals increasingly save and plan
for retirement, protect themselves and their families against disability or
death and prepare their estates for an efficient transfer of wealth between
generations.
SEGMENT RESULTS
The Company operates in three principal segments: Annuity, Individual Life
Insurance, and Employee Benefits as well as a Guaranteed Investments
Contracts segment, which is primarily comprised of guaranteed rate contract
business written prior to 1995. The Company also maintains a Corporate
Operation through which it reports items that are not directly allocable to
any of its business segments.
Below is a summary of net income (loss) by segment.
1997 1996
- ------------------------------------------------------------------
ANNUITY $206 $ 148
INDIVIDUAL LIFE INSURANCE 55 44
EMPLOYEE BENEFITS 32 29
GUARANTEED INVESTMENT CONTRACTS - (225)
CORPORATE OPERATION 9 42
- ------------------------------------------------------------------
NET INCOME $302 $ 38
- ------------------------------------------------------------------
ANNUITY
OPERATING SUMMARY
1997 1996
- ------------------------------------------------------------------
REVENUES $1,269 $968
EXPENSES 1,063 820
---------------------------------------------------------------
NET INCOME $ 206 $148
---------------------------------------------------------------
The Annuity segment focuses on the savings and retirement needs of the
growing number of individuals who are preparing for retirement or have
already retired. This segment consists of two areas of operation: Individual
Annuity and Group Annuity. The variety of products sold within this segment
reflects the diverse nature of the market. These products include, in the
Individual Annuity operation, individual variable annuities, fixed MVA
annuities, and mutual funds; and in the Group Annuity operation, deferred
compensation and retirement plan services for municipal governments and
corporations, structured settlement contracts and other special purpose
annuity contracts, and investment management contracts. The Company was rated
the number one writer of variable annuities for 1997 with an 11% market share
according to the Variable Annuity Research and Data Service, and sold
approximately $869 of mutual funds in its first full year offering the
product, resulting in total mutual fund assets of $972 at December 31, 1997.
Revenues increased $301, or 31%, to $1.3 billion in 1997 from $1.0 billion in
1996. This increase was principally the result of a $234 increase in premiums
and other considerations, reflecting a substantial increase in aggregate fees
earned due to the segment's growing block of separate account assets. The
11
average separate account assets of this segment increased to $50.7 billion in
1997, from $37.2 billion in 1996 primarily due to sales of individual
variable annuities of approximately $9.7 billion in 1997, as well as
significant market appreciation. Also, Group Annuity sales were $820 in
1997, an increase of $186, or 29%, over 1996. In addition, net investment
income grew $67, or 15%, to $500 in 1997 primarily due to growth in average
general account assets which increased to $8.1 billion in 1997 from $7.2
billion in 1996 largely as a result of growth in the general account portion
of the individual variable annuity products.
The growth in this segment in 1997 also resulted in an increase in expenses
of $243, or 30%, to $1.1 billion in 1997 from $820 in 1996. Benefits, claims
and claim adjustment expenses grew $33, or 8%, in 1997 primarily related to
increased interest credited on Group Annuity general account liabilites.
Amortization of DPAC related to the Individual Annuity operation grew $82, or
52%, in 1997 as prior and current year sales remained strong. Also, other
business expenses increased $101, in 1997, as a result of the growth in this
segment.
A 33% growth in average account value in 1997, coupled with a reduction in
individual annuity operating expenses as a percentage of total individual
annuity account value to 25 basis points in 1997 from 28 basis points in
1996, contributed to the increase in net income of $58, or 39%, to $206 from
$148 in 1996.
Management believes it has developed and implemented strategies to maintain
and enhance its position as a market leader in the financial services
industry as individuals increasingly save and plan for retirement.
INDIVIDUAL LIFE INSURANCE
OPERATING SUMMARY
1997 1996
- --------------------------------------------------------------------------------
REVENUES $487 $440
EXPENSES 432 396
------------------------------------------------------------------------
NET INCOME $ 55 $ 44
------------------------------------------------------------------------
The Individual Life Insurance segment, which focuses on the high end estate
and business planning markets, sells a variety of life insurance products,
including variable life, universal life, interest-sensitive whole life, and
term life insurance policies. The Company is among the top five writers of
individual life insurance based on average face value per policy. In
addition, the Company is among the top five writers of individual variable
life for the nine months ended September 30, 1997, based on the Tillinghast
Value Variable Life Survey.
Revenues in 1997 increased $47, or 11%, to $487 from $440 in 1996. In the
first quarter of 1996, a block of business was assumed from Investors Equity
Life Insurance Company ("IEL") which increased 1996 revenues by $9. Excluding
this transaction, 1997 revenues increased $56, or 13%, as compared to 1996,
reflecting the impact of applying cost of insurance charges and variable life
fees to a larger block of business. Account values increased $555, or 17%,
to $3.8 billion in 1997 from $3.2 billion in 1996. Sales were $140 in 1997,
an increase of 8% over 1996. Variable life product sales comprised 70%, or
$98, of total 1997 sales and grew $23, or 31%, over 1996 levels.
Expenses increased $36, or 9%, to $432 in 1997 from $396 in 1996. Excluding
IEL, expenses increased $45, or 12%, in 1997. This increase was primarily
driven by an increase in amortization of DPAC of $23 in 1997 related to the
growth in new variable life business.
The growth in this segment's account values, particularly variable life,
along with favorable mortality experience, contributed to an increase in net
income of $11, or 25%, in 1997.
Management believes that the Company's strong market position will provide
opportunities for growth in this segment as individuals increasingly prepare
their estates for an efficient transfer of wealth between generations.
12
EMPLOYEE BENEFITS
OPERATING SUMMARY
1997 1996
- ----------------------------------------------------------------------------
REVENUES $972 $1,366
EXPENSES 940 1,337
---------------------------------------------------------------------
NET INCOME $ 32 $ 29
---------------------------------------------------------------------
The Employee Benefits segment consists of two areas of operation: Group
Insurance and Specialty Insurance. Through Group Insurance, the Company
offers products such as group life insurance products, group short-term and
long-term disability and accidental death and dismemberment. Substantially
all of the Group Insurance directly written by the Company is ceded to its
direct parent, Hartford Life and Accident Insurance Company ("HLA").
Specialty Insurance primarily consists of the Company's COLI business.
Revenues decreased $394 to $972 in 1997, which was primarily attributable to
the COLI business for which associated revenues decreased $380. The decrease
in COLI revenues is primarily a result of the elimination of sales of
leveraged COLI due to the HIPA Act of 1996, which phases out the
deductibility of interest on policy loans under leveraged COLI by the end of
1998. The Company continues to sell variable COLI and recorded $3.6 billion
of new deposits in 1997, increasing total account value to $12.3 billion at
December 31, 1997 compared to $8.5 billion at December 31, 1996.
Expenses decreased $397 to $940 in 1997, which generally reflected a decrease
in dividends to policyholders of $394, or 62%, primarily due to the
elimination of sales of leveraged COLI as discussed above.
Net income increased $3, or 10%, in 1997 as compared to 1996 due to an
increase in COLI of $1 and the sale of a block of reinsurance business which
resulted in a gain of approximately $2, after tax.
The Variable COLI product offered by this segment continues to be used by
employers to fund non-qualified benefits or offset other post-employment
benefits liabilities.
GUARANTEED INVESTMENT CONTRACTS
OPERATING SUMMARY
1997 1996
- ------------------------------------------------------------------------
REVENUES $241 $ 34
EXPENSES 241 259
------------------------------------------------------------------
NET INCOME $ - $(225)
The GIC segment consists of guaranteed rate contract ("GRC") business that is
supported by assets held in either the Company's general account or a
guaranteed separate account and includes a closed block of guaranteed rate
contracts ("Closed Book GRC"). Historically, a significant majority of these
contracts were sold as general account contracts with fixed rates and fixed
maturities. The Company decided in 1995, after a thorough review of its GRC
business, that it would significantly de-emphasize general account GRC,
choosing instead to focus its distribution efforts on other products sold
through other segments and selling general account GRC primarily as an
accommodation to customers. From 1992 to 1994, the GIC segment sold over $5
billion of GRC. In contrast, the GIC segment sold only $47 and $108 of
general account GRC in 1997 and 1996, respectively. Consistent with
management's expectations, the segment had no net income in 1997 and expects
no material income or loss from the GIC segment in the future.
Closed Book GRC results in 1996 were negatively affected by lower investment
rates and earnings in the related investment portfolio (primarily consisting
of collateralized mortgage obligations and mortgage backed securities) due to
prepayments experienced in excess of assumed and historical levels. Closed
Book GRC was also affected by the interest rate rise in 1994 when the
duration of its assets lengthened relative to that of the liabilities.
Although the Closed Book GRC asset portfolio as a whole is duration matched
with its liabilities, certain investments continue to have a longer maturity
than their corresponding liabilities and will need to be liquidated prior to
maturity in order to meet the specific liability commitments. To protect the
existing value of these investments, the Company entered into various hedge
transactions in late September 1996 which substantially eliminated further
fluctuation in fair value of the investments due to interest rate changes.
As of December 31, 1997, Closed Book GRC had general account assets and
liabilities of $2.2 billion. The scheduled maturities are $1.0 billion, or
45%, in 1998, $0.7 billion, or 32%, in 1999 and $0.5 billion, or 23%,
thereafter.
13
During 1996, Closed Book GRC incurred a $51, after-tax, loss from operations
as a result of negative interest spread. With the initiation of the hedge
transactions discussed above, which eliminated the possibility that the fair
value of Closed Book GRC investments would recover to their current amortized
cost prior to sale, an other than temporary impairment loss of $82,
after-tax, was determined to have occurred and was recorded in September
1996. An additional other than temporary impairment loss of $6, after-tax,
occurred in the fourth quarter of 1996 bringing the total 1996 impairment to
$88. Also, during the third quarter of 1996, Closed Book GRC had asset sales
resulting in proceeds of approximately $500 and a realized loss of $55,
after-tax. The asset sales were undertaken as a result of liquidity needs
and favorable market conditions for certain securities. Other charges of
$32, after-tax, were also incurred in the third quarter of 1996.
INVESTMENTS
GENERAL
The Company's investments are managed by its investment strategy group which
consists of a risk management unit and a portfolio management unit and
directly reports to senior management of the Company. The risk management
unit is responsible for monitoring and managing the Company's asset/liability
profile and establishing investment objectives and guidelines. The portfolio
management unit is responsible for determining, within specified risk
tolerances and investment guidelines, the general asset allocation, duration,
convexity and other characteristics of the Company's general account and
guaranteed separate account investment portfolios. The Hartford Investment
Management Company, a wholly owned subsidiary of The Hartford, executes the
investment plan of the investment strategy group including the identification
and purchase of securities that fulfill the objectives of the strategy group.
The primary investment objective of the Company's general account and
guaranteed separate accounts is to maximize after-tax returns consistent with
acceptable risk parameters (including the management of the interest rate
sensitivity of invested assets relative to that of policyholder obligations).
The Company does not have any financial instruments entered into for trading
purposes. The Company is exposed to two primary sources of investment risk:
credit risk, relating to the uncertainty associated with an obligor's
continued ability to make timely payment of principal and interest, and
interest rate risk, relating to the market price and/or cash flow variability
associated with changes in market yield curves. See the Investment Risk
Management section below for further discussion of the Company's approach to
managing these investment risks.
The Company's separate accounts reflect two categories of risk assumption:
non-guaranteed separate accounts totaling $58.6 billion as of December 31,
1997, wherein the policyholder assumes substantially all the investment risk
and reward, and guaranteed separate accounts totaling $10.5 billion as of
December 31, 1997, wherein the Company contractually guarantees either a
minimum return or account value to the policyholder. Non-guaranteed separate
account products include variable annuities, variable life and COLI.
Guaranteed separate account products primarily consist of fixed MVA
individual annuities and modified guaranteed life insurance, and generally
include market value adjustment features to mitigate the disintermediation
risk in the event of surrenders.
The Company's general account consists of a diversified portfolio of
investments. Although all the assets of the general account support all the
Company's liabilities, the Company's investment strategy group has developed
separate investment portfolios for specific classes of product liabilities
within the general account. The strategy group works closely with the
business lines to develop specific investment guidelines, including duration
targets, asset allocation and convexity constraints, asset/liability mismatch
tolerances and return objectives, for each product line in order to achieve
each product line's individual risk and return objectives.
