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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, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1470915
(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(b) of the Act: the following, which
is registered on the New York Stock Exchange, Inc.:
Class A Common Stock, par value $0.01 per share
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[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of February 27, 1998, there were outstanding 25,990,382 shares of Class A
Common Stock, $0.01 par value per share, and 114,000,000 of Class B Common
Stock, $0.01 per share, of the registrant. The aggregate market value of the
shares of the registrant's common equity held by non-affiliates of the
registrant was $1,113,923,187 based on the closing price of $43.06 per share of
the Class A Common Stock on the New York Stock Exchange on February 27, 1998.
Documents Incorporated by Reference:
Portions of the Registrant's definitive proxy statement for its 1998 annual
meeting of shareholders are incorporated by reference in Part III of this Form
10-K.
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[HARTFORD LIFE HARTFORD LIFE, INC. AND ITS SUBSIDIARIES ("HARTFORD
ARTWORK (ELK)] LIFE") IS A LEADING INSURANCE AND FINANCIAL SERVICES
ORGANIZATION PROVIDING PRE-RETIREMENT SAVINGS, ESTATE
PLANNING, EMPLOYEE BENEFITS AND MUTUAL FUND PRODUCTS.
A MAJORITY OWNED SUBSIDIARY OF THE HARTFORD FINANCIAL
SERVICES GROUP, INC., HARTFORD LIFE IS THE NATION'S
LARGEST WRITER OF INDIVIDUAL ANNUITIES AND A TOP
PROVIDER OF BOTH INDIVIDUAL LIFE INSURANCE AND
EMPLOYEE BENEFITS.
CONTENTS
ITEM DESCRIPTION PAGE
PART I 1 Business of Hartford Life 2
2 Properties 11
3 Legal Proceedings 11
4 Submission of Matters to a Vote of Security Holders 11
PART II 5 Market for Hartford Life's Common Stock and Related
Stockholder Matters 11
6 Selected Financial Data 12
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
7A Quantitative and Qualitative Disclosures About
Market Risk 32
8 Financial Statements and Supplementary Data 32
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 32
PART III 10 Directors and Executive Officers of Hartford Life 32
11 Executive Compensation 32
12 Security Ownership of Certain Beneficial Owners and
Management 33
13 Certain Relationships and Related Transactions 33
PART IV 14 Exhibits, Financial Statements, Schedules and Reports
on Form 8-K 33
Signatures II-1
Exhibits Index II-2
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PART I
ITEM 1. BUSINESS OF HARTFORD LIFE
(DOLLAR AMOUNTS IN MILLIONS EXCEPT FOR SHARE DATA UNLESS OTHERWISE STATED)
GENERAL
Hartford Life, Inc. and its subsidiaries ("Hartford Life" or the "Company"), an
indirect subsidiary of The Hartford Financial Services Group, Inc. ("The
Hartford"), is headquartered in Simsbury, Connecticut, and is a leading
insurance and financial services company. Hartford Life provides (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 (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
sixth largest consolidated life insurance company based on statutory assets as
of December 31, 1996, and the second largest writer of group long-term
disability insurance based on premiums written for the nine months ended
September 30, 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 and to maximize shareholder value. 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 $101 billion and stockholders' equity
was $2.1 billion as of December 31, 1997. In addition, Hartford Life generated
$4.7 billion in revenues and $306 in net income in 1997.
Distribution
Hartford Life 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. Hartford Life 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
Hartford Life 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, Hartford Life 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. The Company was also a
leader in the introduction of a "managed disability" approach to the group
disability insurance market, which focuses on early claimant intervention in an
effort to facilitate a claimant's return to work and to contain costs.
Customer Service, Technology and Economies of Scale
Hartford Life 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
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administered through Hartford Life. The DALBAR award is given in recognition of
those organizations who achieve the highest tier of customer service in the
variable annuity industry.
Risk Management
Hartford Life'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, 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 the Company's then outstanding securities, the license
may be revoked upon the later of the fifth anniversary of the date of
consummation of the Company's Initial Public Offering ("IPO") of its Class A
Common Stock or one year after receipt by the Company of written notice of The
Hartford's intention to revoke the license.
BUSINESS SEGMENTS
Hartford Life 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 Hartford Life's business segments may be found in the
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") on pages 13 to 18 and Note 17 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 $202 and $145 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
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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.
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 Hartford Life 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 $1.0 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.
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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.
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. 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 $510, an
increase of $38, or 8%, over prior year and net income of $56 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.
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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.
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. During 1997, 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.
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. 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 and international operations in South America.
Group Insurance
The Company provides life, disability, and other group insurance coverage to
large and small employers across the United States. According to the latest
results published by the Life Insurance Marketing and Research Association
("LIMRA"), the Company is the second largest provider of group disability
insurance for the nine months ended September 30, 1997. 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. The
Group Insurance operation generated premiums of $1.5 billion in 1997 of which
$653 was attributable to group disability coverage and $504 was attributable to
group life coverage. Included in the 1997 results are group disability and group
life premiums of $88 and $16, respectively, related to the acquisition of a
block of business from the United States branch of Confederation Life Insurance
Company. At December 31, 1997, the Company's consolidated balance sheet included
disability reserves of $1.5 billion and group life reserves of $451. Group
Insurance net income increased $13 to $58 in 1997 as compared to 1996.
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,
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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 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 $944 and $1.4 billion and net income of $27 and $33 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 and the decline in net income is
due to a $6 operating loss related to the Company's international start-up
operations.
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.
In 1994, the Company initiated an international strategy to expand its business
opportunities into certain emerging insurance markets. As part of that strategy,
the Company invested in ITT Hartford Sudamericana Holding, S.A. ("Suda"), with a
group of Argentine individuals with insurance industry experience. The Company
initially owned 55% of Suda and increased its ownership to 60% in 1995. Suda
operates several subsidiaries devoted to life insurance, retirement annuities
and pensions. In addition, Suda entered into a joint venture with Banco de
Galicia y Buenos Aires, S.A. to operate an insurance business in a number of
countries throughout South America. In November of 1997, as part of a financial
and managerial restructuring, the Company purchased the remaining 40% interest
in Suda from its local shareholders. The Company has also formed two Brazilian
joint ventures with Itaboria Participacoes, S.A. (known as Grupo Icatu), a
broad-based financial services company in Brazil, to sell life insurance,
savings products, specialty health insurance and pensions. As of December 31,
1997, the Company had invested approximately $100 of start-up capital in all its
existing international operations.
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.
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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, Inc., a Delaware corporation, was formed in December, 1996 as a
direct subsidiary of Hartford Accident and Indemnity Company ("HA&I") and an
indirect subsidiary of The Hartford. On December 19, 1995, ITT Industries, Inc.
(formerly ITT Corporation) ("ITT") distributed all of its outstanding shares of
The Hartford to ITT shareholders of record in an action known herein as the
"Distribution". As a result of the Distribution, The Hartford became an
independent, publicly traded company. On February 10, 1997, Hartford Life filed
a registration statement, as amended, with the Securities and Exchange
Commission, relating to the IPO. Pursuant to the IPO on May 22, 1997, the
Company sold to the public 26 million shares representing approximately 18.6% of
the equity ownership in the Company. Additional information regarding the IPO
may be found in Note 3 of Notes to Consolidated Financial Statements and within
the "Initial Public Offering" discussion within the Capital Resources and
Liquidity section of the MD&A.
As a holding company, Hartford Life, Inc. has no significant business operations
of its own and, therefore, relies on the dividends from its insurance company
subsidiaries, which are primarily domiciled in Connecticut, as the principal
source of cash to meet its obligations (primarily debt obligations). Additional
information regarding the cash flow and liquidity needs of Hartford Life, Inc.
may be found in the Capital Resources and Liquidity section of the MD&A.
LIFE RESERVES
In accordance with applicable insurance regulations under which Hartford Life
operates, life insurance subsidiaries of the Company establish and carry as
liabilities actuarially determined reserves which are calculated to meet
Hartford Life'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 Hartford Life'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 Hartford Life'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. For the
Company's group disability policies, the level of reserves is based on a variety
of factors including particular diagnoses, termination rates and benefit
payments.
The persistency of Hartford Life'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.
Hartford Life'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.
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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.
RATINGS
Reference is made to the Capital Resources and Liquidity section of the MD&A
under "Ratings".
RISK-BASED CAPITAL
Reference is made to the Capital Resources and Liquidity section of the MD&A
under "Risk-Based Capital".
LEGISLATIVE INITIATIVES
Reference is made to the Regulatory Initiatives and Contingencies section of the
MD&A.
REINSURANCE
In accordance with normal industry practice, Hartford Life is involved in both
the cession and assumption of insurance with other insurance and reinsurance
companies. At December 31, 1997, the maximum amount of life insurance retained
on any one life by any of the life operations is approximately $2.5, excluding
accidental death benefits.
INVESTMENT OPERATIONS
The Company's investment operations are managed by its investment strategy group
which reports directly to senior management of the Company. Hartford Life's
investments have been separated into specific portfolios which support specific
classes of product liabilities. The investment strategy group works closely with
the product lines to develop investment guidelines, including duration targets,
asset allocation and convexity constraints, asset/liability mismatch tolerances
and return objectives, to ensure that the product line's individual risk and
return objectives are met. The Company's primary investment objective for its
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 to that of policyholder
obligations.
For further discussion of Hartford Life's investment operations and the
Company's approach to managing investment risk, see the Investments section and
Capital Markets Risk Management section of the MD&A, as well as Note 4 to the
Consolidated Financial Statements.
EMPLOYEES
Hartford Life had approximately 4,000 employees at February 28, 1998, primarily
in the United States and Canada.
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EXECUTIVE OFFICERS OF HARTFORD LIFE
Information about the executive officers of Hartford Life who are also directors
and/or nominees for election as directors is set forth in Hartford Life's 1998
Proxy Statement. Listed below are the Company's executive officers:
LOWNDES A. SMITH, 58, has been Vice-Chairman of The Hartford since February 1,
1997 and is President and Chief Executive Officer of the Company. He served as
an Executive Vice President of The Hartford from December 1995 until his
appointment as Vice-Chairman and has been a director of The Hartford since 1991.
Mr. Smith served as President and Chief Operating Officer of The Hartford's life
insurance subsidiaries since 1989. Prior to that time, he served as Senior Vice
President and Group Controller for all companies owned or operated by The
Hartford. Mr. Smith joined The Hartford in 1968 as a member of the Corporate
Accounting Department and in 1972 he was appointed the Secretary and Director of
Corporate Accounting. He was elected Assistant Vice President in 1974, and he
was named Controller in 1977. Mr. Smith is a director of the Connecticut
Children's Medical Center.
JOHN P. GINNETTI, 52, has been Executive Vice President and Director of Asset
Management Services since 1994. From 1988 to 1994, he served as Senior Vice
President and Director of Individual Life and Annuities. Mr. Ginnetti joined
Hartford Life in 1982 as General Counsel. Previously, he was Assistant General
Counsel with the Life Insurance Company of North America.
THOMAS M. MARRA, 39, has been Executive Vice President and Director of
Individual Life and Annuities since 1996. Mr. Marra also oversees the Individual
Life Insurance Segment. Mr. Marra joined Hartford Life in 1980 as an associate
actuary. He held positions of increasing responsibility and in 1991 was named
Vice President and Director of Individual Annuities. He was elected Senior Vice
President in 1994. He is a fellow of the Society of Actuaries.
RAYMOND P. WELNICKI, 49, has been Senior Vice President and Director of Employee
Benefits since 1994. He joined Hartford Life in 1992 as Actuary, Director of
Group Actuarial and Long-Term Care. He was named Vice President of Hartford Life
in 1993. Prior to 1992, he was employed with Aetna Life & Casualty Company as
Assistant Vice President, Issues and Strategic Management. He is a Fellow of the
Society of Actuaries.
GREG A. BOYKO, 46, is Senior Vice President, Chief Financial Officer and
Treasurer. He joined Hartford Life in 1995 as Controller and was elected Vice
President in 1996. In November 1997, Mr. Boyko assumed responsibility for the
Company's international operations. He previously worked at ING America Life
Insurance Company where he held the position of Senior Vice President and Chief
Financial Officer. His prior experience included positions at Connecticut Mutual
Life Insurance Company ("CML"), where he progressed from Controller of CML to
Chief Financial Officer of Connecticut Mutual Insurance Services. Mr. Boyko
holds a Juris Doctor degree and is a Certified Public Accountant, Chartered Life
Underwriter and Chartered Financial Consultant. He is a member of the
Connecticut and American Bar Associations and the Connecticut Society of
Certified Public Accountants.
LYNDA GODKIN, 43, is Vice President and General Counsel. She joined Hartford
Life in 1990 as Counsel for the Employee Benefits Segment. In 1994 she was named
Assistant General Counsel and Director of Hartford Life's Law Department. In
1996 she was named General Counsel of Hartford Life. She previously practiced
law at CIGNA Corporation. She began her legal career in 1981 at the law firm of
Day, Berry & Howard in Hartford, Connecticut. She is a member of the Connecticut
and American Bar Associations.
CRAIG R. RAYMOND, 36, is Vice President and Chief Actuary. Since joining
Hartford Life in 1985, Mr. Raymond has held actuarial positions of increased
responsibility throughout the Company. In 1992, he was named Assistant Vice
President and Director of Individual Life and Annuities, Actuarial and became
Vice President in 1994. Prior to joining Hartford Life, Mr. Raymond held
positions at Integon Corporation and The National Life and Accident Insurance
Company. He is a Fellow of the Society of Actuaries and Chairman of the American
Academy of Actuaries Committee on Life Insurance.
ANN M. DE RAISMES, 47, is Vice President and Director of Human Resources. Ms. de
Raismes joined Hartford Life in 1984 as Manager of Staffing. She has been
Director of Human Resources since 1991 and was elected Vice President in 1994.
Previously, she held human resource management positions of increasing
responsibility with SCM Corporation. She is a member of The Hartford Foundation
Board of Directors.
DAVID M. ZNAMIEROWSKI, 37, is Vice President and Director of Investment
Strategy. Mr. Znamierowski joined Hartford Life in 1996 as Director of Risk
Management. Previously, he held various positions with Aetna Life & Casualty
Company, including Vice President, Investment Strategy and Policy. From 1986
through 1991, Mr. Znamierowski held positions with Salomon Brothers Inc.
LIZABETH H. ZLATKUS, 39, is Vice President and Director of Group Life and
Disability. Ms. Zlatkus has held positions of increasing responsibility since
joining The Hartford in 1983. She was named Vice President and Director of Risk
Management and Business Operations in 1994. Prior to joining The Hartford, she
was a senior accountant at Peat, Marwick, Mitchell & Company. She became a
Certified Public Accountant in 1982.
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WILLIAM A. GODFREY, 39, is Vice President and Director of Information
Technology. Mr. Godfrey joined the senior team at Hartford Life in 1996 to
oversee technology management. Previously, Mr. Godfrey held information
technology positions at Fleet Financial Group and systems development positions
with CIGNA Corporation and Electronic Data Systems.
ROBERT F. NOLAN, 43, is Vice President and Director of Corporate Relations. Mr.
Nolan joined Hartford Life in 1992 and was elected Vice President in 1995.
Previously, Mr. Nolan held positions of increasing responsibility at Aetna Life
& Casualty Company in public relations, marketing communications and corporate
communications.
WALTER C. WELSH, 50, is Vice President and Director of Government Affairs. Mr.
Welsh has worked at The Hartford since 1979. Since 1993, Mr. Welsh has served as
Director of Government Relations for Hartford Life. From 1979 to 1993, Mr. Welsh
held various tax management positions within the Law Department of The Hartford.
He was named Assistant General Counsel in 1984 and was named Assistant Director
of Taxes in 1986. He previously practiced law with the Internal Revenue Service
and is a member of the Connecticut and American Bar Associations.
ITEM 2. PROPERTIES
Hartford Life 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
Hartford Life 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders of Hartford Life during
the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR HARTFORD LIFE'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Hartford Life's Class A Common Stock is traded on the New York Stock Exchange
("NYSE") under the trading symbol "HLI". Hartford Accident and Indemnity
Insurance Company ("HA&I"), an indirect wholly-owned subsidiary of The
Hartford, holds all of the shares of Class B Common Stock. As such, the Class B
Common Stock is not listed on any exchange and there is no established public
trading market for it.
The following table presents high and low closing prices for the Class A Common
Stock of Hartford Life on the NYSE for the periods indicated, and the quarterly
dividends declared per share:
1997 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
- --------------------------------------------------------------------------------
Common Stock Price
High N/A $37.50 $41.75 $45.31
Low N/A 32.13 33.94 34.63
Dividends Declared (1) - - 0.09 0.09
- --------------------------------------------------------------------------------
(1) Dividends declared exclude amounts paid to Hartford Life's parent prior to
the Company's initial public offering.
N/A - Not applicable
At February 27, 1998, there were approximately 530 shareholders of record of
Hartford Life's Class A common stock and HA&I was the only holder of Class B
common stock.
In 1998, Hartford Life expects to continue to pay quarterly dividends on its
common stock of $0.09 per share. Dividend decisions will be based on and
affected by a number of factors, including the operating results and financial
requirements of Hartford Life on a stand-alone basis and the impact of
regulatory restrictions discussed in the Liquidity Requirements section of the
MD&A.
There are also various legal limitations governing the extent to which Hartford
Life's insurance subsidiaries may extend credit, pay dividends or otherwise
provide funds to Hartford Life, Inc. as discussed in the Capital Resources and
Liquidity section of the MD&A under "Liquidity Requirements".
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ITEM 6. SELECTED FINANCIAL DATA
(IN MILLIONS, EXCEPT FOR PER SHARE DATA)
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
General account invested assets $ 20,970 $19,830 $20,072 $18,078 $15,866
Separate account assets (1) 69,362 49,770 36,296 22,847 16,314
All other assets 10,648 10,333 9,594 9,324 7,454
-------- ------- ------- ------- -------
TOTAL ASSETS $100,980 $79,933 $65,962 $50,249 $39,634
-------- ------- ------- ------- -------
Policy liabilities $ 26,078 $26,239 $26,318 $25,208 $20,863
Separate account liabilities (1) 69,362 49,770 36,296 22,847 16,314
Allocated Advances from parent (2) -- 893 732 525 425
Debt (2) 700 -- -- -- --
All other liabilities 2,696 1,757 1,439 1,283 1,107
-------- ------- ------- ------- -------
TOTAL LIABILITIES $ 98,836 $78,659 $64,785 $49,863 $38,709
-------- ------- ------- ------- -------
STOCKHOLDERS' EQUITY (3) $ 2,144 $ 1,274 $ 1,177 $ 386 $ 925
- ------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA
Total revenues $ 4,699 $ 4,384 $ 4,090 $ 3,543 $ 2,922
Total expenses 4,393 4,360 3,940 3,392 2,792
-------- ------- ------- ------- -------
NET INCOME (4) $ 306 $ 24 $ 150 $ 151 $ 130
- ------------------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE DATA
PRO FORMA BASIC EARNINGS PER SHARE (5) $ 2.28 $ 0.19 $ -- $ -- $ --
PRO FORMA DILUTED EARNINGS PER SHARE (5) $ 2.28 $ 0.19 $ -- $ -- $ --
DIVIDENDS DECLARED PER COMMON SHARE (6) $ 0.18 $ -- $ -- $ -- $ --
- ------------------------------------------------------------------------------------------------------------------------------
(1) Includes both non-guaranteed and guaranteed separate accounts.
(2) For financial reporting purposes, the Company has treated certain amounts
previously allocated by The Hartford Financial Services Group, Inc. ("The
Hartford") to the Company's life insurance subsidiaries as Allocated Advances
from parent. Cash received in respect of Allocated Advances from parent was used
to support the growth of the life insurance subsidiaries. For further
information see the "Debt" discussion in the Capital Resources and Liquidity
section of the Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") and also see Note 7 of Notes to Consolidated
Financial Statements.
(3) Stockholders' equity beginning December 31, 1994 reflects the adoption of
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". Under SFAS No. 115 the Company's fixed maturity investments are
classified as "available for sale" and, accordingly, these investments are
reflected at fair value with the corresponding impact included as a component of
stockholders' equity.
(4) 1996 includes a $169 third quarter charge related to Closed Book GRC (see
the discussions related to Closed Book GRC in the "Guaranteed Investment
Contracts" discussion within the MD&A).
(5) In 1997, the Company adopted SFAS No. 128, "Earnings per Share". Pro forma
basic earnings per share is calculated based upon the weighted average number of
common shares outstanding during the respective periods. Pro forma diluted
earnings per share are determined on the assumption that stock options were
exercised upon issuance. For periods prior to the Company's Initial Public
Offering ("IPO") (May 22, 1997), outstanding shares are based upon 114 million
shares of Class B Common Stock owned by The Hartford plus an assumed issuance of
11 million shares of Class A Common Stock (the number of shares that, based upon
the IPO price and the underwriting discounts and expenses payable by the
Company, would result in net proceeds equal to the excess of the amount of the
February and April 1997 dividends over the 1996 earnings and the allocated
advances from parent). For the period subsequent to the closing of the IPO,
outstanding shares are based upon 114 million shares of Class B Common Stock
owned by The Hartford plus approximately 26 million shares of Class A Common
Stock owned by the public. See Note 9 of Notes to Consolidated Financial
Statements for further explanation associated with earnings per share for
periods prior to the IPO.