Invested assets in the Company's general account totaled $18.2 billion at
December 31, 1997 and were comprised of $14.2 billion of fixed maturities,
$3.8 billion of policy loans, and other investments of $227. Policy loans,
which had a weighted-average interest rate of 11.2%, as of December 31, 1997,
are secured by the cash value of the underlying life insurance policies.
These loans do not mature in a conventional sense, but expire in conjunction
with the related policy liabilities.
During 1997, the Company continued to concentrate on reducing exposure to
CMO's and reallocated the funds into public and private corporate bonds,
commercial mortgage-backed securities and other nonresidential asset-backed
securities. In general, commercial MBS and asset-backed securities, although
subject to prepayment risk, are significantly less sensitive to changes in
interest rates as compared to CMO's and MBS.
As of December 31, 1997 and 1996, approximately 22.1% and 13.2%,
respectively, of the Company's fixed maturity portfolio was invested in
private placement securities (including Rule 144A offerings). Private
placement securities are generally less liquid than public securities;
however, covenants for private placements are designed to mitigate the impact
of such increased liquidity risk. Most of the private placement securities
in the Company's portfolio are rated by nationally recognized rating
organizations.
14
INVESTMENT RESULTS
The table below summarizes the Company's results for the past two years.
(BEFORE TAXES) 1997 1996
-----------------------------------------------------------
Net investment income $1,368 $1,397
Yield on average invested assets (1) 7.7% 7.8%
Net realized capital gains (losses) $ 4 $(213)
-----------------------------------------------------------
(1) REPRESENTS NET INVESTMENT INCOME (EXCLUDING NET REALIZED
CAPITAL LOSSES) DIVIDED BY AVERAGE INVESTED ASSETS AT COST
(FIXED MATURITIES AT AMORTIZED COST).
For the year ended December 31, 1997, before-tax net investment income
totaled $1.4 billion, unchanged from 1996. Before-tax yields on average
invested assets decreased to 7.7% in 1997 from 7.8% in 1996. The decrease in
before-tax yields was primarily attributable to declining market interest
rates and a reduction in policy loan yields.
Net realized capital gains were $4 in 1997, as compared to net realized
capital losses of $213 in 1996. The 1996 capital losses were primarily
attributable to the writedown and sale of certain securities within Closed
Book GRC.
INVESTMENT RISK MANAGEMENT
Credit risk and interest rate risk are the primary sources of investment risk
to the Company. The Company manages credit risk through industry and issuer
diversification and asset allocation. Credit policies have been established
that focus on the credit quality of obligors and counterparties, limit credit
concentrations, and encourage frequent creditworthiness reviews. The Company
invests in investment grade securities and has established exposure limits,
diversification standards and review procedures for all credit risks whether
borrower, issuer, or counterparty. Also, the Company maintains credit
policies regarding the financial stability and credit standing of its major
derivatives' counterparties and, to the extent the current value of
derivatives exceed exposure policy thresholds, collateral is pledged to or
held by the Company. The Company manages interest rate risk as part of its
asset/liability management strategies, including the use of certain hedging
techniques (which may include the use of certain financial derivatives),
product design, such as the use of MVA features and surrender charges, and
proactive monitoring and management of certain non-guaranteed elements of the
Company's products (such as resetting of credited rates for policies that
permit such adjustments). For further discussion of the Company's interest
rate risk management techniques see the Asset/Liability Management Strategies
section on page 17.
The following table, which includes general and guaranteed separate accounts,
reflects the principal amounts of the fixed and variable rate fixed maturity
portfolio at December 31, 1997, along with the respective weighted average
coupons by estimated maturity year. Expected maturities differ from
contractual maturities due to call or prepayment provisions. The weighted
average coupon on variable rate securities is based upon spot rates as of
December 31, 1997, and is primarily based upon the London Interbank Offered
Rate ("LIBOR"). Callable bonds and notes are distributed to either call
dates or maturity depending on which date produces the most conservative
yield. Asset backed securities, collateralized mortgage obligations and
mortgage backed securities are distributed to maturity year based on
estimates of the rate of future prepayments of principal over the remaining
life of the securities. These estimates are developed using prepayment
speeds provided in broker consensus data. Such estimates are derived from
prepayment speeds previously experienced at the interest rate levels
projected for the underlying collateral. Actual prepayment experience may
vary from these estimates. Financial instruments with certain leverage
features have been included in each of the fixed maturity categories. These
instruments have not been separately displayed because they were immaterial
to the Company's investment portfolio.
15
1997
1998 1999 2000 2001 2002 Thereafter TOTAL Fair Value
- -------------------------------------------------------------------------------------------------------------------------------
BONDS AND NOTES - CALLABLE
FIXED RATE
Par value $ 37 $ 50 $ 21 $ 13 $ 12 $ 333 $ 466 $ 435
Weighted average coupon 10.5% 7.5% 8.0% 7.6% 7.7% 5.4% 6.3%
VARIABLE RATE
Par value $ 66 $ 15 $ 28 $ 33 $ 15 $ 863 $ 1,020 $ 966
Weighted average coupon 6.4% 6.7% 7.1% 6.0% 6.4% 6.5% 6.5%
BONDS AND NOTES - OTHER
FIXED RATE
Par value $2,762 $1,328 $1,192 $1,133 $ 897 $6,075 $13,387 $13,465
Weighted average coupon 3.9% 6.8% 7.1% 7.5% 7.7% 6.3% 6.1%
VARIABLE RATE
Par value $ 140 $ 47 $ 138 $ - $ 84 $ 841 $ 1,250 $ 1,141
Weighted average coupon 5.1% 1.3% 6.4% - 5.7% 5.3% 5.3%
ASSET BACKED SECURITIES
FIXED RATE
Par value $ 211 $ 221 $ 433 $ 500 $ 220 $ 491 $ 2,076 $ 2,109
Weighted average coupon 6.9% 6.5% 6.7% 7.0% 6.8% 7.4% 6.9%
VARIABLE RATE
Par value $ 39 $ 186 $ 184 $ 261 $ 305 $ 721 $ 1,696 $ 1,696
Weighted average coupon 6.2% 6.2% 6.2% 6.7% 6.2% 6.4% 6.4%
COLLATERALIZED MORTGAGE OBLIGATIONS
FIXED RATE
Par value $ 29 $ 170 $ 529 $ 307 $ 78 $ 506 $ 1,619 $ 1,582
Weighted average coupon 6.5% 6.0% 6.0% 5.6% 5.6% 6.1% 6.0%
VARIABLE RATE
Par value $ 29 $ 11 $ 25 $ 13 $ 6 $ 346 $ 430 $ 408
Weighted average coupon 6.7% 6.6% 4.2% 6.7% 3.4% 7.7% 7.3%
COMMERCIAL MORTGAGE BACKED SECURITIES
FIXED RATE
Par value $ 4 $ 34 $ 176 $ 114 $ 118 $ 798 $ 1,244 $ 1,246
Weighted average coupon 8.6% 7.7% 6.9% 7.7% 7.0% 7.4% 7.3%
VARIABLE RATE
Par value $ 20 $ 82 $ 75 $ 43 $ 153 $ 335 $ 708 $ 718
Weighted average coupon 6.1% 7.5% 7.0% 6.6% 6.5% 7.4% 7.1%
MORTGAGE BACKED SECURITIES
FIXED RATE
Par value $ 4 $ 25 $ 3 $ 41 $ 2 $ 424 $ 499 $ 511
Weighted average coupon 7.0% 7.0% 7.4% 6.2% 8.1% 7.5% 7.3%
VARIABLE RATE
Par value $ - $ - $ - $ - $ - $ 24 $ 24 $ 24
Weighted average coupon - - - - - 6.6% 6.6%
- -------------------------------------------------------------------------------------------------------------------------------
16
ASSET/LIABILITY MANAGEMENT STRATEGIES
The Company employs several risk management tools to quantify and manage
market risk arising from its investments and interest sensitive liabilities.
For certain portfolios, management monitors the changes in present value
between assets and liabilities resulting from various interest rate scenarios
using integrated asset/liability measurement systems and a proprietary system
that simulates the impacts of parallel and non-parallel yield curve shifts.
Based on this current and prospective information, management implements risk
reducing techniques to improve the match between assets and liabilities.
Derivatives play an important role in facilitating the management of interest
rate risk, creating opportunities to efficiently fund obligations, hedge
against risks that affect the value of certain liabilities and adjust broad
investment risk characteristics as a result of any significant changes in
market risks. The Company uses a variety of derivatives, including swaps,
caps, floors, forwards and exchange-traded financial futures and options, in
order to hedge exposure primarily to interest rate risk on anticipated
investment purchases or existing assets and liabilities. The Company does not
make a market or trade derivatives for the express purpose of earning trading
profits. The Company's derivative program is monitored by an internal
compliance unit and is reviewed by senior management and Hartford Life's
Finance Committee. The notional amounts of derivative contracts, which
represent the basis upon which pay or receive amounts are calculated and are
not reflective of credit risk, totaled $6.5 billion at December 31, 1997
($4.6 billion related to insurance investments and $1.9 related to life
insurance liabilities).
The strategies described below are used to manage the aforementioned risks.
ANTICIPATORY HEDGING -- For certain liabilities, the Company commits to the
price of the product prior to receipt of the associated premium or deposit.
Anticipatory hedges are routinely executed to offset the impact of changes in
asset prices arising from interest rate changes pending the receipt of
premium or deposit and the subsequent purchase of an asset. These hedges
involve taking a long position in interest rate futures or entering into an
interest rate swap with duration characteristics equivalent to the associated
liabilities or anticipated investments. The Company did not have any
anticipatory hedges as of December 31, 1997.
LIABILITY HEDGING -- Several products obligate the Company to credit a return
to the contract holder which is indexed to a market rate. To hedge risks
associated with these products, the Company typically enters into interest
rate swaps to convert the contract rate into a rate that trades in a more
liquid and efficient market. This hedging strategy enables the Company to
customize contract terms and conditions to customer objectives and satisfies
the operation's asset/liability matching policy. Additionally, interest rate
swaps are used to convert certain fixed contract rates into floating rates,
thereby allowing them to be appropriately matched against floating rate
assets. The notional amount of derivatives used for liability hedging as of
December 31, 1997 was $1.9 billion.
ASSET HEDGING -- To meet the various policyholder obligations and to provide
cost effective prudent investment risk diversification, the Company may
combine two or more financial instruments to achieve the investment
characteristics of a fixed maturity security or that match an associated
liability. The use of derivative instruments in this regard effectively
transfers unwanted investment risks or attributes to others. The selection
of the appropriate derivative instruments depends on the investment risk, the
liquidity and efficiency of the market, and the asset and liability
characteristics. The notional amount of asset hedges as of December 31, 1997
was $1.8 billion.
PORTFOLIO HEDGING -- The Company periodically compares the duration and
convexity of its portfolios of assets to their corresponding liabilities and
enters into portfolio hedges to reduce any difference to desired levels.
Portfolio hedges reduce the mismatch between assets and liabilities and
offset the potential impact to cash flows caused by changes in interest
rates. The notional amount of portfolio hedges as of December 31, 1997 was
$2.8 billion.
LIFE INSURANCE LIABILITY CHARACTERISTICS
Insurance liabilities, other than non-guaranteed separate accounts, which
were backed by $39.4 billion in total assets (including investments of $28.7
billion), totaled $24.1 billion (net of ceded reinsurance and policy loans)
at December 31, 1997. These insurance liabilities consisted of future policy
benefits of $3.3 billion, other policyholder funds of $21 billion, guaranteed
separate accounts of $9.9 billion and reinsurance recoverables of $(6.3)
billion and policy loans of $(3.8) billion. Matching of the duration of the
investments with respective policyholder obligations is an explicit objective
of the Company's management strategy. The Company's insurance policy
liabilities, along with estimated duration periods based on the Company's
internal actuarial assumptions, can be summarized based on investment needs
in the five categories described below at December 31, 1997.
17
($ IN BILLIONS)
- ----------------------------------------------------------------------------------------------------------------------------------
DESCRIPTION (1) 1998 1999 2000 2001 2002 Thereafter TOTAL
- ----------------------------------------------------------------------------------------------------------------------------------
Fixed rate asset accumulation vehicles $ 2.9 $ 1.8 $ 1.9 $ 1.2 $ 0.6 $ 4.3 $ 12.7
Weighted average credited rate 6.6% 7.1% 6.9% 6.9% 7.1% 6.6% 6.8%
Indexed asset accumulation vehicles $ 0.1 $ 0.1 $ - $ - $ - $ - $ 0.2
Weighted average credited rate 5.7% 6.3% - - - - 5.9%
Interest credited asset accumulation vehicles $ 4.2 $ 0.6 $ 0.4 $ 0.4 $ 0.5 $ 4.7 $ 10.8
Weighted average credited rate 5.7% 6.0% 6.0% 6.0% 6.1% 5.9% 5.8%
Long-term pay out liabilities $ 0.1 $ 0.1 $ - $ - $ - $ 0.4 $ 0.6
Short-term pay out liabilities $ - $ - $ - $ - $ - $ - $ -
- ----------------------------------------------------------------------------------------------------------------------------------
(1) AS OF DECEMBER 31, 1997, THE FAIR VALUE OF THE COMPANY'S INVESTMENT
CONTRACTS INCLUDING GUARANTEED SEPARATE ACCOUNTS WAS $21.7 BILLION.