(6) Dividends per common share represent amounts paid subsequent to the
Company's IPO. In the third and fourth quarters of 1997, Hartford Life declared
and paid a dividend of $0.09 per share of common stock totaling $25. In 1998,
Hartford Life expects to continue paying quarterly dividends on its common stock
of $0.09 per share. The table does not include dividends paid to the parent in
periods prior to the IPO. For further explanation see the "Dividends" discussion
within the Capital Resources and Liquidity section of the MD&A.
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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, Inc. and subsidiaries ("Hartford Life" or 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 Hartford Life 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 13
Annuity 15
Individual Life Insurance 16
Employee Benefits 17
Guaranteed Investment Contracts 18
Reserves 19
Investments 19
Capital Markets Risk Management 21
Capital Resources and Liquidity 28
Regulatory Initiatives and Contingencies 31
Effect of Inflation 32
CONSOLIDATED RESULTS OF OPERATIONS
Hartford Life is a leading insurance and financial services company 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) fully insured premiums;
(c) net investment income on general account assets; and (d) 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. Premium
revenues are derived primarily from the sale of group life and group disability
insurance products. Hartford Life'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. Hartford Life'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 1995
- ----------------------------------------------------------------------------------------------------
Premiums and other considerations $3,163 $ 3,069 $ 2,643
Net investment income 1,536 1,534 1,451
Net realized capital losses -- (219) (4)
- ----------------------------------------------------------------------------------------------------
TOTAL REVENUES 4,699 4,384 4,090
------ ------- -------
Benefits, claims and claim adjustment expenses 2,671 2,727 2,395
Amortization of deferred policy acquisition costs 345 241 205
Dividends to policyholders 241 635 675
Other expenses 962 750 589
- ----------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 4,219 4,353 3,864
------ ------- -------
INCOME BEFORE INCOME TAX EXPENSE 480 31 226
Income tax expense 174 7 76
- ----------------------------------------------------------------------------------------------------
NET INCOME $ 306 $ 24 $ 150
------ ------- -------
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Revenues increased $315, or 7%, to $4.7 billion in 1997 from $4.4 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 $490,
or 16%, to $3.5 billion in 1997 as compared to $3.0 billion 1996. This growth
was driven by premiums and other considerations related to the Annuity segment
and the Group Insurance operation of the Employee Benefits segment. Annuity
premiums and other considerations increased $230 in 1997, primarily resulting
from increased variable annuity fee income, which grew $198, or 54%, in 1997 as
compared to 1996. Average variable annuity account value increased $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. Premium revenue related to the Group Insurance
operation of the Employee Benefits segment increased $209, or 16%, in 1997 due
to strong sales of $480, a 17% increase over 1996, and good persistency.
Revenues increased $294, or 7%, to $4.4 billion in 1996 from $4.1 billion on
1995. Excluding COLI and GIC, revenues increased $549, or 22%, to $3.0 billion
in 1996 as compared to $2.4 billion 1995. This increase was driven by increases
in premiums and other considerations, which included an increase in fees from
the Annuity segment of $216, as the separate account assets grew due to sales
growth and market appreciation, as well as increased premiums and other
considerations of $226 from the Group Insurance operation due to strong sales
and renewals.
Total benefits, claims and expenses decreased $134 in 1997 as compared to 1996.
Excluding COLI and GIC for the reasons described above, total benefits, claims
and expenses increased $391, or 15%, to $3.0 billion in 1997 as compared to $2.6
billion in 1996. Benefits, claims and claim adjustment expenses related to the
Group Insurance operation increased $161, or 14%, reflecting the growth in that
operation's group life and group disability business. Amortization of deferred
policy acquisition costs ("DPAC") increased $105 in 1997 primarily due to the
Annuity segment, which increased $76, or 44%, as a result of strong sales in
both 1997 and 1996. Also, other business expenses increased $157 in 1997 as
compared to 1996. Total benefits, claims and expenses increased $489 in 1996 as
compared to 1995. Excluding COLI and GIC, total benefits, claims and expenses
increased $508, or 24%, to $2.6 billion in 1996 as compared to $2.1 billion in
1995. This increase was related to increased benefits, claims and claim
adjustment expenses of approximately $205, $99, and $49 related to the Group
Insurance operation, the Annuity segment and the Individual Life Insurance
segment, respectively, as these blocks of business all experienced strong
growth. Also, increased prior year sales and total account value in the Annuity
segment caused an increase in amortization of DPAC of $57 in 1996 as compared to
1995.
Net income totaled $306 in 1997 as compared to $24 in 1996 and $150 in 1995. The
1996 results include a $225 net loss related to GIC, which when excluded,
results in an increase in 1997 net income of $57, or 23%, 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 and Group Insurance operation of the Employee Benefits
segment. Partially offsetting improved earnings in the principal segments were
increased losses of $19 in the Corporate Operation due to the increased capital
allocated to the other segments to fund their growth and higher interest expense
due to increased indebtedness in connection with the Company's Initial Public
Offering ("IPO").
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 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 1995
- ------------------------------------------------------------------------
ANNUITY $ 202 $ 145 $ 113
INDIVIDUAL LIFE INSURANCE 56 44 37
EMPLOYEE BENEFITS 85 78 67
GUARANTEED INVESTMENT
CONTRACTS -- (225) (67)
CORPORATE OPERATION (37) (18) --
- ------------------------------------------------------------------------
NET INCOME $ 306 $ 24 $ 150
- ------------------------------------------------------------------------
14
16
ANNUITY
OPERATING SUMMARY
1997 1996 1995
- ----------------------------------------------------------------------------------------------
Premiums and other considerations $ 769 $539 $323
Net investment income 502 434 397
Net realized capital gains -- -- --
- ----------------------------------------------------------------------------------------------
TOTAL REVENUES 1,271 973 720
--------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 445 416 317
Amortization of deferred policy acquisition costs 250 174 117
Dividends to policyholders -- -- --
Other expenses 262 159 118
- ----------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 957 749 552
--------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 314 224 168
Income tax expense 112 79 55
- ----------------------------------------------------------------------------------------------
NET INCOME $ 202 $145 $113
--------------------------------------------------------------------------------------
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 market value adjusted ("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 $298, or 31%, to $1.3 billion in 1997 from $1.0 billion in
1996. This increase was principally the result of a $230 increase in premiums
and other considerations, reflecting a substantial increase in aggregate fees
earned due to the segment's growing block of separate account assets. The
average separate account assets of this segment increased to $50.7 billion in
1997, from $37.2 billion in 1996 primarily due to sales of individual variable
annuities of approximately $9.7 billion in 1997, as well as significant market
appreciation. Also, Group Annuity sales were $820 in 1997, an increase of $186,
or 29%, over 1996. In addition, net investment income grew $68, or 16%, to $502
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 total
benefits, claims and expenses of $208, or 28%, to $957 in 1997 from $749 in
1996. Benefits, claims and claim adjustment expenses grew $29, or 7%, in 1997
primarily related to increased interest credited on Group Annuity general
account liabilities. 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 $103, 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 $57, or 39%, to $202 from $145 in
1996.
Similar factors generated an increase in 1996, as compared with 1995, in
revenues of $253, or 35%, average general account assets of $1.0 billion, or
16%, average separate account assets of $11.1 billion, or 42%, total benefits,
claims and expenses of $197, or 36%, net income of $32, or 28%, and a reduction
in individual annuity operating expenses as a percentage of total individual
annuity account value to 28 basis points in 1996 from 31 basis points in 1995.
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.
15
17
INDIVIDUAL LIFE INSURANCE
OPERATING SUMMARY
1997 1996 1995
- -------------------------------------------------------------------------------------------
Premiums and other considerations $339 $313 $266
Net investment income 171 159 142
Net realized capital gains -- -- --
- -------------------------------------------------------------------------------------------
TOTAL REVENUES 510 472 408
------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 251 266 217
Amortization of deferred policy acquisition costs 87 63 72
Dividends to policyholders 1 1 --
Other expenses 84 74 61
- -------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 423 404 350
------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 87 68 58
Income tax expense 31 24 21
- -------------------------------------------------------------------------------------------
NET INCOME $ 56 $ 44 $ 37
------------------------------------------------------------------------------------
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 $38, or 8%, to $510 from $472 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 $47, or 10%, 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 constituted 70%, or $98,
of total 1997 sales and grew $23, or 31%, over 1996 levels.
Total benefits, claims and expenses increased $19, or 5%, to $423 in 1997 from
$404 in 1996. Total benefits, claims and expenses, excluding IEL, increased $28,
or 7%, in 1997. This increase was primarily driven by an increase in
amortization of DPAC of $24 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
$12, or 27%, in 1997.
Revenues in 1996 increased $64, or 16%, to $472 from $408 in 1995. This increase
was primarily due to a $47 increase in premiums and other considerations,
reflecting an increase in cost of insurance charges and variable life fees
applied to a larger block of business as account values increased $678 to $3.2
billion in 1996 from $2.6 billion in 1995. Total benefits, claims and expenses
increased $54, or 15%, to $404 in 1996 from $350 in 1995. This increase reflects
the growth in the block of individual life insurance business and is partially
offset by favorable mortality results and the full year impact of expense
leverage due to the consolidation of the division's two individual life
operations in 1995. The combination of account value growth, operational
efficiencies, and favorable mortality experience resulted in an increase in net
income of $7, or 19%, to $44 in 1996 from $37 in 1995.
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.
16
18
EMPLOYEE BENEFITS
OPERATING SUMMARY
1997 1996 1995
- -----------------------------------------------------------------------------------------
Premiums and other considerations $ 2,051 $ 2,215 $ 2,048
Net investment income 593 618 467
Net realized capital gains - - -
- -----------------------------------------------------------------------------------------
TOTAL REVENUES 2,644 2,833 2,515
----------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 1,705 1,684 1,373
Amortization of deferred policy acquisition costs 8 4 4
Dividends to policyholders 240 634 675
Other expenses 553 396 362
- -----------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 2,506 2,718 2,414
----------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 138 115 101
Income tax expense 53 37 34
- -----------------------------------------------------------------------------------------
NET INCOME $ 85 $ 78 $ 67
----------------------------------------------------------------------------------
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, group short-term and long-term disability
and accidental death and dismemberment. According to the latest results
published by the Life Insurance Marketing and Research Association ("LIMRA"),
the Company is the second largest provider of group disability insurance for the
nine months ended September 30, 1997. Specialty Insurance primarily consists of
the Company's COLI business and its international operations, primarily in South
America.
Revenues decreased $189 to $2.6 billion in 1997, which was primarily
attributable to the COLI business for which associated revenues decreased $380,
or 28%, to $980 from $1.4 billion in 1996. 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. Excluding COLI, this segment's revenues
increased $191, or 13%, to $1.7 billion, in 1997, as compared to $1.5 billion,
in 1996. This increase was driven by Group Insurance which had growth in
premiums and other considerations of $209, or 16%, in 1997 as compared to 1996.
The increased Group Insurance premiums were primarily attributable to group
disability business, where premiums increased $115, or 21%, in 1997 and group
life business, where premiums increased $72, or 17%, in 1997 as compared to
1996. Group Insurance sales increased $68, or 17%, to $480 in 1997 as compared
to $412 in 1996. Included in the 1997 results are group disability and group
life premiums of $88 and $16, respectively, as a result of the acquisition of a
block of business from the United States branch of Confederation Life Insurance
Company. The 1996 results include $78 of group disability premiums and $23 of
group life premiums related to the acquisition of a block of business from North
American Life Assurance Company of Toronto.
Benefits, claims and expenses decreased $212 to $2.5 billion 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.
Benefits, claims and expenses, excluding COLI, increased $172, or 12%, to $1.6
billion, in 1997 from $1.4 billion in 1996. The increase in benefits, claims,
and claim adjustment expenses is directly related to an increase in benefits of
$161, or 14%, due to growth in the Company's group life and group disability
business.
As a result of the factors mentioned above, and the impact of favorable
mortality and morbidity results, Group Insurance net income grew $13, or 29%, to
$58 in 1997. Within Specialty Insurance, net income related to COLI increased $1
in 1997 to $27. In addition, the results of Specialty Insurance were impacted by
a $6 operating loss arising from the Company's international operations. This
loss was primarily attributable to the Company's operations in Argentina. In
November 1997, the Company replaced the Argentine management team with a new
management team and purchased the remaining 40% interest in ITT Hartford
Sudamericana Holding, S.A. from the local shareholders. The Argentine loss was
primarily due to higher than anticipated costs and expenditures.
Revenues increased $318, or 13%, to $2.8 billion in 1996 from $2.5 billion in
1995. This increase was largely the result of (i) a $167 increase in premiums
and other considerations, reflecting a $226 increase in group insurance premiums
from strong group disability sales and renewals, partially offset by a decline
in leveraged COLI premiums as a result of the HIPA Act of 1996 and (ii) a $151
increase in net investment income, primarily due to an increase in COLI account
value related to strong sales in 1995. Total benefits, claims and expenses
increased $304, or 13%, to $2.7 billion in 1996 from $2.4 billion in 1995. This
increase generally reflected an increased block of group disability business and
an increase in the Company's COLI account value, partially offset by a $41
decrease in dividends to policyholders primarily due to the elimination of sales
of leveraged COLI as a result of the enactment of the HIPA
17
19
Act of 1996. The premium growth in Group Insurance, along with favorable
mortality and morbidity experience, resulted in an increase in net income in
this segment of $11, or 16%, to $78 in 1996 from $67 in 1995.
As employers continue to offer benefit plans in order to attract and retain
valued employees, management expects that the need for group life and group
disability insurance will continue to expand and believes the Company is well
positioned to take advantage of this growth potential.
GUARANTEED INVESTMENT CONTRACTS
OPERATING SUMMARY
1997 1996 1995
- ---------------------------------------------------------------------------------------------------
Premiums and other considerations $ 2 $ 2 $ 1
Net investment income 237 251 377
Net realized capital losses -- (219) --
- --------------------------------------------------------------------------------------------------
TOTAL REVENUES 239 34 378
-------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 232 332 453
Amortization of deferred policy acquisition costs -- 1 12
Dividends to policyholders -- -- --
Other expenses 7 47 16
- --------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 239 380 481
-------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT) -- (346) (103)
Income tax expense (benefit) -- (121) (36)
- ---------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ -- $(225) $ (67)
-------------------------------------------------------------------------------------------
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 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 and 1995 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.
During 1996, Closed Book GRC incurred a $51, after-tax, loss from operations as
a result of negative interest spread, as compared with an after-tax loss from
operations of $68 in 1995. With the initiation of the hedge transactions
discussed above, which eliminated the possibility that the fair value of Closed
Book GRC investments would recover to their current amortized cost 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.
18
20
RESERVES
In accordance with applicable insurance regulations under which Hartford Life
operates, life insurance subsidiaries of the Company establish and carry as
liabilities actuarially determined reserves which are calculated to meet
Hartford Life'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 Hartford Life's actual experience when appropriate. These reserves are
computed at amounts that, with additions from premiums to be received and with
interest on such reserves compounded annually at certain assumed rates, are
expected to be sufficient to meet the Company's policy obligations at their
maturities or in the event of an insured's death. Reserves include unearned
premiums, premium deposits, claims reported but not yet paid, claims incurred
but not reported and claims in the process of settlement. Reserves for assumed
reinsurance are computed on bases essentially comparable to direct insurance
reserves.
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 reports
directly 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 Capital Markets Risk Management section of the MD&A
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 $58.7 billion as of December 31, 1997,
wherein the policyholder assumes substantially all the investment risk and
reward, and guaranteed separate accounts totaling $10.7 billion as of December
31, 1997, wherein Hartford Life 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 $21 billion at December
31, 1997 and were comprised of $16.8 billion of fixed maturities, $3.8 billion
of policy loans, and other investments of $363. 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.
19
21
The following table sets forth by type the fixed maturity securities held in the
Company's general account as of December 31, 1997 and 1996.
FIXED MATURITIES BY TYPE
- -------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------
FAIR FAIR
TYPE VALUE PERCENT VALUE PERCENT
- -------------------------------------------------------------------------
Corporate $ 7,970 47.3% $ 7,587 48.3%
ABS 3,199 19.0% 2,693 17.1%
Commercial MBS 1,606 9.5% 1,098 7.0%
Short-term 1,395 8.3% 765 4.9%
CMO 978 5.8% 2,150 13.7%
MBS - agency 514 3.1% 402 2.6%
Gov't/Gov't agencies - For. 502 3.0% 395 2.5%
Municipal - taxable 267 1.6% 266 1.7%
Gov't/Gov't agencies - U.S. 241 1.4% 355 2.2%
Municipal - tax-exempt 171 1.0% -- --
Redeemable preferred stock 5 -- -- --
- -------------------------------------------------------------------------
TOTAL FIXED MATURITIES $16,848 100.0% $15,711 100.0%
- -------------------------------------------------------------------------
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 non-residential 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 22.6% and 10.3%, 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. For further discussion of the
Company's investment credit policies, see the Capital Markets Risk Management
section of the MD&A under "Credit Risk".
INVESTMENT RESULTS
The table below summarizes Hartford Life's results for the past three years.
(Before taxes) 1997 1996 1995
- ----------------------------------------------------------------------
Net investment income $1,536 $1,534 $1,451
Yield on average invested assets (1) 7.6% 7.7% 7.4%
Net realized capital losses $ - $(219) $(4)
- ----------------------------------------------------------------------
(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
$1.5 billion, unchanged from 1996. Before-tax yields on average invested assets
decreased to 7.6% in 1997 from 7.7% in 1996. The decrease in before-tax yields
was primarily attributable to declining market interest rates and a reduction in
policy loan yields.
For the year ended December 31, 1996, before-tax net investment income increased
$83 to $1.5 billion. The increase in net investment income was primarily due to
an increase in policy loans, new business cash flow invested in fixed maturities
and asset mix changes offset by asset sales and maturities in Closed Book GRC.
Yields on average invested assets increased to 7.7% in 1996 from 7.4% in 1995.
The increase in the before-tax yield was primarily due to the increase in policy
loan yields offset by a reduction in yields on fixed maturities as a result of
sales and maturities of higher yielding assets reinvested at lower average
yields.
There were no net realized capital gains or losses for the year ended December
31, 1997, as compared to net realized losses of $219 in 1996 and $4 in 1995. The
1996 capital losses were primarily attributable to the writedown and sale of
certain securities within Closed Book GRC.
20
22
CAPITAL MARKETS RISK MANAGEMENT
As described below, credit risk and market risk are the primary sources of
investment risk to the Company. The following discussion identifies the
Company's policies and procedures for managing these risks and monitoring the
results of the Company's risk management activities.
CREDIT RISK
Hartford Life has established investment credit policies that focus on the
credit quality of obligors and counterparties, limit credit concentrations,
encourage diversification and require frequent creditworthiness reviews.
Investment activity, including setting of policy and defining acceptable risk
levels, is subject to regular review and approval by senior management and
frequent review by Hartford Life's Finance Committee.
The Company invests primarily in investment grade securities and has established
exposure limits, diversification standards and review procedures for all credit
risks whether borrower, issuer or counterparty. The creditworthiness of specific
obligors is determined by an internal credit evaluation supplemented by
consideration of external determinants of creditworthiness, typically ratings
assigned by nationally recognized ratings agencies. Obligor, geographic, asset
sector and industry concentrations are subject to established limits and
monitored at regular intervals.
The following table identifies fixed maturity securities for the Company's
operations by credit quality. The ratings referenced in the tables are based on
the ratings of nationally recognized rating organizations or, if not rated,
assigned based on the Company's internal analysis of such securities.
As of December 31, 1997, more than 99% of the fixed maturity portfolio,
including guaranteed separate accounts, was invested in investment-grade
securities.
FIXED MATURITIES BY CREDIT QUALITY
- -------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------
FAIR VALUE PERCENT FAIR VALUE PERCENT
- -------------------------------------------------------------------------------
U.S. Gov't/Gov't agencies $ 2,907 10.7% $ 2,003 7.8%
AAA 3,974 14.6% 5,752 22.2%
AA 2,967 10.9% 3,693 14.3%
A 9,351 34.3% 8,935 34.5%
BBB 5,966 21.9% 4,467 17.3%
BB & below 205 0.7% 155 0.6%
Short-term 1,869 6.9% 863 3.3%
- -------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 27,239 100.0% $ 25,868 100.0%
- -------------------------------------------------------------------------------
The Company also maintains credit policies regarding the financial stability and
credit standing of its major derivatives' counterparties and typically requires
credit enhancement provisions to further reduce its credit risk. Credit risk for
derivatives contracts is limited to the amounts calculated to be due to the
Company on such contracts 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.
MARKET RISK
Hartford Life's exposure to market risk relates to the market price and/or cash
flow variability associated with changes in market interest rates. The following
discussion focuses on the Company's exposure to interest rate risk,
asset/liability management strategies utilized to manage this risk, and
characteristics of the Company's insurance liabilities and their sensitivity to
movements in interest rates.
INTEREST RATE RISK
Changes in interest rates can potentially impact the Company' profitability.