FIXED RATE ASSET ACCUMULATION VEHICLES -- Products in this category require
the Company to pay a fixed rate for a certain period of time. The cash flows
are not interest sensitive because the products are written with a market
value adjustment feature and the liabilities have protection against the
early withdrawal of funds through surrender charges. Product examples
include fixed rate annuities with a market value adjustment and fixed rate
guaranteed investment contracts. Contract duration is dependent on the
policyholder's choice of guarantee period.
INDEXED ASSET ACCUMULATION VEHICLES -- Products in this category are similar
to the fixed rate asset accumulation vehicles but require the Company to pay
a rate that is determined by an external index. The amount and/or timing of
cash flows will therefore vary based on the level of the particular index.
The primary risks inherent in these products are similar to the fixed rate
asset accumulation vehicles, with an additional risk that changes in the
index may adversely affect profitability. Product examples include
indexed-guaranteed investment contracts with an estimated duration of up to
two years.
INTEREST CREDITED ASSET ACCUMULATION VEHICLES -- Products in this category
credit interest to policyholders, subject to market conditions and minimum
guarantees. Policyholders may surrender at book value but are subject to
surrender charges for an initial period. Product examples include universal
life contracts and the general account portion of the Company's variable
annuity products. Liability duration is short to intermediate term.
LONG-TERM PAY OUT LIABILITIES -- Products in this category are long-term in
nature and may contain significant actuarial (including mortality and
morbidity) pricing and cash flow risks. The cash flows associated with these
policy liabilities are not interest rate sensitive but do vary based on the
timing and amount of benefit payments. The primary risks associated with
these products are that the benefits will exceed expected actuarial pricing
and/or that the actual timing of the cash flows differ from those anticipated
resulting in an investment return lower than that assumed in pricing.
Product examples include structured settlement contracts, on-benefit
annuities (i.e., the annuitant is currently receiving benefits thereon) and
long-term disability contracts. Contract duration is generally 6 to 10 years
but, at times, exceeds 30 years.
SHORT-TERM PAY OUT LIABILITIES -- These liabilities are short-term in nature
with a duration of less than one year. The primary risks associated with
these products are determined by the non-investment contingencies such as
mortality or morbidity and the variability in the timing of the expected cash
flows. Liquidity is of greater concern than for the long-term pay out
liabilities. Products include individual and group term life insurance
contracts and short-term disability contracts.
REGULATORY INITIATIVES AND CONTINGENCIES
LEGISLATIVE INITIATIVES
Although the Federal government does not directly regulate the insurance
business, Federal initiatives often have an impact on the insurance industry
in a variety of ways. Current and proposed Federal measures which may
significantly affect the life insurance business include tax law changes
affecting the tax treatment of life insurance products and its impact on the
relative desirability of various personal investment vehicles, medical
testing for insurability, and proposed legislation to prohibit the use of
gender in determining insurance and pension rates and benefits. In
particular, President Clinton's 1998 Federal Budget Proposal currently
contains certain recommendations for modifying tax rules related to the
treatment of variable annuities and COLI by contractholders, which if enacted
as described, could have a material adverse impact on the Company's sales of
these products. It is too early to determine whether these tax proposals will
ultimately be enacted by Congress and the potential impact, if any, to the
Company's financial condition or results of operations.
18
NAIC PROPOSALS
The National Association of Insurance Commissioners ("NAIC") has been
developing several model laws and regulations, including a Model Investment
Law and amendments to the Model Holding Company System Regulatory Act (the
"Holding Act Amendments"). The Model Investment Law defines the investments
which are permissible for life insurers to hold, and the Holding Act
Amendments address the types of activities in which subsidiaries and
affiliates may engage. The NAIC adopted these models in 1997 and 1996, but
the laws have not been enacted for insurance companies domiciled in the State
of Connecticut, such as Hartford Life Insurance Company. Even if enacted in
Connecticut or other states in which the Company's subsidiaries are
domiciled, it is expected that these laws will neither significantly change
the Company's investment strategies nor have any material adverse effect on
the Company's liquidity or financial position.
The NAIC is expected to adopt its codification of Statutory Accounting
Principles ("SAP") in early 1998 with a proposed effective date of January 1,
1999. The American Institute of Certified Public Accountants has not yet
determined whether SAP will qualify as an Other Comprehensive Basis of
Accounting ("OCBOA"). If SAP is granted OCBOA status and is adopted by the
Company's domiciliary states, the Company will make the necessary changes
required for implementation. These changes are not anticipated to have a
material impact on the statutory financial statements of the Company.
YEAR 2000
The Year 2000 issue relates to the ability or inability of computer systems
to properly process information and data containing or related to dates
beginning with the year 2000 and beyond. The Year 2000 issue exists because
many computer systems that are in use today were developed years ago when a
year was identified using a two-digit field rather than a four-digit field.
As information and data containing or related to the century date are
introduced to computer hardware, software and other systems, date sensitive
systems may recognize the year 2000 as "1900", or not at all, which may
result in computer systems processing information incorrectly. This, in turn,
may significantly and adversely affect the integrity and reliability of
information databases and may result in a wide variety of adverse
consequences to a company. In addition, Year 2000 problems that occur with
third parties with which a company does business, such as suppliers, computer
vendors and others, may also adversely affect any given company.
As an insurance and financial services company, the Company has thousands of
individual and business customers that have insurance policies, annuities,
mutual funds and other financial products of the Company. Nearly all of these
policies and products contain date sensitive data, such as policy expiration
dates, birth dates, premium payment dates, and the like. In addition, the
Company has business relationships with numerous third parties that affect
virtually all aspects of the Company's business, including, without
limitation, suppliers, computer hardware and software vendors, insurance
agents and brokers, securities broker-dealers and other distributors of
financial products.
Beginning in 1990, the Company began working on making its computer systems
Year 2000 ready, either through installing new programs or replacing systems.
In January 1998, the Company commenced a company-wide program to further
identify, assess and remediate the impact of Year 2000 problems in all of the
Company's business segments. The Company currently anticipates that this
internal program will be substantially completed by the end of 1998, and
testing of computer systems will continue through 1999. The costs of
addressing the Year 2000 issue that have been incurred by the Company through
the year ended December 31, 1997 have not been material to the Company's
financial condition or results of operations. The Company will continue to
incur costs related to its Year 2000 efforts and is in the process of
attempting to determine the approximate total costs to be incurred in the
future, which are not currently anticipated to be material to the Company's
results of operations or financial condition.
In addition, as part of its Year 2000 program, the Company is identifying
third parties with which it has significant business relations in order to
attempt to assess the potential impact on the Company of their Year 2000
issues and remediation plans. Hartford Life currently anticipates that it
will substantially complete this evaluation by the end of 1998, and will
conduct systems testing with certain third parties through 1999. The Company
does not have control over these third parties and, as a result, the Company
cannot currently determine to what extent future operating results may be
adversely affected by the failure of these third parties to successfully
address their Year 2000 issues.
19
OTHER MATTERS
RATINGS
The following table summarizes Hartford Life's significant U.S. member
companies' financial ratings from the major independent rating organizations
as of February 10, 1998:
A.M. DUFF & STANDARD
BEST PHELPS MOODY'S & POOR'S
- -------------------------------------------------------------------------
INSURANCE RATINGS:
Hartford Life Insurance Company A+ AA+ Aa3 AA
Hartford Life & Accident A+ AA+ Aa3 AA
Hartford Life & Annuity A+ AA+ Aa3 AA
- -------------------------------------------------------------------------
OTHER RATINGS:
Hartford Life, Inc.:
Senior debt - A+ A2 A
Commercial paper - D-1 P-1 A-1
- -------------------------------------------------------------------------
Ratings are an important factor in establishing the competitive position of
an insurance company such as Hartford Life Insurance Company. There can be
no assurance that the Company's ratings will continue for any given period of
time, or that they will not be changed. In the event that the Company's
ratings are downgraded, the level of sales or the persistency of the
Company's block of in-force business may be adversely impacted.
RISK-BASED CAPITAL
The NAIC adopted regulations establishing minimum capitalization requirements
based on Risk-Based Capital ("RBC") formulas for life insurance companies
(effective December 31, 1993). The requirements consist of formulas which
identify companies that are undercapitalized and require specific regulatory
actions. The RBC formula for life insurance companies establishes capital
requirements relating to insurance, business, asset and interest rate risks.
The RBC ratios for all insurance subsidiaries of Hartford Life are in excess
of 200% as of December 31, 1997.
EFFECT OF INFLATION
The rate of inflation as measured by the change in the average consumer price
index has not had a material effect on the revenues or operating results of
the Company during the three most recent fiscal years.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For disclosures about market risk see the Investments discussion within the
MD&A.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements and Schedules elsewhere herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
20
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this report:
1. CONSOLIDATED FINANCIAL STATEMENTS. See Index to Consolidated Financial
Statements and Schedules elsewhere herein.
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES. See Index to Consolidated
Financial Statement and Schedules elsewhere herein.
3. EXHIBITS. See Exhibits Index elsewhere herein.
(b) Reports on Form 8-K - None.
(c) See Item 14(a)(3).
(d) See Item 14(a)(2).
21
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Page(s)
Report of Management F-1
Report of Independent Public Accountants F-2
Consolidated Statements of Income for the three years ended December 31, 1997 F-3
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-4
Consolidated Statements of Stockholder's Equity for the three years ended
December 31, 1997 F-5
Consolidated Statements of Cash Flows for the three years ended December 31,
1997 F-6
Notes to Consolidated Financial Statements F-7-22
Summary of Investments - Other Than Investments in Affiliates S-1
Supplementary Insurance Information S-2
Reinsurance S-3
REPORT OF MANAGEMENT
The management of Hartford Life Insurance Company and subsidiaries (the
"Company") is responsible for the preparation and integrity of information
contained in the accompanying consolidated financial statements and other
sections of the Annual Report. The financial statements are prepared in
accordance with generally accepted accounting principles, and, where
necessary, include amounts that are based on management's informed judgments
and estimates. Management believes these statements present fairly the
Company's financial position and results of operation, and, that any other
information contained in the Annual Report is consistent with the financial
statements.
Management has made available the Company's financial records and related
data to Arthur Andersen LLP, independent public accountants, in order for
them to perform an audit of the Company's consolidated financial statements.
Their report appears on page F-2.
An essential element in meeting management's financial responsibilities is
the Company's system of internal controls. These controls, which include
accounting controls and the internal auditing program, are designed to
provide reasonable assurance that assets are safeguarded, and transactions
are properly authorized, executed and recorded. The controls, which are
documented and communicated to employees in the form of written codes of
conduct and policies and procedures, provide for careful selection of
personnel and for appropriate division of responsibility. Management
continually monitors for compliance, while the Company's internal auditors
independently assess the effectiveness of the controls and make
recommendations for improvement. Also, Arthur Andersen LLP took into
consideration the Company's system of internal controls in determining the
nature, timing and extent of its audit tests.
Another important element is management's recognition of its responsibility
for fostering a strong, ethical climate, thereby ensuring that the Company's
affairs are transacted according to the highest standards of personal and
professional conduct. The Company has a long-standing reputation of
integrity in business conduct and utilizes communication and education to
create and fortify a strong compliance culture.