Under certain circumstances of interest rate volatility, the Company could be
exposed to disintermediation risk and reduction in net interest rate spread or
profit margins. For the Company's non-guaranteed separate accounts, exposure is
not significant since the policyholder assumes substantially all of the
investment risk.
The Company's general account and guaranteed separate account investment
portfolios primarily consist of investment-grade, fixed maturity securities,
including corporate bonds, asset backed securities, mortgage backed securities
and collateralized mortgage obligations. The fair value of these and the
Company's other invested assets fluctuates depending on the interest rate
environment
21
23
and other general economic conditions. During periods of declining interest
rates, paydowns on mortgage backed securities and collateralized mortgage
obligations increase as the underlying mortgages are prepaid. In addition,
during such periods, the Company generally will not be able to reinvest the
proceeds of any such prepayments at comparable yields. Conversely, during
periods of rising interest rates, the rate of prepayments generally declines,
which also exposes the Company to the possibility of asset/liability cash flow
mismatch. For a discussion of the Company's risk management techniques to manage
this market risk, see the "Asset/Liability Management Strategies used to Manage
Market Risk" section below.
As described above, the Company holds a significant fixed maturity portfolio
which includes both fixed and variable rate features. The following table
reflects the principal amounts of the fixed and variable rate fixed maturity
portfolio at December 31, 1997, along with the respective weighted average
coupons by estimated maturity year. Expected maturities differ from contractual
maturities due to call or prepayment provisions. The weighted average coupon on
variable rate securities is based upon spot rates as of December 31, 1997, and
is primarily based upon the London Interbank Offered Rate ("LIBOR"). Callable
bonds and notes are distributed to either call dates or maturity depending on
which date produces the most conservative yield. Asset backed securities,
collateralized mortgage obligations and mortgage backed securities are
distributed to maturity year based on estimates of the rate of future
prepayments of principal over the remaining life of the securities. These
estimates are developed using prepayment speeds provided in broker consensus
data. Such estimates are derived from prepayment speeds previously experienced
at the interest rate levels projected for the underlying collateral. Actual
prepayment experience may vary from these estimates. Financial instruments with
certain leverage features have been included in each of the fixed maturity
categories. These instruments have not been separately displayed because they
were immaterial to the Company's investment portfolio.
22
24
1997
1998 1999 2000 2001 2002 Thereafter TOTAL Fair Value
- -----------------------------------------------------------------------------------------------------------------------------------
BONDS AND NOTES - CALLABLE
Fixed Rate
Par value $ 37 $ 50 $ 28 $ 13 $ 12 $ 566 $ 706 $ 668
Weighted average coupon 10.5% 7.5% 7.7% 7.6% 7.7% 5.4% 6.0%
Variable Rate
Par value $ 66 $ 33 $ 28 $ 44 $ 15 $ 981 $ 1,167 $ 1,106
Weighted average coupon 6.4% 6.9% 7.1% 6.0% 6.4% 6.5% 6.5%
BONDS AND NOTES - OTHER
Fixed Rate
Par value $3,013 $1,400 $1,285 $1,215 $1,033 $7,053 $14,999 $14,815
Weighted average coupon 3.2% 6.8% 7.1% 7.4% 7.7% 6.1% 5.9%
Variable Rate
Par value $ 140 $ 47 $ 138 $ -- $ 84 $ 900 $ 1,309 $ 1,352
Weighted average coupon 5.1% 1.3% 6.4% -- 5.7% 5.4% 5.3%
ASSET BACKED SECURITIES
Fixed Rate
Par value $ 211 $ 251 $ 447 $ 566 $ 240 $ 573 $ 2,288 $ 2,325
Weighted average coupon 6.9% 6.6% 6.7% 7.0% 6.8% 7.3% 7.0%
Variable Rate
Par value $ 40 $ 183 $ 237 $ 304 $ 358 $ 837 $ 1,959 $ 1,959
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 $ 171 $ 572 $ 308 $ 78 $ 581 $ 1,739 $ 1,695
Weighted average coupon 6.5% 6.0% 6.1% 5.6% 5.6% 6.0% 5.9%
Variable Rate
Par value $ 28 $ 12 $ 27 $ 14 $ 6 $ 359 $ 446 $ 424
Weighted average coupon 6.8% 6.6% 4.2% 6.7% 3.4% 7.7% 7.3%
COMMERCIAL MORTGAGE BACKED SECURITIES
Fixed Rate
Par value $ 4 $ 45 $ 184 $ 112 $ 134 $ 969 $ 1,448 $ 1,441
Weighted average coupon 8.6% 7.4% 6.9% 7.7% 7.0% 7.4% 7.3%
Variable Rate
Par value $ 20 $ 83 $ 90 $ 70 $ 165 $ 382 $ 810 $ 821
Weighted average coupon 6.1% 7.5% 6.9% 6.6% 6.5% 7.3% 7.0%
MORTGAGE BACKED SECURITIES
Fixed Rate
Par value $ 4 $ 25 $ 3 $ 41 $ 2 $ 501 $ 576 $ 590
Weighted average coupon 7.3% 7.0% 7.4% 6.2% 8.1% 7.4% 7.3%
Variable Rate
Par value $ -- $ -- $ -- $ -- $ -- $ 24 $ 24 $ 24
Weighted average coupon -- -- -- -- -- 6.5% 6.5%
- -----------------------------------------------------------------------------------------------------------------------------------
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The table below provides information on debt obligations and reflects principal
cashflows and related weighted average interest rate by maturity year.
1997
1998 1999 2000 2001 2002 Thereafter TOTAL FAIR VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM DEBT
Fixed Rate
Amount $ 50 $ -- $ -- $ -- $ -- $ -- $ 50 $ 50
Weighted average interest rate 5.8% -- -- -- -- -- 5.8% 5.8%
LONG-TERM DEBT
Fixed Rate
Amount $ -- $ -- $ -- $ -- $ -- $ 650 $ 650 $ 674
Weighted average effective interest rate -- -- -- -- -- 7.4% 7.4% 6.9%
- -----------------------------------------------------------------------------------------------------------------------------------
ASSET/LIABILITY MANAGEMENT STRATEGIES USED TO MANAGE MARKET RISK
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 $10.9
billion at December 31, 1997 ($6.6 billion related to insurance investments and
$4.3 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 notional amount of anticipatory hedges as of
December 31, 1997 was $255.
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 $4.3 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 $3.2 billion.
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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 $3.1 billion.
The following tables provide information on derivative instruments used in
accordance with the aforementioned hedging strategies. For interest rate swaps,
caps, floors and options, the tables present notional amounts with weighted
average pay and received rates for swaps and weighted average strike rates for
caps, floors and options by maturity year. For interest rate futures, the tables
present contract amount and weighted average settlement price by expected
maturity year.
1997
INTEREST RATE SWAPS 1998 1999 2000 2001 2002 Thereafter TOTAL Fair Value
- -----------------------------------------------------------------------------------------------------------------------------------
Pay Fixed/Receive Variable
Notional value $ 120 $ 151 $ 69 $ 198 $ 39 $ 297 $ 874 (19)
Weighted average pay rate 5.9% 6.4% 6.5% 6.7% 6.7% 6.5% 6.5%
Weighted average receive rate 7.1% 6.2% 5.9% 6.1% 5.9% 5.8% 6.1%
Pay Variable/Receive Fixed
Notional value $ 749 $ 995 $ 428 $ 351 $ 449 $ 1,240 $ 4,212 172
Weighted average pay rate 5.9% 5.9% 5.9% 6.0% 5.9% 5.9% 5.9%
Weighted average receive rate 6.4% 6.5% 6.8% 7.0% 6.7% 7.5% 6.9%
Pay Variable /Receive Different Variable
Notional value $ 83 $ 161 $ 275 $ 50 $ 291 $ 721 $ 1,581 (3)
Weighted average pay rate 6.0% 5.9% 5.9% 5.9% 7.7% 6.5% 6.4%
Weighted average receive rate 6.0% 6.8% 6.1% 9.6% 6.1% 7.0% 6.7%
- -----------------------------------------------------------------------------------------------------------------------------------
1997
1998 1999 2000 2001 2002 Thereafter TOTAL Fair Value
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST RATE CAPS - LIBOR BASED
Purchased
Notional value $ -- $ -- $ -- $ 5 $ -- $ 38 $ 43 $3
Weighted average strike rate (4.0 - 5.9%) -- -- -- 5.9% -- 5.2% 5.2%
Notional value $ 50 $ -- $ -- $ -- $ -- $ 35 $ 85 $1
Weighted average strike rate (6.0 - 7.9%) 7.0% -- -- -- -- 6.6% 6.8%
Notional value $ 37 $ -- $ -- $ -- $ 13 $ 210 $ 260 $2
Weighted average strike rate (8.0 - 9.9%) 8.6% -- -- -- 9.0% 8.4% 8.5%
Notional value $ -- $ 16 $ 10 $ -- $ 26 $ -- $ 52 $--
Weighted average strike rate (10.0 - 11.9%) -- 11.8% 11.5% -- 10.1% -- 10.9%
Issued
Notional value $ 50 $ -- $ -- $ -- $ -- $ 13 $ 63 $--
Weighted average strike rate (6.0 - 7.9%) 7.0% -- -- -- -- 7.2% 7.0%
Notional value $ -- $ -- $ -- $ 4 $ -- $ 13 $ 17 $--
Weighted average strike rate (8.0 - 9.9%) -- -- -- 8.9% -- 8.3% 8.5%
INTEREST RATE CAPS - CMT BASED
Purchased
Notional value $ 200 $ -- $ 343 $ -- $ -- $ 18 $ 561 $--
Weighted average strike rate (6 - 7.9%) 7.5% -- 7.8% -- -- 7.0% 7.6%
Notional value $ -- $ -- $ 95 $ 100 $ 100 $ -- $ 295 $--
Weighted average strike rate (8 - 9.9%) -- -- 8.0% 8.0% 9.5% -- 8.5%
Issued
Notional value $ -- $ -- $ 343 $ -- $ -- $ 18 $ 361 $--
Weighted average strike rate (6 - 7.9%) -- -- 7.8% -- -- 7.5% 7.8%
Notional value $ -- $ -- $ -- $ 100 $ 100 $ -- $ 200 $--
Weighted average strike rate (8 - 9.9%) -- -- -- 8.0% 9.5% -- 8.8%
- -----------------------------------------------------------------------------------------------------------------------------------
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1997
1998 1999 2000 2001 2002 Thereafter TOTAL Fair Value
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST RATE FLOORS - LIBOR BASED
Purchased
Notional value $ -- $ 100 $ -- $ -- $ -- $ -- $ 100 $--
Weighted average strike rate (4.0 - 5.9%) -- 4.2% -- -- -- -- 4.2%
Notional value $ -- $ -- $ -- $ -- $ -- $ 65 $ 65 $ 5
Weighted average strike rate (6.0 - 7.9%) -- -- -- -- -- 7.0% 7.0%
Issued
Notional value $ -- $ -- $ 10 $ 10 $ 39 $ 204 $ 263 $(4)
Weighted average strike rate (4.0 - 5.9%) -- -- 5.1% 4.9% 5.3% 5.3% 5.3%
Notional value $ -- $ -- $ -- $ -- $ -- $ 27 $ 27 $(3)
Weighted average strike rate (6.0 - 7.9%) -- -- -- -- -- 7.8% 7.8%
INTEREST RATE FLOORS - CMT BASED
Purchased
Notional value $ 300 $ -- $ 100 $ -- $ -- $ 150 $ 550 $ 4
Weighted average strike rate (4.0 - 5.9%) 5.8% -- 5.8% -- -- 5.5% 5.7%
Notional value $ 81 $ 40 $ 10 $ 500 $ -- $ -- $ 631 $ 9
Weighted average strike rate (6.0 - 7.9%) 6.3% 6.5% 6.0% 6.0% -- -- 6.1%
Issued
Notional value $ -- $ -- $ -- $ 540 $ -- $ -- $ 540 $(2)
Weighted average strike rate (4.0 - 5.9%) -- -- -- 5.0% -- -- 5.0%
- -----------------------------------------------------------------------------------------------------------------------------------
1997
INTEREST RATE FUTURES 1998 1999 2000 2001 2002 Thereafter TOTAL Fair Value
- -----------------------------------------------------------------------------------------------------------------------------------
Long
Contract amount / Notional $ 19 $ -- $ -- $ -- $ -- $ -- $ 19 N/A
Weighted average settlement price $ 121 $ -- $ -- $ -- $ -- $ -- $ 121 N/A
Short
Contract amount / Notional $ 22 $ 3 $ 25 $ -- $ -- $ -- $ 50 N/A
Weighted average settlement price $ 94 $ 94 $ 94 $ -- $ -- $ -- $ 94 N/A
- -----------------------------------------------------------------------------------------------------------------------------------
N/A - Not Applicable
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LIFE INSURANCE LIABILITY CHARACTERISTICS
Insurance liabilities, other than non-guaranteed separate accounts, which were
backed by $42.3 billion in total assets (including investments of $31.6
billion), totaled $26.5 billion (net of ceded reinsurance and policy loans) at
December 31, 1997. These insurance liabilities consisted of future policy
benefits of $4.9 billion, other policyholder funds of $21.1 billion, guaranteed
separate accounts of $10.1 billion and reinsurance recoverables of $(5.8)
billion and policy loans of $(3.8) billion. Matching of the duration of the
investments with respective policyholder obligations is an explicit objective of
the Company's management strategy. The Company's insurance policy liabilities,
along with estimated duration periods based on the Company's internal actuarial
assumptions, can be summarized based on investment needs in the five categories
described below at December 31, 1997.