The Audit Committee of the Board of Directors of Hartford Life, Inc. (the
"Committee"), the Company's ultimate parent, composed of non-employee
directors, meets periodically with the external and internal auditors to
evaluate the effectiveness of 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:
We have audited the accompanying Consolidated Balance Sheets of Hartford Life
Insurance Company (the "Company") and subsidiaries as of December 31, 1997
and 1996, and the related Consolidated Statements of Income, Stockholder's
Equity and Cash Flows for each of the three years in the period ended
December 31, 1997. These consolidated financial statements and the schedules
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Hartford
Life Insurance Company and subsidiaries as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in Index to
Consolidated Financial Statements and Schedules are presented for the purpose
of complying with the Securities and Exchange Commission's rules and are not
part of the basic financial statements. These schedules have been subjected
to the auditing procedures applied in the audits of the basic financial
statements and, in our opinion, fairly state in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Hartford, Connecticut
January 27, 1998
F-2
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31,
(IN MILLIONS) 1997 1996 1995
- ----------------------------------------------------------------------------------
REVENUES
Premiums and other considerations $1,637 $1,705 $1,487
Net investment income 1,368 1,397 1,328
Net realized capital gains (losses) 4 (213) (11)
- ----------------------------------------------------------------------------------
TOTAL REVENUES 3,009 2,889 2,804
- ----------------------------------------------------------------------------------
BENEFITS, CLAIMS AND EXPENSES
Benefits, claims and claim adjustment expenses 1,379 1,535 1,422
Amortization of deferred policy acquisition costs 335 234 199
Dividends to policyholders 240 635 675
Other expenses 586 427 317
- ----------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 2,540 2,831 2,613
- ----------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 469 58 191
Income tax expense 167 20 62
- ----------------------------------------------------------------------------------
NET INCOME $ 302 $ 38 $ 129
- ----------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31,
--------------------
(IN MILLIONS, EXCEPT FOR SHARE DATA) 1997 1996
- --------------------------------------------------------------------------
ASSETS
Investments
- -----------
Fixed maturities, available for sale, at fair value
(amortized cost of $13,885 and $13,579) $14,176 $13,624
Equity securities, at fair value 180 119
Policy loans, at outstanding balance 3,756 3,836
Other investments, at cost 47 56
- --------------------------------------------------------------------------
Total investments 18,159 17,635
Cash 54 43
Premiums receivable and agents' balances 18 137
Accrued investment income 330 407
Reinsurance recoverables 6,325 6,259
Deferred policy acquisition costs 3,315 2,760
Deferred income tax 348 474
Other assets 352 357
Separate account assets 69,055 49,690
- --------------------------------------------------------------------------
TOTAL ASSETS $97,956 $77,762
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
LIABILITIES
Future policy benefits $ 3,270 $ 2,474
Other policyholder funds 21,034 22,134
Other liabilities 2,254 1,572
Separate account liabilities 69,055 49,690
- --------------------------------------------------------------------------
TOTAL LIABILITIES 95,613 75,870
STOCKHOLDER'S EQUITY
Common stock -- 1,000 shares authorized, issued and
outstanding, par value $5,690 6 6
Additional paid in capital 1,045 1,045
Net unrealized capital gains on securities, net of tax 179 30
Retained earnings 1,113 811
- --------------------------------------------------------------------------
TOTAL STOCKHOLDER'S EQUITY 2,343 1,892
- --------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $97,956 $77,762
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
Net
Unrealized Capital
Gains (Losses) on
Additional Paid Securities, Net of Total Stockholder's
(IN MILLIONS) Common Stock In Capital Tax Retained Earnings Equity
- ------------------------------ -------------- ----------------- ------------------- ----------------- -------------------
BALANCE, DECEMBER 31, 1994 $6 $ 826 $(654) $644 $822
Net income -- -- -- 129 129
Capital contribution -- 181 -- -- 181
Change in net unrealized
capital gains (losses)
on securities, net of tax -- -- 597 -- 597
- ------------------------------ -------------- ----------------- ------------------- ----------------- -------------------
BALANCE, DECEMBER 31, 1995 6 1,007 (57) 773 1,729
Net income -- -- -- 38 38
Capital contribution -- 38 -- -- 38
Change in net unrealized
capital gains (losses)
on securities, net of tax -- -- 87 -- 87
- ------------------------------ -------------- ----------------- ------------------- ----------------- -------------------
BALANCE, DECEMBER 31, 1996 6 1,045 30 811 1,892
Net income -- -- -- 302 302
Change in net unrealized
capital gains (losses)
on securities, net of tax -- -- 149 -- 149
- ------------------------------ -------------- ----------------- ------------------- ----------------- -------------------
BALANCE, DECEMBER 31, 1997 $6 $1,045 $179 $1,113 $2,343
- ------------------------------ -------------- ----------------- ------------------- ----------------- -------------------
- ------------------------------ -------------- ----------------- ------------------- ----------------- -------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
(IN MILLIONS) 1997 1996 1995
- ----------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 302 $ 38 $ 129
ADJUSTMENTS TO RECONCILE NET INCOME TO CASH
PROVIDED BY OPERATING ACTIVITIES
Depreciation and amortization 8 14 21
Net realized capital (gains) losses (4) 213 11
Decrease (increase) in deferred income taxes 40 (102) (172)
Increase in deferred policy acquisition costs (555) (572) (379)
Decrease (increase) in premiums receivable
and agents' balances 119 10 (81)
Decrease (increase) in accrued investment
income 77 (13) (16)
Decrease (increase) in other assets 52 (132) (177)
(Increase) decrease in reinsurance recoverables (416) 179 (35)
Increase (decrease) in liabilities for future
policy benefits 796 (92) 483
Increase in other liabilities 379 477 281
- ----------------------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES 798 20 65
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of fixed maturity investments (6,231) (5,747) (6,228)
Sales of fixed maturity investments 4,232 3,459 4,845
Maturities and principal paydowns of fixed
maturity investments 2,329 2,693 1,741
Net sales (purchases) of other investments 24 (107) (871)
Net (purchases) sales of short-term investments (638) 84 (24)
- ----------------------------------------------------------------------------------
CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES (284) 382 (537)
- ----------------------------------------------------------------------------------
FINANCING ACTIVITIES
Capital contribution -- 38 --
Net (disbursements for) receipts from investment
and universal life-type contracts (charged
against) credited to policyholder accounts (503) (443) 498
- ----------------------------------------------------------------------------------
CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES (503) (405) 498
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
Increase (decrease) in cash 11 (3) 26
Cash -- beginning of year 43 46 20
- ----------------------------------------------------------------------------------
CASH -- END OF YEAR $ 54 $ 43 $ 46
- ----------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
- -------------------------------------------------
NET CASH PAID DURING THE YEAR FOR:
Income taxes $ 9 $ 189 $ 162
NONCASH FINANCING ACTIVITIES:
Capital contribution $ -- $ -- $ 181
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN MILLIONS EXCEPT PER SHARE DATA UNLESS OTHERWISE STATED)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
These consolidated financial statements include Hartford Life Insurance
Company and its wholly-owned subsidiaries (the "Company"), ITT Hartford Life
and Annuity Insurance Company ("ILA") and ITT Hartford International Life
Reassurance Corporation ("HLRe"), formerly American Skandia Life Reinsurance
Corporation. The Company is a wholly-owned subsidiary of Hartford Life and
Accident Insurance Company ("HLA"), a wholly-owned subsidiary of Hartford
Life, Inc. ("Hartford Life"). Hartford Life is a direct subsidiary of
Hartford Accident and Indemnity Company ("HA&I"), an indirect subsidiary of
The Hartford Financial Services Group, Inc. ("The Hartford"). On February
10, 1997, Hartford Life filed a registration statement, as amended, with the
Securities and Exchange Commission relating to an Initial Public Offering
("IPO") of the Hartford Life's Class A Common Stock. Pursuant to the IPO on
May 22, 1997, Hartford Life sold to the public 26 million shares at $28.25
per share and received net proceeds of $687. Of the proceeds, $527 was used
to retire debt related to Hartford Life's outstanding promissory notes and
line of credit with the remaining $160 contributed by Hartford Life to HLA to
support growth in its core businesses.
On December 19, 1995, ITT Industries, Inc. (formerly ITT Corporation) ("ITT")
distributed all the outstanding shares of capital stock of The Hartford to
ITT stockholders of record on such date. As a result, The Hartford became an
independent, publicly traded company.
Along with its parent, the Company is a leading insurance and financial
services company which provides (a) investment products such as individual
variable annuities and fixed market value adjusted annuities, deferred
compensation and retirement plan services and mutual funds for savings and
retirement needs; (b) life insurance for income protection and estate
planning; and (c) employee benefits products such as group life and group
disability insurance and corporate owned life insurance.
2. SIGNIFICANT ACCOUNTING POLICIES
(A) BASIS OF PRESENTATION
These consolidated financial statements present the financial position,
results of operations and cash flows of the Company. All material
intercompany transactions and balances between the Company, its subsidiaries
and affiliates have been eliminated. The consolidated financial statements
are prepared on the basis of generally accepted accounting principles which
differ materially from the statutory accounting practices prescribed by
various insurance regulatory authorities.
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The most
significant estimates include those used in determining deferred policy
acquisition costs and the liability for future policy benefits and other
policyholder funds. Although some variability is inherent in these
estimates, management believes the amounts provided are adequate.
Certain reclassifications have been made to prior year financial information
to conform to the current year presentation.
(B) CHANGES IN ACCOUNTING PRINCIPLES
In December 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") No. 97-3 "Accounting by
Insurance and Other Enterprises for Insurance Related Assessments". This SOP
provides guidance on accounting by insurance and other enterprises for
assessments related to insurance activities. Specifically, the SOP provides
guidance on when a guaranty fund or other assessment should be recognized,
how to measure the liability, and what information should be disclosed. This
SOP will be effective for fiscal years beginning after December 15, 1998.
Adoption of SOP 97-3 is not expected to have a material impact on the
Company's financial condition or results of operations.
F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
On November 14, 1996, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 96-12, "Recognition of Interest Income and Balance Sheet
Classification of Structured Notes". This EITF issue requires companies to
record income on certain structured securities on a retrospective interest
method. The Company adopted EITF No. 96-12 for structured securities acquired
after November 14, 1996. Adoption of EITF No. 96-12 did not have a material
effect on the Company's financial condition or results of operations.
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities" which is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996.
This statement established criteria for determining whether transferred
assets should be accounted for as sales or secured borrowings. Subsequently,
in December 1996, the FASB issued SFAS No. 127, "Deferral of Effective Date
of Certain Provisions of FASB Statement No. 125", which defers the effective
date of certain provisions of SFAS No. 125 for one year. Adoption of SFAS
No. 125 is not expected to have a material effect on the Company's financial
condition or results of operations.
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of ". This statement establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles, and goodwill related to
those assets to be held and used and for long-lived assets and certain
identifiable intangibles to be disposed of. Adoption of SFAS No. 121 did not
have a material effect on the Company's financial condition or results of
operations.
The Company's cash flows were not impacted by these changes in accounting
principles.
(C) REVENUE RECOGNITION
Revenues for universal life-type policies and investment products consist of
policy charges for the cost of insurance, policy administration and surrender
charges assessed to policy account balances and are recognized in the period in
which services are provided. Premiums for traditional life insurance and
disability policies are recognized as revenues when they are due from
policyholders.
(D) FUTURE POLICY BENEFITS AND OTHER POLICYHOLDER FUNDS
Liabilities for future policy benefits are computed by the net level premium
method using interest rate assumptions varying from 3% to 11% and withdrawal
and mortality assumptions appropriate at the time the policies were issued.
Health reserves, which are the result of sales of group long-term and
short-term disability, stop loss, Medicare Supplement and individual
disability products, are stated at amounts determined by estimates on
individual cases and estimates of unreported claims based on past experience.
Liabilities for universal life-type and investment contracts are stated at
policyholder account values before surrender charges.
(E) POLICYHOLDER REALIZED CAPITAL GAINS AND LOSSES
Realized capital gains and losses on security transactions associated with the
Company's immediate participation guaranteed contracts are excluded from
revenues and deferred over the expected maturity of the securities, since under
the terms of the contracts the realized gains and losses will be credited to
policyholders in future years as they are entitled to receive them.
F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(F) INVESTMENTS
The Company's investments in fixed maturities include bonds and commercial
paper which are considered "available for sale" and accordingly are carried
at fair value with the after-tax difference from cost reflected as a
component of Stockholder's Equity designated "Net unrealized capital gains
(losses) on securities, net of tax". Equity securities, which include common
and non-redeemable preferred stocks, are carried at fair values with the
after-tax difference from cost reflected in Stockholder's Equity. Policy
loans are carried at outstanding balance which approximates fair value. Net
realized capital gains and losses, after deducting pension policyholders'
share, are reported as a component of revenue and are determined on a
specific identification basis.
The Company's accounting policy for impairment requires recognition of an
other than temporary impairment charge on a security if it is determined that
the Company is unable to recover all amounts due under the contractual
obligations of the security. In addition, for securities expected to be sold,
an other than temporary impairment charge is recognized if the Company does
not expect the fair value of a security to recover to cost or amortized cost
prior to the expected date of sale. Once an impairment charge has been
recorded, the Company then continues to review the other than temporarily
impaired securities for appropriate valuation on an on-going basis.
During 1996, it was determined that certain individual securities within the
investment portfolio supporting the Company's block of guaranteed rate
contract business written prior to 1995 ("Closed Book GRC") could not recover
to amortized cost prior to sale. Therefore, an other than temporary
impairment loss of $88, after-tax, was recorded.
(G) DERIVATIVE INSTRUMENTS
The Company uses a variety of derivative instruments including swaps, caps,
floors, forwards and exchange traded financial futures and options as part of
an overall risk management strategy. These instruments are used as a means of
hedging exposure to price, foreign currency and/or interest rate risk on
planned investment purchases or existing assets and liabilities. The Company
does not hold or issue derivative instruments for trading purposes. The
Company's accounting for derivative instruments used to manage risk is in
accordance with the concepts established in SFAS No. 80, "Accounting for
Futures Contracts", SFAS No. 52, "Foreign Currency Translation", AICPA SOP
86-2, "Accounting for Options" and various EITF pronouncements. Written
options are used, in all cases in conjunction with other assets and
derivatives, as part of the Company's asset and liability management
strategy. Derivative instruments are carried at values consistent with the
asset or liability being hedged. Derivative instruments used to hedge fixed
maturities or equity securities are carried at fair value with the after-tax
difference from cost reflected in Stockholder's Equity. Derivative
instruments used to hedge other invested assets or liabilities are carried at
cost.
Derivative instruments must be designated at inception as a hedge and
measured for effectiveness both at inception and on an on-going basis. The
Company's minimum correlation threshold for hedge designation is 80%. If
correlation, which is assessed monthly and measured based on a rolling three
month average, falls below 80%, hedge accounting will be terminated.
Derivative instruments used to create a synthetic asset must meet synthetic
accounting criteria including designation at inception and consistency of
terms between the synthetic and the instrument being replicated. Consistent
with industry practice, synthetic instruments are accounted for like the
financial instrument it is intended to replicate. Derivative instruments
which fail to meet risk management criteria, subsequent to acquisition, are
marked to market with the impact reflected in the Consolidated Statements of
Income.
Gains or losses on financial futures contracts entered into in anticipation
of the investment of future receipt of product cash flows are deferred and,
at the time of the ultimate investment purchase, reflected as an adjustment
to the cost basis of the purchased asset. Gains or losses on futures used in
invested asset risk management are deferred and adjusted into the cost basis
of the hedged asset when the contract futures are closed, except for futures
used in duration hedging which are deferred and basis adjusted on a quarterly
basis. The basis adjustments are amortized into net investment income over
the remaining asset life.
Open forward commitment contracts are marked to market through Stockholder's
Equity. Such contracts are accounted for at settlement by recording the
purchase of the specified securities at the previously committed price.
Gains or losses resulting from the termination of forward commitment
contracts before the delivery of the securities are recognized immediately in
the Consolidated Statements of Income as a component of net investment
income.
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The cost of options entered into as part of a risk management strategy are
basis adjusted to the underlying asset or liability and amortized over the
remaining life of the option. Gains or losses on expiration or termination
are adjusted into the basis of the underlying asset or liability and
amortized over the remaining asset life.
Interest rate swaps involve the periodic exchange of payments without the
exchange of underlying principal or notional amounts. Net receipts or
payments are accrued and recognized over the life of the swap agreement as an
adjustment to investment income. Should the swap be terminated, the gain or
loss is adjusted into the basis of the asset or liability and amortized over
the remaining life. Should the hedged asset be sold or liability terminated
without terminating the swap position, any swap gains or losses are
immediately recognized in net investment income. Interest rate swaps
purchased in anticipation of an asset purchase ("anticipatory transaction")
are recognized consistent with the underlying asset components such that the
settlement component is recognized in the Consolidated Statements of Income
while the change in market value is recognized as an unrealized capital gain
or loss.
Premiums paid on purchased floor or cap agreements and the premium received
on issued cap or floor agreements (used for risk management) are adjusted
into the basis of the applicable asset and amortized over the asset life.
Gains or losses on termination of such positions are adjusted into the basis
of the asset or liability and amortized over the remaining asset life. Net
payments are recognized as an adjustment to income or basis adjusted and
amortized depending on the specific hedge strategy.
Forward exchange contracts and foreign currency swaps are accounted for in
accordance with SFAS No. 52. Changes in the spot rate of instruments
designated as hedges of the net investment in a foreign subsidiary are
reflected in the cumulative translation adjustments component of
Stockholder's Equity. Cash flows from futures, options, and swaps, accounted
for as hedges, are included with the cash flows of the item being hedged.
(H) SEPARATE ACCOUNTS
The Company maintains separate account assets and liabilities which are
reported at fair value. Separate account assets are segregated from other
investments, and investment income and gains and losses accrue directly to
the policyholders. Separate accounts reflect two categories of risk
assumption: non-guaranteed separate accounts, wherein the policyholder
assumes the investment risk, and guaranteed separate account assets, wherein
the Company contractually guarantees either a minimum return or account value
to the policyholder.
(I) DEFERRED POLICY ACQUISITION COSTS
Policy acquisition costs, which include commissions and certain underwriting
expenses associated with acquiring business, are deferred and amortized over
the estimated lives of the contracts, generally 20 years. Generally,
acquisition costs are deferred and amortized using the retrospective deposit
method. Under the retrospective deposit method, acquisition costs are
amortized in proportion to the present value of expected gross profits from
surrender charges, investment, mortality and expense margins. Actual gross
profits can vary from management's estimates resulting in increases or
decreases in the rate of amortization. Management periodically updates these
estimates, when appropriate, and evaluates the recoverability of the deferred
acquisition cost asset. When appropriate, management revises its assumptions
on the estimated gross profits of these contracts and the cumulative
amortization for the books of business are reestimated and adjusted by a
cumulative charge or credit to income.
The Company's other expenses include the following:
1997 1996 1995
------ ------ ------
Commissions $ 976 $ 848 $ 619
Deferred acquisition costs (862) (823) (618)
Other 472 402 316
------ ------ ------
Total other expenses $ 586 $ 427 $ 317
------ ------ ------
------ ------ ------
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(J) DIVIDENDS TO POLICYHOLDERS
Certain life insurance policies contain dividend payment provisions that enable
the policyholder to participate in the earnings of the life insurance
subsidiaries of the Company. The participating insurance in force accounted for
55%, 44%, and 41% in 1997, 1996, and 1995, respectively, of total insurance in
force.
3. INITIAL PUBLIC OFFERING
On February 10, 1997, Hartford Life filed a registration statement, as
amended, with the Securities and Exchange Commission, relating to the IPO of
Hartford Life's Class A Common Stock. Pursuant to the IPO on May 22, 1997,
Hartford Life sold to the public 26 million shares at $28.25 per share and
received proceeds, net of offering expenses, of $687. Of the proceeds, $527
was used to retire debt related to Hartford Life's promissory notes
outstanding and line of credit. The remaining $160 was contributed by
Hartford Life to HLA to support growth in its core businesses.
The 26 million shares sold in the Offering represent approximately 18.6% of
the equity ownership in Hartford Life and approximately 4.4% of the combined
voting power of Hartford Life's Class A and Class B Common Stock. The
Hartford owns all of the 114 million outstanding shares of Class B Common
Stock of Hartford Life, representing approximately 81.4% of the equity
ownership in Hartford Life and approximately 95.6% of the combined voting
power of Hartford Life's Class A and Class B Common Stock. Holders of Class
A Common Stock generally have identical rights to the holders of Class B
Common Stock except that the holders of Class A Common Stock are entitled to
one vote per share while holders of Class B Common Stock are entitled to five
votes per share on all matters submitted to a vote of Hartford Life's
stockholders.
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS AND DERIVATIVE INSTRUMENTS
For the years ended December 31,
--------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------
(A) COMPONENTS OF NET INVESTMENT INCOME
Interest income from fixed maturities $ 932 $ 918 $ 996
Interest income from policy loans 425 477 342
Income from other investments 26 15 1
- ----------------------------------------------------------------------------
Gross investment income 1,383 1,410 1,339
Less: Investment expenses 15 13 11
- ----------------------------------------------------------------------------
NET INVESTMENT INCOME $1,368 $1,397 $1,328
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
(B) COMPONENTS OF NET REALIZED CAPITAL GAINS (LOSSES)
Fixed maturities $ (7) $ (201) $ 23
Equity securities 12 2 (6)
Real estate and other (1) (4) (25)
Less: Increase in liability to policyholders
for realized capital gains -- (10) (3)
- ----------------------------------------------------------------------------
NET REALIZED CAPITAL GAINS (LOSSES) $ 4 $ (213) $ (11)
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
(C) NET UNREALIZED CAPITAL GAINS (LOSSES) ON EQUITY SECURITIES
Gross unrealized capital gains $ 14 $ 13 $ 4
Gross unrealized capital losses -- (1) (2)
- ----------------------------------------------------------------------------
Net unrealized capital gains 14 12 2
Deferred income tax expense 5 4 1
- ----------------------------------------------------------------------------
Net unrealized capital gains, net of tax 9 8 1
Balance -- beginning of year 8 1 (6)
- ----------------------------------------------------------------------------
NET CHANGE IN UNREALIZED CAPITAL GAINS
(LOSSES) ON EQUITY SECURITIES $ 1 $ 7 $ 7
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
(D) NET UNREALIZED CAPITAL GAINS (LOSSES) ON FIXED MATURITIES
Gross unrealized capital gains $ 371 $ 386 $ 529
Gross unrealized capital losses (80) (341) (569)
Unrealized capital (gains) losses
credited to policyholders (30) (11) (52)
- ----------------------------------------------------------------------------
Net unrealized capital gains (losses) 261 34 (92)
Deferred income tax expense (benefit) 91 12 (34)
- ----------------------------------------------------------------------------
Net unrealized capital gains (losses),
net of tax 170 22 (58)
Balance -- beginning of year 22 (58) (648)
- ----------------------------------------------------------------------------
NET CHANGE IN UNREALIZED CAPITAL GAINS
(LOSSES) ON FIXED MATURITIES $148 $80 $590
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS AND DERIVATIVE INSTRUMENTS (CONTINUED)
(E) FIXED MATURITY INVESTMENTS
AS OF DECEMBER 31, 1997
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
----------- ------------- ------------- -----------
U.S. gov't and gov't agencies and authorities
(guaranteed and sponsored) $ 217 $ 3 $ (1) $ 219
U.S. gov't and gov't agencies and authorities
(guaranteed and sponsored) -- asset backed 1,175 64 (35) 1,204
States, municipalities and political subdivisions 211 7 (1) 217
International governments 376 20 (3) 393
Public utilities 871 26 (3) 894
All other corporate including international 5,033 200 (25) 5,208
All other corporate -- asset backed 4,091 41 (8) 4,124
Short-term investments 1,318 - - 1,318
Certificates of deposit 593 10 (4) 599
----------- ----- ----- -----------
TOTAL FIXED MATURITIES $ 13,885 $ 371 $ (80) $ 14,176
----------- ----- ----- -----------
----------- ----- ----- -----------
AS OF DECEMBER 31, 1996
-----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
----------- ------------- ----------- -----------
U.S. gov't and gov't agencies and authorities
(guaranteed and sponsored) $ 166 $ 12 $ (3) $ 175
U.S. gov't and gov't agencies and authorities
(guaranteed and sponsored) -- asset backed 1,970 161 (128) 2,003
States, municipalities and political subdivisions 373 6 (11) 368
International governments 281 12 (4) 289
Public utilities 877 12 (8) 881
All other corporate including international 4,656 120 (107) 4,669
All other corporate -- asset backed 3,601 49 (59) 3,591
Short-term investments 1,655 14 (21) 1,648
----------- ----- ----------- -----------
TOTAL FIXED MATURITIES $ 13,579 $ 386 $ (341) $ 13,624
----------- ----- ----------- -----------
----------- ----- ----------- -----------
The amortized cost and estimated fair value of fixed maturity investments at
December 31, 1997 by estimated maturity year are shown below. Expected
maturities differ from contractual maturities due to call or prepayment
provisions. Asset backed securities, including MBS and CMO's, are
distributed to maturity year based on the Company's estimates of the rate of
future prepayments of principal over the remaining lives of the securities.