($ 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 $ 0.4 $ 0.3 $ 0.2 $ 0.1 $ 0.1 $ 1.2 $ 2.3
Short-term pay out liabilities $ 0.5 $ -- $ -- $ -- $ -- $ -- $ 0.5
- --------------------------------------------------------------------------------------------------------------------------------
(1) As of December 31, 1997, the fair value of the Company's investment
contracts including guaranteed separate accounts was $21.9 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 will 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.
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SENSITIVITY TO CHANGES IN INTEREST RATES
For liabilities whose cash flows are not substantially affected by changes in
interest rates ("fixed liabilities") and where investment experience is
substantially absorbed by the Company, the sensitivity of the net economic value
(discounted present value of asset cash flows less the discounted present value
of liability cash flows) of those portfolios to 100 basis point shifts in
interest rates is shown in the table below. These fixed liabilities represent
approximately 60% of the Company's general and guaranteed separate account
liabilities. The remaining liabilities generally allow the Company significant
flexibility to adjust credited rates to reflect actual investment experience and
thereby pass through a substantial portion of actual investment experience to
the policyholder. The fixed liability portfolios are managed and monitored
relative to defined objectives and are analyzed regularly by management for
internal risk management purposes using scenario simulation techniques, and
evaluated annually consistent with regulatory requirements.
CHANGE IN NET ECONOMIC
VALUE DECEMBER 31, 1997
- ---------------------------------------------------------------------------------
Basis Point Shift -100 +100
- ---------------------------------------------------------------------------------
Dollar amount $5 $(10)
Percent of liability value 0.03% (0.06%)
- ---------------------------------------------------------------------------------
CAPITAL RESOURCES AND LIQUIDITY
Capital resources and liquidity represent the overall financial strength of
Hartford Life and its ability to generate strong cash flows from each of the
business segments and borrow funds at competitive rates to meet operating and
growth needs. The Company maintained cash and short-term investments totaling
$1.5 billion, $837 and $1.2 billion as of December 31, 1997, 1996 and 1995,
respectively. The capital structure of Hartford Life consists of debt and
equity, and is summarized as follows:
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
Short-term debt $ 50 $ -- $ --
Long-term debt 650 -- --
Allocated Advances from parent -- 893 732
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL DEBT $ 700 $ 893 $ 732
-----------------------------------------------------------------------------------------------------------------------------
Equity excluding net unrealized capital gains (losses) on securities, net of tax $ 1,907 $ 1,245 $ 1,221
Net unrealized capital gains (losses) on securities, net of tax 237 29 (44)
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 2,144 $ 1,274 $ 1,177
-----------------------------------------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION EXCLUDING NET UNREALIZED CAPITAL GAINS (LOSSES) ON
SECURITIES, NET OF TAX $ 2,607 $ 2,138 $ 1,953
-----------------------------------------------------------------------------------------------------------------------------
Debt to equity excluding net unrealized capital gains (losses) on
securities, net of tax 37% 72% 60%
Debt to capitalization excluding net unrealized capital gains (losses) on securities,
net of tax 27% 42% 37%
- -----------------------------------------------------------------------------------------------------------------------------------
CAPITALIZATION
The Company's total capitalization, excluding net unrealized capital gains
(losses) on securities, net of tax, increased $469, or 22%, to $2.6 billion in
1997 and $185, or 9%, to $2.1 billion in 1996. In 1997, the increase was
primarily the result of net income of $306 and net proceeds from the IPO of
$687, which were partially offset by a net reduction in debt of $193 and
dividends of $341. As a result of the IPO and debt restructuring described
below, both the debt to equity and debt to capitalization ratios decreased to
37% and 27% as of December 31, 1997, respectively, from 72% and 42% as of
December 31, 1996, respectively. The Company's commercial paper and senior debt
are rated by independent rating agencies and the Company continues to maintain
debt to capital ratios consistent with these ratings.
INITIAL PUBLIC OFFERING
On February 10, 1997, the Company filed a registration statement, as amended,
with the Securities and Exchange Commission relating to an IPO of the Company's
Class A Common Stock. Pursuant to the IPO on May 22, 1997, the Company 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 the Company's
outstanding promissory notes and line of credit with the remaining $160
contributed to the Company's insurance subsidiaries to support growth in its
core businesses.
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DEBT
On February 7, 1997, the Company declared a dividend of $1.2 billion payable to
its direct parent, Hartford Accident and Indemnity Company ("HA&I"). As a
result, the Company borrowed $1.1 billion on February 18, 1997, pursuant to a
$1.3 billion line of credit, with interest payable at the two-month Eurodollar
rate plus 15 basis points, which, together with a promissory note in the amount
of $100, was paid as a dividend to HA&I on February 20, 1997. Of the $1.2
billion dividend, $893 constituted a repayment of the portion of The Hartford's
third party indebtedness internally allocated, for financial reporting purposes,
to the Company's life insurance subsidiaries (the "Allocated Advances"). In
addition, on April 4, 1997 the Company declared and paid a dividend of $25 to
its parent in the form of a promissory note. Subsequently, $12 of this note was
forgiven in the form of a capital contribution from HA&I.
On February 14, 1997, the Company filed a shelf registration statement for the
issuance and sale of up to $1.0 billion in the aggregate of senior debt
securities, subordinated debt securities and preferred stock. On June 12, 1997,
the Company issued $650 of unsecured redeemable long-term debt in the form of
notes and debentures. Of this amount, $200 was in the form of 6.90% notes due
June 15, 2004, $200 of 7.10% notes due June 15, 2007, and $250 of 7.65%
debentures due June 15, 2027. Interest on each of the notes and debentures is
payable semi-annually on June 15 and December 15, of each year, commencing
December 15, 1997. The Company also issued $50 of short-term debt in the form of
commercial paper. Of the proceeds from these issuances, $670 was used to retire
the remaining balance on the $1.3 billion line of credit with the remainder
being used for working capital and other general corporate purposes.
Subsequently, the Company reduced the capacity of the line of credit from $1.3
billion to $250, which will be primarily used to support the commercial paper
program.
DIVIDENDS
In 1997, a total of $25 in dividends was paid to holders of Class A and Class B
Common Stock. See "Debt" discussion above for 1997 dividend payments made prior
to the IPO.
In 1998, Hartford Life expects to continue paying quarterly dividends on its
common stock of $0.09 per share. Dividend decisions will be based on, and
affected by, a number of factors, including the operating results and financial
requirements of Hartford Life on a stand-alone basis and the impact of the
regulatory restrictions discussed in the Liquidity Requirements section below.
The Company received dividends from its regulated life insurance subsidiaries of
$68 in 1997.
TREASURY STOCK
During 1997, to make shares available to employees pursuant to stock-based
benefit plans, the Company repurchased 100,000 shares of its common stock in the
open market at a total cost of $4. Shares repurchased in the open market are
carried at cost and reflected as a reduction to stockholders' equity. Treasury
shares subsequently reissued are reduced from treasury stock on a weighted
average cost basis. The Company currently intends to purchase shares of its
common stock to make shares available for its various employee stock-based
benefit plans.
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 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
- -------------------------------------------------------------------------------------
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Ratings are an important factor in establishing the competitive position of an
insurance company such as Hartford Life. 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.
LIQUIDITY REQUIREMENTS
The liquidity requirements of Hartford Life have been and will continue to be
met by funds from operations as well as the issuance of commercial paper, debt
securities and bank borrowings. The principal sources of funds are premiums and
investment income as well as maturities and sales of invested assets. Hartford
Life is a holding company which receives operating cash flow in the form of
dividends from its subsidiaries, enabling it to service debt.