These estimates are developed using prepayment speeds provided in broker
consensus data. Such estimates are derived from prepayment speeds
experienced at the interest rate levels projected for the applicable
underlying collateral and can be expected to vary from actual experience.
AMORTIZED
MATURITY COST FAIR VALUE
----------- -----------
One year or less $ 2,838 $ 2,867
Over one year through five years 5,528 5,595
Over five years through ten years 3,094 3,156
Over ten years 2,425 2,558
----------- -----------
TOTAL $ 13,885 $ 14,176
----------- -----------
----------- -----------
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS AND DERIVATIVE INSTRUMENTS (CONTINUED)
(E) FIXED MATURITY INVESTMENTS (CONTINUED)
Sales of fixed maturities, excluding short-term fixed maturities, for the
years ended December 31, 1997, 1996 and 1995 resulted in proceeds of $4.2
billion, $3.5 billion and $4.8 billion, gross realized capital gains of $169,
$87 and $91, gross realized capital losses (including writedowns) of $176,
$298 and $72, respectively. Sales of equity security investments for the
years ended December 31, 1997, 1996 and 1995 resulted in proceeds of $132,
$74 and $64, gross realized capital gains of $12, $2 and $28 and gross
realized capital losses of $0, $0 and $59, respectively.
(F) CONCENTRATION OF CREDIT RISK
Excluding investments in U.S. government and agencies, the Company has not
invested in the securities of a single issuer in amounts greater than 10% of
stockholder's equity at December 31, 1997.
(G) DERIVATIVE INSTRUMENTS
The Company utilizes a variety of derivative instruments, including swaps,
caps, floors, forwards and exchange traded futures and options, in accordance
with Company policy and in order to achieve one of three Company approved
objectives: to hedge risk arising from interest rate, price or currency
exchange rate volatility; to manage liquidity; or, to control transactions
costs. The Company utilizes derivative instruments to manage market risk
through four principal risk management strategies: hedging anticipated
transactions, hedging liability instruments, hedging invested assets and
hedging portfolios of assets and/or liabilities. The Company does not trade
in these instruments for the express purpose of earning trading profits.
The Company maintains a derivatives counterparty exposure policy which
establishes market-based credit limits, favors long-term financial stability
and creditworthiness, and typically requires credit enhancement/credit risk
reducing agreements. Credit risk is measured as the amount owed to the
Company based on current market conditions and potential payment obligations
between the Company and its counterparties. Credit exposures are quantified
weekly and netted, and collateral is pledged to or held by the Company to the
extent the current value of derivatives exceed exposure policy thresholds.
The Company's derivative program is monitored by an internal compliance unit
and is reviewed by senior management and Hartford Life's Finance Committee.
Notional amounts, which represent the basis upon which pay or receive amounts
are calculated and are not reflective of credit risk, pertaining to
derivative financial instruments (excluding the Company's guaranteed separate
account derivative investments), totaled $6.5 billion and $9.9 billion ($4.6
billion and $7.4 billion related to the Company's investments, $1.9 billion
and $2.5 billion on the Company's liabilities) at December 31, 1997 and
1996, respectively.
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS AND DERIVATIVE INSTRUMENTS (CONTINUED)
The table below provides a summary of derivative instruments held by the
Company at December 31, 1997 and 1996, segregated by major investment and
liability category:
1997 AMOUNT HEDGED (NOTIONAL AMOUNTS)
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL ISSUED PURCHASED INTEREST FOREIGN TOTAL
CARRYING CAPS & CAPS, FLOORS RATE CURRENCY NOTIONAL
ASSETS HEDGED VALUE FLOORS AND OPTIONS FUTURES (2) SWAPS SWAPS (3) AMOUNT
- ---------------------------------------- --------- --------- ------------- --------------- --------- ------------- -----------
Asset backed securities (excluding
inverse floaters and anticipatory) $ 5,253 $ 500 $ 1,404 $ 28 $ 221 $ -- $ 2,153
Inverse floaters (1) 75 47 80 -- 25 -- 152
Anticipatory (4) -- -- -- -- -- -- --
Other bonds and notes 7,531 462 460 22 1,258 91 2,293
Short-term investments 1,317 -- -- -- -- -- --
--------- --------- ------------- --- --------- --- -----------
TOTAL FIXED MATURITIES 14,176 1,009 1,944 50 1,504 91 4,598
Equity securities, policy loans and
other investments 3,983 -- -- -- -- -- --
--------- --------- ------------- --- --------- --- -----------
TOTAL INVESTMENTS $ 18,159 $ 1,009 $ 1,944 $ 50 $ 1,504 $ 91 $ 4,598
LONG TERM DEBT -- -- -- -- -- -- --
OTHER POLICY CLAIMS -- 10 150 -- 1,747 -- 1,907
--------- --------- ------------- --- --------- --- -----------
TOTAL DERIVATIVES -- NOTIONAL VALUE $ 1,019 $ 2,094 $ 50 $ 3,251 $ 91 $ 6,505
--------- --------- ------------- --- --------- --- -----------
TOTAL DERIVATIVES -- FAIR VALUE $ (8) $ 23 $ -- $ 19 $ (6) $ 28
--------- --------- ------------- --- --------- --- -----------
--------- --------- ------------- --- --------- --- -----------
1996 AMOUNT HEDGED (NOTIONAL AMOUNTS)
--------------------------------------------------------------------------
TOTAL ISSUED PURCHASED INTEREST FOREIGN TOTAL
CARRYING CAPS & CAPS, FLOORS RATE CURRENCY NOTIONAL
ASSETS HEDGED VALUE FLOORS AND OPTIONS FUTURES (2) SWAPS SWAPS (3) AMOUNT
- ------------------------------------------ --------- --------- ------------- ------------- --------- ----------- -----------
Asset backed securities (excluding
inverse floaters and anticipatory) $ 5,242 $ 500 $ 2,454 $ -- $ 941 $ -- $ 3,895
Inverse floaters (1) 352 98 856 -- 346 -- 1,300
Anticipatory (4) -- -- -- 132 -- -- 132
Other bonds and notes 7,369 425 440 5 1,079 125 2,074
Short-term investments 661 -- -- -- -- -- --
--------- --------- ------------- ----- --------- ----- -----------
TOTAL FIXED MATURITIES 13,624 1,023 3,750 137 2,366 125 7,401
Equity securities, policy loans and
other investments 4,011 -- -- -- 19 -- 19
--------- --------- ------------- ----- --------- ----- -----------
TOTAL INVESTMENTS $ 17,635 $ 1,023 $ 3,750 $ 137 $ 2,385 $ 125 $ 7,420
LONG TERM DEBT -- -- -- -- -- -- --
OTHER POLICY CLAIMS -- 10 150 -- 2,351 -- 2,511
--------- --------- ------------- ----- --------- ----- -----------
TOTAL DERIVATIVES -- NOTIONAL VALUE $ 1,033 $ 3,900 $ 137 $ 4,736 $ 125 $ 9,931
--------- --------- ------------- ----- --------- ----- -----------
TOTAL DERIVATIVES -- FAIR VALUE $ (10) $ 38 $ -- $ 2 $ (9) $ 21
--------- --------- ------------- ----- --------- ----- -----------
--------- --------- ------------- ----- --------- ----- -----------
(1) INVERSE FLOATERS ARE VARIATIONS OF COLLATERALIZED MORTGAGE OBLIGATIONS
("CMO'S") FOR WHICH THE COUPON RATES MOVE INVERSELY WITH AN INDEX RATE
SUCH AS THE LONDON INTERBANK OFFERED RATE ("LIBOR"). THE RISK TO
PRINCIPAL IS CONSIDERED NEGLIGIBLE AS THE UNDERLYING COLLATERAL FOR THE
SECURITIES IS GUARANTEED OR SPONSORED BY GOVERNMENT AGENCIES. TO ADDRESS
THE VOLATILITY RISK CREATED BY THE COUPON VARIABILITY, THE COMPANY USES A
VARIETY OF DERIVATIVE INSTRUMENTS, PRIMARILY INTEREST RATE SWAPS, CAPS
AND FLOORS.
(2) AS OF DECEMBER 31, 1997 AND 1996, OVER 44% AND 39% , RESPECTIVELY, OF THE
NOTIONAL FUTURES CONTRACTS EXPIRE WITHIN ONE YEAR.
(3) AS OF DECEMBER 31, 1997 AND 1996, OVER 16% AND 42%, RESPECTIVELY, OF
FOREIGN CURRENCY SWAPS EXPIRE WITHIN ONE YEAR; THE BALANCE MATURES OVER
THE SUCCEEDING 9 YEARS.
(4) DEFERRED GAINS AND LOSSES ON ANTICIPATORY TRANSACTIONS ARE INCLUDED IN
THE CARRYING VALUE OF FIXED MATURITIES IN THE CONSOLIDATED BALANCE
SHEETS. AT THE TIME OF THE ULTIMATE PURCHASE, THEY ARE REFLECTED AS A
BASIS ADJUSTMENT TO THE PURCHASED ASSET. AT DECEMBER 31, 1997, THE
COMPANY HAD $0 DEFERRED GAINS AND LOSSES. AT DECEMBER 31, 1996, THE
COMPANY HAD $0.9 IN NET DEFERRED GAINS FOR FUTURES, INTEREST RATE SWAPS
AND PURCHASED OPTIONS OF WHICH $2.0 WAS BASIS ADJUSTED IN 1997.
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS AND DERIVATIVE INSTRUMENTS (CONTINUED)
The following is a reconciliation of notional amounts by derivative type and
strategy as of December 31, 1997 and 1996:
DECEMBER 31, 1996 MATURITIES/ DECEMBER 31, 1997
NOTIONAL AMOUNT ADDITIONS TERMINATIONS (1) NOTIONAL AMOUNT
------------------- ----------- ----------------- -------------------
BY DERIVATIVE TYPE
Caps $ 1,755 $ 14 $ 530 $ 1,239
Floors 3,168 28 1,332 1,864
Swaps/Forwards 4,861 941 2,460 3,342
Futures 137 131 218 50
Options 10 -- -- 10
------- ----------- ------- -------
TOTAL $ 9,931 $ 1,114 $ 4,540 $ 6,505
------- ----------- ------- -------
------- ----------- ------- -------
BY STRATEGY
Liability $ 2,511 $ 191 $ 795 $ 1,907
Anticipatory 132 4 136 --
Asset 2,112 739 1,046 1,805
Portfolio 5,176 180 2,563 2,793
------- ----------- ------- -------
TOTAL $ 9,931 $ 1,114 $ 4,540 $ 6,505
------- ----------- ------- -------
------- ----------- ------- -------
(1) DURING 1997, THE COMPANY HAD NO SIGNIFICANT GAINS OR LOSSES ON
TERMINATIONS OF HEDGE POSITIONS USING DERIVATIVE FINANCIAL INSTRUMENTS.
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 "Disclosure about Fair
Value of Financial Instruments" requires disclosure of fair value information
of financial instruments. For certain financial instruments where quoted
market prices are not available, other independent valuation techniques and
assumptions are used. Because considerable judgment is used, these estimates
are not necessarily indicative of amounts that could be realized in a current
market exchange. SFAS No. 107 excludes certain financial instruments from
disclosure, including insurance contracts.
For cash, short-term investments, accounts receivable, policy loans, mortgage
loans and other liabilities, carrying amounts on the Consolidated Balance
Sheets approximate fair value.
Fair value for fixed maturities and marketable equity securities are based
upon quoted market prices. Fair value for securities that are not publicly
traded are analytically determined. These amounts are disclosed in Note 4 of
Notes to Consolidated Financial Statements.
The fair value of derivative financial instruments, including swaps, caps,
floors, futures, options and forward commitments, is determined using a
pricing model which is validated through quarterly comparison to dealer
quoted prices. Amounts are disclosed in Note 4 of Notes to Consolidated
Financial Statements.
Fair value for partnerships and trusts are based on external market
valuations from partnership and trust management.
Other policy claims and benefits payable fair value information is determined
by estimating future cash flows, discounted at the current market rate.
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying amount and fair values of the Company's financial instruments
at December 31, 1997 and 1996 were as follows:
1997 1996
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- --------- --------- ---------
ASSETS
Fixed maturities $ 14,176 $ 14,176 $ 13,624 $ 13,624
Equity securities 180 180 119 119
Policy loans 3,756 3,756 3,836 3,836
Mortgage loans -- -- 2 2
Investments in partnerships, trusts and other 47 91 54 104
LIABILITIES
Other policy benefits $ 11,769 $ 11,755 $ 11,707 $ 11,469
6. SEPARATE ACCOUNTS
The Company maintained separate account assets and liabilities totaling $69.1
billion and $49.7 billion at December 31, 1997 and 1996, respectively, which
are reported at fair value. Separate account assets are segregated from other
investments and net investment income and net realized capital gains and
losses accrue directly to the policyholder. Separate accounts reflect two
categories of risk assumption: non-guaranteed separate accounts totaling
$58.6 billion and $39.4 billion at December 31, 1997 and 1996, respectively,
wherein the policyholder assumes the investment risk, and guaranteed separate
accounts totaling $10.5 and $10.3 billion at December 31, 1997 and 1996,
respectively, wherein the Company contractually guarantees either a minimum
return or account value to the policyholder. Included in the non-guaranteed
category were policy loans totaling $1.9 billion and $2.0 billion at December
31, 1997 and 1996, respectively. Net investment income (including net
realized capital gains and losses) and interest credited to policyholders on
separate account assets are not reflected in the Consolidated Statements of
Income.
Separate account management fees were $699, $538 and $387 in 1997, 1996 and
1995, respectively. The guaranteed separate accounts include fixed market
value adjusted individual annuity and modified guaranteed life insurance.
The average credited interest rate on these contracts was 6.52% at December
31, 1997. The assets that support these liabilities were comprised of $10.2
billion in fixed maturities as of December 31, 1997. The portfolios are
segregated from other investments and are managed to minimize liquidity and
interest rate risk. In order to minimize the risk of disintermediation
associated with early withdrawals, fixed MVA annuity and modified guaranteed
life insurance contracts carry a graded surrender charge as well as a market
value adjustment. Additional investment risk is hedged using a variety of
derivatives which totaled $119 in carrying value and $3.0 billion in notional
amounts as of December 31, 1997.
7. INCOME TAX
Hartford Life and The Hartford have entered into a tax sharing agreement
under which each member in the consolidated U.S. Federal income tax return
will make payments between them such that, with respect to any period, the
amount of taxes to be paid by the Company, subject to certain adjustments,
generally will be determined as though the Company were filing separate
Federal, state and local income tax returns.
As long as The Hartford continues to beneficially own, directly or
indirectly, at least 80% of the combined voting power and 80% of the value of
the outstanding capital stock of Hartford Life, the Company will be included
for Federal income tax purposes in the affiliated group of which The Hartford
is the common parent. To the extent allowed by law, it is the intention of
The Hartford and its subsidiaries to continue to file a single consolidated
Federal income tax return. The Company will continue to remit (receive from)
The Hartford a current income tax provision (benefit) computed in accordance
with such tax sharing agreement. The Company's effective tax rate was 36%,
35% and 32% in 1997, 1996 and 1995, respectively.
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAX (CONTINUED)
Income tax expense is as follows:
For the years ended December 31,
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
1997 1996 1995
--------- --------- ---------
Current $ 119 $ 122 $ 211
Deferred 48 (102) (149)
--------- --------- ---------
INCOME TAX EXPENSE $ 167 $ 20 $ 62
--------- --------- ---------
--------- --------- ---------
A reconciliation of the tax provision at the U.S. Federal statutory rate to
the provision for income taxes is as follows:
For the years ended December 31,
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
--------- ----- -----
Tax provision at the U.S. Federal statutory
rate $ 164 $ 20 $ 67
Tax-exempt income -- -- (3)
Foreign tax credit -- -- (4)
Other 3 -- 2
--------- --- ---
TOTAL $ 167 $ 20 $ 62
--------- --- ---
--------- --- ---
Deferred tax assets include the following at December 31:
DECEMBER 31,
--------------------
1997 1996
--------- ---------
Tax return deferred acquisition costs $ 639 $ 514
Financial statement deferred acquisition costs
and reserves (366) (242)
Employee benefits 5 8
Net unrealized capital gains on securities (96) (16)
Investments and other 166 210
--------- ---------
TOTAL $ 348 $ 474
--------- ---------
--------- ---------
Income taxes paid were $9, $189 and $162 in 1997, 1996 and 1995,
respectively. The Company had a current tax payment of $27 due to The
Hartford at December 31, 1997 and a tax refund due from The Hartford of $72
at December 31, 1996.
Prior to the Tax Reform Act of 1984, the Life Insurance Company Income Tax
Act of 1959 permitted the deferral from taxation of a portion of statutory
income under certain circumstances. In these situations, the deferred income
was accumulated in a "Policyholders' Surplus Account" and will be taxable in
the future only under conditions which management considers to be remote;
therefore, no Federal income taxes have been provided on this deferred
income. The balance for tax return purposes of the Policyholders' Surplus
Account as of December 31, 1997 was $37.
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. POSTRETIREMENT BENEFIT AND SAVINGS PLANS
(A) PENSION PLANS
The Company's employees are included in The Hartford's noncontributory
defined benefit pension plans. These plans provide pension benefits that are
based on years of service and the employee's compensation during the last ten
years of employment. The Company's funding policy is to contribute annually
an amount between the minimum funding requirements set forth in the Employee
Retirement Income Security Act of 1974, as amended, and the maximum amount
that can be deducted for U.S. Federal income tax purposes. Generally,
pension costs are funded through the purchase of the Company's group pension
contracts. The cost to the Company was approximately $5, $5 and $2 in 1997,
1996 and 1995, respectively.
The Company also provides, through The Hartford, certain health care and life
insurance benefits for eligible retired employees. A substantial portion of
the Company's employees may become eligible for these benefits upon
retirement. The Company's contribution for health care benefits will depend
on the retiree's date of retirement and years of service. In addition, the
plan has a defined dollar cap which limits average Company contributions.
The Company has prefunded a portion of the health care and life insurance
obligations through trust funds where such prefunding can be accomplished on
a tax effective basis. Postretirement health care and life insurance
benefits expense, allocated by The Hartford, was immaterial to the results of
operations for 1997, 1996 and 1995, respectively.
The assumed rate in the per capita cost of health care (the health care trend
rate) was 8.5% for 1997, decreasing ratably to 6.0% in the year 2001.
Increasing the health care trend rates by one percent per year would have an
immaterial impact on the accumulated postretirement benefit obligation and
the annual expense. To the extent that the actual experience differs from
the inherent assumptions, the effect will be amortized over the average
future service of covered employees.
(B) INVESTMENT AND SAVINGS PLAN
Substantially all employees of the Company are eliglibe to participate in The
Hartford's Investment and Savings Plan. Under this plan, designated
contributions, which may be invested in Class A Common Stock of Hartford Life
or certain other investments, are matched, up to 3% of compensation, by the
Company. The cost to the Company for the above-mentioned plans was
approximately $2 in 1997.
9. STOCK COMPENSATION PLANS
During the second quarter of 1997, Hartford Life adopted the 1997 HLI
Incentive Stock Plan (the "Plan"). Under the Plan, options granted may be
either non-qualified options or incentive stock options qualifying under
Section 422A of the Internal Revenue Code. The aggregate number of shares of
Class A Common Stock which may be awarded in any one year shall be subject to
an annual limit. The maximum number of shares of Class A Common Stock which
may be granted under the Plan in each year shall be 1.5% of the total issued
and outstanding shares of Hartford Life Class A Common Stock and treasury
stock as reported in the Annual Report on Hartford Life's Form 10-K for the
preceding year plus unused portions of such limit from prior years. In
addition, no more than 5,000,000 shares of Class A Common Stock shall be
cumulatively available for awards of incentive stock options under the Plan,
and no more than 20% of the total number of shares on a cumulative basis
shall be available for restricted stock and performance shares.
All options granted have an exercise price equal to the market price of
Hartford Life's stock on the date of grant and an option's maximum term is
ten years. Certain nonperformance based options become exercisable upon the
attainment of specified market price appreciation of Hartford Life's common
shares or at seven years after the date of grant, while the remaining
nonperformance based options become exercisable over a three year period
commencing with the date of grant.
Also included in the Plan are long term performance awards which become
payable upon the attainment of specific performance goals achieved over a
three year period.
During the second quarter of 1997, Hartford Life established the HLI Employee
Stock Purchase Plan ("ESPP"). Under this plan, eligible employees of
Hartford Life and the Company may purchase Class A Common Stock of
Hartford Life at a 15% discount from the lower of the market price at the
beginning or end of the quarterly offering period. Hartford Life may sell up
to 2,700,000 shares of stock to eligible employees. Hartford Life sold
54,316 shares under the ESPP in 1997.
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED )
10. REINSURANCE
The Company cedes insurance to other insurers, including its parent HLA, in
order to limit its maximum loss. Such transfer does not relieve the Company
of its primary liability. The Company also assumes insurance from other
insurers. Failure of reinsurers to honor their obligations could result in
losses to the Company. The Company evaluates the financial condition of its
reinsurers and monitors concentration of credit risk.
Net premiums and other considerations were comprised of the following:
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
Gross premiums $ 2,164 $ 2,138 $ 1,545
Assumed 159 190 591
Ceded (686) (623) (649)
--------- --------- ---------
NET PREMIUMS AND OTHER
CONSIDERATIONS $ 1,637 $ 1,705 $ 1,487
--------- --------- ---------
--------- --------- ---------
The Company ceded approximately $76, $100 and $101 of group life premium in
1997, 1996 and 1995, respectively, representing $33.6 billion, $33.3 billion
and $32.3 billion of insurance in force, respectively. The Company ceded
$339, $318 and $320 of accident and health premium to HLA in 1997, 1996 and
1995, respectively. The Company assumed $89, $101 and $103 of premium in
1997, 1996 and 1995, respectively, representing $8.2 billion, $8.5 billion
and $8.5 billion of individual life insurance in force, respectively, from
HLA.
Life reinsurance recoveries, which reduce death and other benefits,
approximated $158, $140 and $220 for the years ended December 31, 1997, 1996
and 1995, respectively.
As of December 31, 1997, the Company had reinsurance recoverables of $5.0
billion from Mutual Benefit Life Assurance Corporation ("Mutual Benefit"),
supported by assets in a security trust of $5.0 billion (including policy
loans and accrued interest of $4.5 billion). The risk of Mutual Benefit
becoming insolvent is mitigated by the reinsurance agreement's requirement
that the assets be kept in a security trust with the Company as sole
beneficiary. The Company has no other significant reinsurance-related
concentrations of credit risk.
11. RELATED PARTY TRANSACTIONS
Transactions of the Company with HA&I and its affiliates relate principally
to tax settlements, reinsurance, insurance coverage, rental and service fees,
payment of dividends and capital contributions. In addition, certain
affiliated insurance companies purchased group annuity contracts from the
Company to fund pension costs and claim annuities to settle casualty claims.
Substantially all general insurance expenses related to the Company,
including rent and employee benefit plan expenses, are initially paid by The
Hartford. Direct expenses are allocated to the Company using specific
identification, and indirect expenses are allocated using other applicable
methods. Indirect expenses include those for corporate areas which,
depending on type, are allocated based on either a percentage of direct
expenses or on utilization. Indirect expenses allocated to the Company by
The Hartford were $34, $40, and $45 in 1997, 1996 and 1995, respectively.
Management believes that the methods used are reasonable.
The rent paid to Hartford Fire for space occupied by the Company was $7 in
1997, and $3 in 1996 and 1995. The Company expects to pay annual rent of $7
in 1998 and 1999, respectively, $12 in 2000 and 2001, respectively, $13 in
2002 and $87 thereafter, over the remaining term of the sublease, which
expires on December 31, 2009. Rental expense is recognized over a level
basis over the term of the sublease and amounted to approximately $9 in 1997
and $8 in 1996 and 1995.
12. STATUTORY RESULTS
The domestic insurance subsidiaries of Hartford Life prepare their statutory
financial statements in accordance with accounting practices prescribed by
the State of Connecticut Insurance Department. Prescribed statutory
accounting practices include publications of the National Association of
Insurance Commissioners ("NAIC"), as well as state laws, regulations, and
general administrative rules.
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED )
12. STATUTORY RESULTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
Statutory net income $ 214 $ 144 $ 112
--------- --------- ---------
Statutory surplus $ 1,441 $ 1,207 $ 1,125
--------- --------- ---------
A significant percentage of the consolidated statutory surplus is permanently
reinvested or is subject to various state regulatory restrictions which limit
the payment of dividends without prior approval. The total amount of
statutory dividends which may be paid by the insurance subsidiaries of the
Company in 1998 is estimated to be $144.