Dividends to Hartford Life, Inc. from its subsidiaries are restricted. The
payment of dividends by Connecticut-domiciled insurers is limited under the
insurance holding company laws of Connecticut. Hartford Life and Accident
("HLA"), a direct subsidiary of the Company, adheres to these laws which require
notice to and approval by the state insurance commissioner for the declaration
or payment of any dividend, which together with other dividends or distributions
made within the preceding twelve months, exceeds the greater of (i) 10% of the
insurer's policyholder surplus as of December 31 of the preceding year or (ii)
net income (or net gain from operations, if such company is a life insurance
company) for the twelve-month period ending on the thirty-first day of December
last preceding, in each case determined under statutory insurance accounting
policies. In addition, if any dividend of a Connecticut-domiciled insurer
exceeds the insurer's earned surplus, it requires the prior approval of the
Connecticut Insurance Commissioner. The total amount of statutory dividends
which may be paid by the insurance subsidiaries of the Company without prior
approval in 1997 is estimated to be $167.
The insurance holding company laws of the other jurisdictions in which Hartford
Life's insurance subsidiaries are incorporated (or deemed commercially
domiciled) generally contain similar (although in certain instances somewhat
more restrictive) limitations on the payment of dividends.
The primary uses of funds are to pay claims, policy benefits, operating expenses
and commissions, and to purchase new investments. In addition, Hartford Life
carries a significant short-term investment position and accordingly does not
anticipate selling intermediate and long-term fixed maturity investments to meet
any liquidity needs. For a discussion of the Company's investment objectives and
strategies, see the "Investments" section of the MD&A.
RISK-BASED CAPITAL
The National Association of Insurance Commissioners ("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 each of the major
life insurance subsidiaries are in excess of 200% as of December 31, 1997.
CASH FLOW
1997 1996 1995
- ----------------------------------------------------------------------------
Cash provided by operating
activities $ 1,147 $ 338 $ 266
Cash (used for) provided by
investing activities $ (650) $ 58 $(662)
Cash (used for) provided by
financing activities $ (480) $(394) $ 431
- ----------------------------------------------------------------------------
Increase in cash $ 17 $ 2 $ 35
Impact of foreign exchange $ (1) $ -- $ 1
Cash - beginning of year $ 72 $ 70 $ 34
- ----------------------------------------------------------------------------
Cash - end of year $ 88 $ 72 $ 70
- ----------------------------------------------------------------------------
During 1997, cash provided by operating activities increased from the prior year
due primarily to growth in the Individual Life Insurance segment and the Group
Insurance operation of the Employee Benefits segment. The change in cash used
for investing activities primarily reflects the investment of cash from
operating activities. The change in cash used for financing activities was
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primarily due to declines in investment-type contracts and changes in debt and
dividends paid to the Company's parent, which were partially offset by proceeds
from the IPO.
During 1996, cash provided by operating activities increased from the prior year
due primarily to continued growth in business operations. The changes in cash
provided by or used for both investing and financing activities were primarily
due to increases in investment-type contract maturities, partially offset by
changes in allocated advances from the Company's parent. Operating cash flows in
each of the past three years have been more than adequate to meet liquidity
requirements.
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.
INSOLVENCY FUND
In all states, insurers licensed to transact certain classes of insurance are
required to become members of an insolvency fund. In most states, in the event
of the insolvency of an insurer writing any such class of insurance in the
state, all members of the fund are assessed to pay certain claims of the
insolvent insurer. A particular state's fund assesses its members based on their
respective written premiums in the state for the classes of insurance in which
the insolvent insurer is engaged. Assessments are generally limited for any year
to 1% or 2% of premiums written per year depending on the state. Such
assessments paid by Hartford Life approximated $15, $12 and $13 in 1997, 1996
and 1995, respectively.
NAIC PROPOSALS
The 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. Even if enacted in Connecticut or other
states in which Hartford Life's subsidiaries are domiciled, it is expected that
these laws will neither significantly change Hartford Life's investment
strategies nor have any material adverse effect on Hartford Life'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 ("AICPA") 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 Hartford
Life'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, Hartford Life has thousands of
individual and business customers that have insurance policies, annuities,
mutual funds and other financial products from Hartford Life. Nearly all of
these policies and products
31
33
contain date sensitive data, such as policy expiration dates, birth dates,
premium payment dates, and the like. In addition, Hartford Life has business
relationships with numerous third parties that affect virtually all aspects of
Hartford Life'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, Hartford Life began working on making its computer systems
Year 2000 ready, either by installing new programs or by replacing systems. In
January 1998, Hartford Life commenced a company-wide program to further
identify, assess and remediate the impact of Year 2000 problems in all of
Hartford Life's business segments. Hartford Life 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 Hartford Life through the year ended
December 31, 1997 have not been material to Hartford Life's financial condition
or results of operations. Hartford Life 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, Hartford Life is identifying
third parties with which it has significant business relations in order to
attempt to assess the potential impact on Hartford Life 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. Hartford Life does not
have control over these third parties and, as a result, Hartford Life 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.
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
Hartford Life during the three most recent fiscal years.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to the Capital Markets Risk Management section of the
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
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.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF HARTFORD LIFE
Certain of the information called for by Item 10 is set forth in the definitive
proxy statement for the 1998 annual meeting of shareholders (the "Proxy
Statement") filed or to be filed by Hartford Life with the Securities and
Exchange Commission within 120 days after the end of the last fiscal year
covered by this Form 10-K under the caption "Item 1. Election of Directors" and
"The Board of Directors and Its Committees" and is incorporated herein by
reference. Additional information required by Item 10 regarding Hartford Life's
executive officers is set forth in Item 1 of this Form 10-K under the caption
"Executive Officers of Hartford Life" and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 is set forth in the Proxy Statement under
the captions "Compensation of Executive Officers", "The Board of Directors
and its Committees - Directors' Compensation", and "Compensation Committee
Interlocks and Insider Participation" and is incorporated herein by
reference.
32
34
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by Item 12 is set forth in the Proxy Statement under
the caption "Stock Ownership of Directors, Executive Officers and Certain
Shareholders" and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Item 13 is set forth in Proxy Statement under
the caption "Certain Relationships with The Hartford" and is incorporated
herein by reference.
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 Exhibit Index elsewhere herein.
(b) Reports on Form 8-K - None.
(c) See Item 14(a)(3).
(d) See Item 14(a)(2).
33
35
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 Stockholders' 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-7-25
Summary of Investments - Other Than Investments in Affiliates S-1
Condensed Financial Information of Hartford Life, Inc. S-2-3
Supplementary Insurance Information S-4
Reinsurance S-5
Valuation and Qualifying Accounts S-6
REPORT OF MANAGEMENT
The management of Hartford Life, Inc. ("Hartford Life") 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 Hartford Life's financial position and results of
operations, and, that any other information contained in the Annual Report is
consistent with the financial statements.
Management has made available Hartford Life's financial records and related data
to Arthur Andersen LLP, independent public accountants, in order for them to
perform an audit of Hartford Life's consolidated financial statements. Their
report appears on page F-2.
An essential element in meeting management's financial responsibilities is
Hartford Life's system of internal controls. These controls, which include
accounting controls and the internal auditing program, are designed to provide
reasonable assurance that assets are safeguarded, and transactions are properly
authorized, executed and recorded. The controls, which are documented and
communicated to employees in the form of written codes of conduct and policies
and procedures, provide for careful selection of personnel and for appropriate
division of responsibility. Management continually monitors for compliance,
while Hartford Life's internal auditors independently assess the effectiveness
of the controls and make recommendations for improvement. Also, Arthur Andersen
LLP took into consideration Hartford Life's system of internal controls in
determining the nature, timing and extent of its audit tests.
Another important element is management's recognition of its responsibility for
fostering a strong, ethical climate, thereby ensuring that Hartford Life's
affairs are transacted according to the highest standards of personal and
professional conduct. Hartford Life has a long-standing reputation of integrity
in business conduct and utilizes communication and education to create and
fortify a strong compliance culture.
The Audit Committee of the Board of Directors of Hartford Life (the
"Committee"), 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 assure their
independence and free access to the Committee.
F-1
36
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO HARTFORD LIFE, INC.:
We have audited the accompanying Consolidated Balance Sheets of Hartford Life,
Inc. ("Hartford Life") (a Delaware corporation) and subsidiaries as of December
31, 1997 and 1996, and the related Consolidated Statements of Income,
Stockholders' 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 Hartford Life'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 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 the 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
37
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31,
(In millions, except for per share data) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
REVENUES
Premiums and other considerations $3,163 $ 3,069 $ 2,643
Net investment income 1,536 1,534 1,451
Net realized capital gains (losses) -- (219) (4)
- ----------------------------------------------------------------------------------------------------------
TOTAL REVENUES 4,699 4,384 4,090
-----------------------------------------------------------------------------------------------------
BENEFITS, CLAIMS AND EXPENSES
Benefits, claims and claim adjustment expenses 2,671 2,727 2,395
Amortization of deferred policy acquisition costs 345 241 205
Dividends to policyholders 241 635 675
Interest expense 58 55 35
Other expenses 904 695 554
- ----------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 4,219 4,353 3,864
-----------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 480 31 226
Income tax expense 174 7 76
- ----------------------------------------------------------------------------------------------------------
NET INCOME $ 306 $ 24 $ 150
-----------------------------------------------------------------------------------------------------
PRO FORMA BASIC EARNINGS PER SHARE (1) $ 2.28 $ 0.19 $ --
PRO FORMA DILUTED EARNINGS PER SHARE (1) $ 2.28 $ 0.19 $ --
- ----------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding (1) 134 125 --
Weighted average common shares outstanding
and dilutive potential common shares (1) 134 125 --
- ----------------------------------------------------------------------------------------------------------
Cash dividends declared per share subsequent
to the Initial Public Offering (2) $ 0.18 $ -- $ --
(1) See Note 9 of Notes to Consolidated Financial Statements for further
explanation.
(2) Cash dividends declared exclude amounts paid to the Company's parent prior
to the Initial Public Offering (May 22, 1997).