13. COMMITMENTS AND CONTINGENT LIABILITIES
(A) LITIGATION
The Company is involved in pending and threatened litigation in the normal
course of its business in which claims for monetary and punitive damages have
been asserted. Although there can be no assurances, management, at the
present time, does not anticipate that the ultimate liability arising from
such pending or threatened litigation will have a material effect on the
financial condition or operating results of the Company.
(B) GUARANTY FUNDS
Under insurance guaranty fund laws in each state, the District of Columbia
and Puerto Rico, insurers licensed to do business can be assessed by state
insurance guaranty associations for certain obligations of insolvent
insurance companies to policyholders and claimants. Recent regulatory actions
against certain large life insurers encountering financial difficulty have
prompted various state insurance guaranty associations to begin assessing
life insurance companies for the deemed losses. Most of these laws do
provide, however, that an assessment may be excused or deferred if it would
threaten an insurer's solvency and further provide annual limits on such
assessments. A large part of the assessments paid by the Company's insurance
subsidiaries pursuant to these laws may be used as credits for a portion of
the Company's insurance subsidiaries' premium taxes. The Company paid
guaranty fund assessments of approximately $15, $11 and $10 in 1997, 1996 and
1995, respectively, of which $4, $5, and $6 were estimated to be creditable
against premium taxes.
14. BUSINESS SEGMENT INFORMATION
The Company, along with its parent, sells financial products such as fixed
and variable annuities, retirement plan services, and life and disability
insurance on both an individual and a group basis. The Company divides its
core businesses into three segments: Annuity, Individual Life Insurance, and
Employee Benefits. The Company also maintains a Guaranteed Investment
Contracts segment, which is primarily comprised of guaranteed rate contract
business written prior to 1995 and a Corporate Operation. The Annuity segment
offers individual variable annuities and fixed market value adjusted
annuities, deferred compensation and retirement plan services, mutual funds,
investment management services and other financial products. The Individual
Life Insurance segment sells a variety of individual life insurance products,
including variable life, universal life, interest-sensitive whole life, and
term life policies. The Employee Benefits segment sells group insurance
products, including group life, group short- and long-term disability and
corporate owned life insurance, and engages in certain international
operations. The Guaranteed Investment Contracts segment sells a limited
amount of guaranteed investment contracts and contains Closed Book GRC.
Through its Corporate Operation, the Company reports items that are not
directly allocable to any of its business segments. Included in the Corporate
Operation are unallocated income and expense and certain other items not
directly allocable to any segment. Net realized capital gains and losses are
recognized in the period of realization, but are allocated to the segments
utilizing durations of the segment portfolios.
F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. BUSINESS SEGMENT INFORMATION (CONTINUED)
The following table outlines revenues, operating income and assets by
business segment:
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
REVENUES
Annuity $ 1,269 $ 968 $ 719
Individual Life Insurance 487 440 383
Employee Benefits 972 1,366 1,273
Guaranteed Investment
Contracts 241 34 377
Corporate Operation 40 81 52
--------- --------- ---------
TOTAL REVENUES $ 3,009 $ 2,889 $ 2,804
--------- --------- ---------
--------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAX
EXPENSE (BENEFIT)
Annuity $ 317 $ 226 $ 171
Individual Life Insurance 85 68 56
Employee Benefits 53 44 37
Guaranteed Investment
Contracts -- (346) (103)
Corporate Operation 14 66 30
--------- --------- ---------
TOTAL INCOME BEFORE INCOME
TAX EXPENSE $ 469 $ 58 $ 191
--------- --------- ---------
--------- --------- ---------
ASSETS
Annuity $ 69,152 $ 52,877 $ 39,732
Individual Life Insurance 4,918 3,753 3,173
Employee Benefits 18,196 14,708 13,494
Guaranteed Investment
Contracts 3,347 4,533 6,069
Corporate Operation 2,343 1,891 1,729
--------- --------- ---------
TOTAL ASSETS $ 97,956 $ 77,762 $ 64,197
--------- --------- ---------
--------- --------- ---------
F-22
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE I
SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN AFFILIATES
(IN MILLIONS)
AS OF DECEMBER 31, 1997
-------------------------------------
AMOUNT AT
WHICH
FAIR SHOWN ON
TYPE OF INVESTMENT COST VALUE BALANCE SHEET
- ------------------------------------------------------------------------------------ --------- --------- -------------
FIXED MATURITIES
Bonds and Notes
U. S. gov't and gov't agencies and authorities (guaranteed and sponsored) $ 217 $ 219 $ 219
U. S. gov't and gov't agencies and authorities (guaranteed and sponsored) --
asset-backed 1,175 1,204 1,204
States, municipalities and political subdivisions 211 217 217
International governments 376 393 393
Public utilities 871 894 894
All other corporate including international 5,033 5,208 5,208
All other corporate -- asset-backed 4,091 4,124 4,124
Short-term investments 1,318 1,318 1,318
Certificates of deposit 593 599 599
--------- --------- -------------
TOTAL FIXED MATURITIES 13,885 14,176 14,176
--------- --------- -------------
EQUITY SECURITIES
Common Stocks
Public utilities -- -- --
Banks, trusts and insurance companies -- -- --
Industrial and miscellaneous 166 180 180
Nonredeemable preferred stocks -- -- --
--------- --------- -------------
TOTAL EQUITY SECURITIES 166 180 180
--------- --------- -------------
TOTAL FIXED MATURITIES AND EQUITY SECURITIES 14,051 14,356 14,356
--------- --------- -------------
REAL ESTATE -- -- --
OTHER INVESTMENTS
Mortgage loans on real estate -- -- --
Policy loans 3,756 3,756 3,756
Investments in partnerships, trusts and other 47 91 47
--------- --------- -------------
TOTAL OTHER INVESTMENTS 3,803 3,847 3,803
--------- --------- -------------
TOTAL INVESTMENTS $ 17,854 $ 18,203 $ 18,159
--------- --------- -------------
--------- --------- -------------
S-1
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN MILLIONS)
FUTURE POLICY
BENEFITS, OTHER
DEFERRED UNPAID CLAIMS POLICY
POLICY AND CLAIM CLAIMS AND PREMIUMS AND NET
ACQUISITION ADJUSTMENT BENEFITS OTHER INVESTMENT
SEGMENT COSTS EXPENSES PAYABLE CONSIDERATIONS INCOME
- -------------------------------------------------------------------------------------------------------------
1997
Annuity $ 2,478 $ 2,070 $ 6,838 $ 769 $ 500
Individual Life
Insurance 837 392 2,182 323 164
Employee Benefits -- 780 9,232 541 431
Guaranteed Investment
Contracts -- -- 2,782 2 239
Corporate Operation -- 28 -- 2 34
- -------------------------------------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS $ 3,315 $ 3,270 $ 21,034 $ 1,637 $ 1,368
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
1996
Annuity $ 2,030 $ 1,526 $ 6,016 $ 535 $ 433
Individual Life
Insurance 730 346 2,160 287 153
Employee Benefits -- 574 9,834 881 485
Guaranteed Investment
Contracts -- -- 4,124 2 251
Corporate Operation -- 28 -- -- 75
- -------------------------------------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS $ 2,760 $ 2,474 $ 22,134 $ 1,705 $ 1,397
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
1995
Annuity $ 1,561 $ 1,314 $ 5,661 $ 319 $ 400
Individual Life
Insurance 615 706 1,932 246 137
Employee Benefits 12 325 9,285 922 351
Guaranteed Investment
Contracts -- 28 5,720 -- 377
Corporate Operation -- -- -- 63
- -------------------------------------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS $ 2,188 $ 2,373 $ 22,598 $ 1,487 $ 1,328
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
BENEFITS,
CLAIMS AND AMORTIZATION OF
NET REALIZED CLAIM DEFERRED POLICY
CAPITAL GAINS ADJUSTMENT ACQUISITION DIVIDENDS TO OTHER
SEGMENT (LOSSES) EXPENSES COSTS POLICYHOLDERS EXPENSES
- -----------------------------------------------------------------------------------------------------------
1997
Annuity $ -- $ 445 $ 250 $ -- $ 257
Individual Life
Insurance -- 242 83 -- 77
Employee Benefits -- 425 2 240 252
Guaranteed Investment
Contracts -- 232 -- -- 9
Corporate Operation 4 35 -- -- (9)
- -----------------------------------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS $ 4 $ 1,379 $ 335 $ 240 $ 586
- -----------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
1996
Annuity $ -- $ 412 $ 174 $ -- $ 156
Individual Life
Insurance -- 245 59 -- 68
Employee Benefits -- 546 -- 635 141
Guaranteed Investment
Contracts (219) 332 1 -- 47
Corporate Operation 6 -- -- -- 15
- -----------------------------------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS $ (213) $ 1,535 $ 234 $ 635 $ 427
- -----------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
1995
Annuity $ -- $ 317 $ 117 $ -- $ 114
Individual Life
Insurance -- 203 70 -- 54
Employee Benefits -- 424 -- 675 137
Guaranteed Investment
Contracts -- 453 12 -- 15
Corporate Operation (11) 25 -- -- (3)
- -----------------------------------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS $ (11) $ 1,422 $ 199 $ 675 $ 317
- -----------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
S-2
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE IV
REINSURANCE
PERCENTAGE OF
GROSS CEDED TO ASSUMED FROM NET AMOUNT ASSUMED TO
(IN MILLIONS) AMOUNT OTHER COMPANIES OTHER COMPANIES AMOUNT NET
- -----------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1997
LIFE INSURANCE IN FORCE $ 245,487 $ 178,771 $ 33,156 $ 99,872 33.2%
INSURANCE REVENUES
Life insurance and annuities 1,818 340 157 1,635 9.6%
Accident and health insurance 346 346 2 2 100.0%
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL INSURANCE REVENUES $ 2,164 $ 686 $ 159 $ 1,637 9.7%
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1996
Life insurance in force $ 177,094 $ 106,146 $ 31,957 $ 102,905 31.1%
INSURANCE REVENUES
Life insurance and annuities 1,801 298 169 1,672 10.1%
Accident and health insurance 337 325 21 33 63.6%
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL INSURANCE REVENUES $ 2,138 $ 623 $ 190 $ 1,705 11.1%
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1995
Life insurance in force $ 182,716 $ 112,774 $ 26,996 $ 96,938 27.8%
INSURANCE REVENUES
Life insurance and annuities 1,232 325 574 1,481 38.8%
Accident and health insurance 313 324 17 6 283.3%
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL INSURANCE REVENUES $ 1,545 $ 649 $ 591 $ 1,487 39.7%
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
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
By: Mary Jane Fortin
-----------------------
Mary Jane Fortin
Assistant Vice President
Date: March 27, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Ramani Ayer Chairman, Chief Executive Officer, March 27, 1998
- --------------------- and Director
Ramani Ayer
/s/ Lowndes A. Smith President, Chief Operating Officer, March 27, 1998
- --------------------- and Director
Lowndes A. Smith
/s/ Gregory A. Boyko Senior Vice President, March 27, 1998
- --------------------- Chief Financial Officer and Treasurer
Gregory A. Boyko
/s/ Thomas M. Marra Senior Vice President March 27, 1998
- --------------------- and Director
Thomas M. Marra
/s/ John P. Ginnetti Executive Vice President March 27, 1998
- --------------------- and Director
John P. Ginnetti
II-1
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
EXHIBITS INDEX
EXHIBIT #
- ------------
3.01 Restated Certificate of Incorporation of Hartford Life
Insurance Company filed March 1985 (File No. 2-89516) is
incorporated herein by reference.
3.02 By-Laws of Hartford Life Insurance Company filed March 1985
(File No. 2-89516) is incorporated herein by reference.
4.01 Restated Certificate of Incorporation and By-Laws of
Hartford Life Insurance Company (included as Exhibits 3.01
and 3.02, respectively).
10.1 Management Agreement between Hartford Life Insurance Company
and The Hartford Investment Management Company was filed as
Exhibit 10.3 to Hartford Life, Inc.'s Form 10-Q filed for
the quarter ended June 30, 1997 and is incorporated herein
by reference.
10.2 Management Agreement among Hartford Life Insurance Company,
certain of its affiliates and Hartford Investment
Services, Inc. was filed as Exhibit 10.4 to Hartford Life,
Inc.'s Form 10-Q filed for the quarter ended June 30, 1997
and is incorporated herein by reference.
10.3 Tax sharing agreement among Hartford Life Insurance
Company, The Hartford Financial Services Group, Inc. and
certain of their affiliates was filed as Exhibit 10.2 to
Hartford Life, Inc.'s Form 10-Q filed for the quarter
ended June 30, 1997 and is incorporated herein by
reference.
27 Financial Data Schedule is filed herewith.
II-2