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
38
HARTFORD LIFE, INC. 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 $16,475 and $15,659) $ 16,848 $15,711
Equity securities, at fair value 181 119
Policy loans, at outstanding balance 3,759 3,839
Other investments, at cost 182 161
- ----------------------------------------------------------------------------------------------
Total investments 20,970 19,830
Cash 88 72
Premiums receivable and agents' balances 147 170
Reinsurance recoverables 5,765 5,839
Deferred policy acquisition costs 3,361 2,800
Deferred income tax 397 543
Other assets 890 909
Separate account assets 69,362 49,770
- ----------------------------------------------------------------------------------------------
TOTAL ASSETS $ 100,980 $79,933
------------------------------------------------------------------------------------------
LIABILITIES
Future policy benefits $ 4,939 $ 3,986
Other policyholder funds 21,139 22,253
Short-term debt 50 --
Long-term debt 650 --
Allocated advances from parent -- 893
Other liabilities 2,696 1,757
Separate account liabilities 69,362 49,770
- ----------------------------------------------------------------------------------------------
TOTAL LIABILITIES 98,836 78,659
STOCKHOLDERS' EQUITY
Preferred stock - authorized 50,000,000 shares; no shares issued
and outstanding, par value $0.01 -- --
Common stock - authorized 0 and 1,000 shares; issued and
outstanding 0 and 100 shares, par value $0.01 -- --
Class A common stock - authorized 600,000,000 shares; issued and
outstanding 26,026,153 and 0 shares, par value $0.01 -- --
Class B common stock - authorized 600,000,000 shares;
issued and outstanding 114,000,000 and 0 shares,
par value $0.01 1 --
Capital surplus 1,283 585
Treasury stock, at cost - 35,684 and 0 shares (1) --
Net unrealized capital gains on securities, net of tax 237 29
Retained earnings 624 660
- ----------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 2,144 1,274
------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 100,980 $79,933
--------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
39
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CLASS A CLASS B
PREFERRED COMMON COMMON COMMON CAPITAL
(In millions) STOCK STOCK STOCK STOCK SURPLUS
--------- --------- --------- --------- -------
BALANCE, DECEMBER 31, 1994 $ -- $ -- $ -- $ -- $ 405
Net income -- -- -- -- --
Dividends -- -- -- -- --
Capital contribution -- -- -- -- 180
Change in net unrealized
capital gains (losses) on
securities, net of tax -- -- -- -- --
Translation adjustments -- -- -- -- --
--------- --------- --------- --------- -------
BALANCE, DECEMBER 31, 1995 -- -- -- -- 585
Net income -- -- -- -- --
Change in net unrealized
capital gains (losses) on
securities, net of tax -- -- -- -- --
--------- --------- --------- --------- -------
BALANCE, DECEMBER 31, 1996 -- -- -- -- 585
Net income -- -- -- -- --
Dividends -- -- -- -- --
Conversion to Class B
common stock -- -- -- 1 (1)
Issuance of Class A
common stock -- -- -- -- 687
Capital contribution -- -- -- -- 12
Net treasury stock activity -- -- -- -- --
Change in net unrealized
capital gains (losses) on
securities, net of tax -- -- -- -- --
Translation adjustments -- -- -- -- --
--------- --------- --------- --------- -------
BALANCE, DECEMBER 31, 1997 $ -- $ -- $ -- $ 1 $ 1,283
========= ========= ========= ========= =======
NET
UNREALIZED
CAPITAL
GAINS (LOSSES)
ON TOTAL
TREASURY SECURITIES, RETAINED STOCKHOLDERS'
STOCK NET OF TAX EARNINGS EQUITY
-------- -------------- --------- -------------
BALANCE, DECEMBER 31, 1994 $-- $(730) $ 711 $ 386
Net income -- -- 150 150
Dividends -- -- (226) (226)
Capital contribution -- -- -- 180
Change in net unrealized
capital gains (losses) on
securities, net of tax -- 686 -- 686
Translation adjustments -- -- 1 1
--- ----- ----- -------
BALANCE, DECEMBER 31, 1995 -- (44) 636 1,177
Net income -- -- 24 24
Change in net unrealized
capital gains (losses) on
securities, net of tax -- 73 -- 73
--- ----- ----- -------
BALANCE, DECEMBER 31, 1996 -- 29 660 1,274
Net income -- -- 306 306
Dividends -- -- (341) (341)
Conversion to Class B
common stock -- -- -- --
Issuance of Class A
common stock -- -- -- 687
Capital contribution -- -- -- 12
Net treasury stock activity (1) -- -- (1)
Change in net unrealized
capital gains (losses) on
securities, net of tax -- 208 -- 208
Translation adjustments -- -- (1) (1)
--- ----- ----- -------
BALANCE, DECEMBER 31, 1997 $(1) $ 237 $ 624 $ 2,144
=== ===== ===== =======
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
40
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
----------------------------------------
(IN MILLIONS) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 306 $ 24 $ 150
ADJUSTMENTS TO RECONCILE NET INCOME TO CASH PROVIDED
BY OPERATING ACTIVITIES
Depreciation and amortization 23 12 17
Net realized capital losses -- 219 4
Decrease (increase) in premiums receivable and
agents' balances 23 (13) (27)
Increase in other liabilities 258 433 171
Increase (decrease) in receivables, payables and
accruals 77 2 (266)
Increase (decrease) in accrued taxes 143 (90) 35
Decrease (increase) in deferred income taxes 37 (137) (104)
Increase in deferred policy acquisition costs (561) (580) (390)
Increase in liabilities for future policy benefits 956 472 654
(Increase) decrease in reinsurance recoverables and
other assets (115) (4) 22
- ----------------------------------------------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES 1,147 338 266
- ----------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of fixed maturity investments (7,943) (7,045) (6,950)
Sales of fixed maturity investments 5,220 4,018 5,494
Maturities and principal paydowns of fixed maturity
investments 2,513 2,890 1,847
Purchases of other investments (159) (391) (928)
Sales of other investments 140 284 64
Net (purchases) sales of short-term investments (421) 302 (189)
- ----------------------------------------------------------------------------------------------------------
CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES (650) 58 (662)
- ----------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase in short-term debt 50 -- --
Increase in long-term debt 650 -- --
(Decrease) increase in allocated advances from parent (893) 115 --
Dividends paid (329) (19) --
Net (disbursements for) receipts from investment
and universal life-type contracts (charged
against) credited to policyholder accounts (644) (490) 431
Net proceeds from the sale of common stock 687 -- --
Acquisition of treasury stock (1) -- --
- ----------------------------------------------------------------------------------------------------------
CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES (480) (394) 431
- ----------------------------------------------------------------------------------------------------------
Increase in cash 17 2 35
Impact of foreign exchange (1) -- 1
- ----------------------------------------------------------------------------------------------------------
Cash - beginning of year 72 70 34
- ----------------------------------------------------------------------------------------------------------
CASH - END OF YEAR $ 88 $ 72 $ 70
- ----------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
NET CASH PAID DURING THE YEAR FOR:
Income taxes $ 45 $ 166 $ 173
Interest $ 55 $ 55 $ 35
NONCASH FINANCING ACTIVITIES:
Capital contribution $ 12 $ -- $ 180
Increase in allocated advances from parent for other assets $ -- $ 46 $ --
Dividends $ -- $ -- $ 207
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
41
HARTFORD LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN MILLIONS EXCEPT PER SHARE DATA UNLESS OTHERWISE STATED)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Hartford Life, Inc. (a Delaware corporation) ("Hartford Life" or the "Company")
was formed on December 13, 1996 and capitalized on December 16, 1996 with the
contribution of all the outstanding common stock of Hartford Life and Accident
Insurance Company ("HLA"). 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" or "the Offering") of the
Company's Class A Common Stock. Pursuant to the IPO on May 22, 1997, Hartford
Life became a publicly traded company selling 26 million shares at $28.25 per
share and receiving net proceeds of $687. The Company is a direct subsidiary of
Hartford Accident and Indemnity Company ("HA&I") and is ultimately a subsidiary
of Hartford Fire Insurance Company ("Hartford Fire"). Hartford Fire is an
indirect wholly owned subsidiary of The Hartford Financial Services Group, Inc.
("The Hartford"). On December 19, 1995, ITT Industries, Inc. (formerly ITT
Corporation) ("ITT") distributed all the outstanding shares of capital stock of
The Hartford to ITT stockholders of record on such date (the transactions
relating to such distribution are referred to herein as the "ITT Spin-off"). As
a result of the ITT Spin-off, The Hartford became an independent, publicly
traded company. The Company is a holding company and as such has no material
business of its own.
The Company is a leading insurance and financial services company which
provides, primarily in the United States: (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.
2. SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF PRESENTATION
The accompanying consolidated financial statements present the financial
position, results of operations and cash flows of Hartford Life, Inc. and HLA
and subsidiaries on the basis of historical cost, in a manner similar to pooling
of interests accounting. HLA directly owns all outstanding shares of ITT
Hartford Life of Canada Insurance Company and Hartford Life Insurance Company,
which in turn owns all outstanding shares of ITT Hartford Life and Annuity
Insurance Company and ITT Hartford International Life Reassurance Corporation.
These financial statements present the financial position, results of operations
and cash flows of Hartford Life as if it were a separate entity for all periods
presented. All material intercompany transactions and balances between Hartford
Life, 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.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share". This statement established new standards for computing and presenting
earnings per share
F-7
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
("EPS") and applies to entities with publicly held common stock or potential
common stock. This statement simplifies the standards for computing earnings per
share previously found in Accounting Principles Board Opinion No. 15, "Earnings
per Share", and makes them comparable to international EPS standards. It
replaces the presentation of primary EPS with the presentation of basic EPS. It
also requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation. This statement is
effective for financial statements for both interim and annual periods ending
after December 15, 1997. For additional information, see Note 9.
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 FASB issued 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, Hartford Life 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.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation", which was effective in 1996. As permitted by SFAS No. 123,
Hartford Life measures compensation costs of employee stock option plans using
the intrinsic value method prescribed by Accounting Principles Board Opinion No.
25 and has made disclosures of pro forma net income and pro forma earnings per
share as if the fair value method prescribed by SFAS No. 123 had been applied.
For additional information, see Note 11.
The Company's cash flows were not impacted by these changes in accounting
principles.
(c) REVENUE RECOGNITION
Revenues for universal life-type $ 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
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(f) INVESTMENTS
Hartford Life'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
Stockholders' 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 Stockholders' 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 could not recover to amortized cost prior to
sale. Therefore, an other than temporary impairment loss of $88, after taxes,
was recorded.
(g) DERIVATIVE INSTRUMENTS
Hartford Life 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. Hartford Life does not
hold or issue derivative instruments for trading purposes. Hartford Life'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 Stockholders' 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. Hartford Life's
minimum correlation threshold for hedge designation is 80%. If correlation,
which is assessed monthly and measured based on a rolling three month average,
falls below 80%, hedge accounting will be terminated. 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 Stockholders'
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
44
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 Stockholders' 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 charges, 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 $ 1,073 $ 949 $ 705
Deferred acquisition costs (881) (836) (633)
Other 712 582 482
------- ----- -----
Total other expenses $ 904 $ 695 $ 554
======= ===== =====
F-10
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(j) CLAIM RESERVES
The following table displays the development of the claim reserves (included in
future policy benefits on the Consolidated Balance Sheets) resulting primarily
from group disability products as of December 31, 1997 and 1996:
1997 1996
------- -------
CLAIM RESERVES, JANUARY 1 $ 1,496 $ 1,254
- ----------------------------------------------------------------------------
Less: Reinsurance recoverable, January 1 53 35
------- -------
Incurred expenses related to:
Current year 890 799
Prior year (51) (66)
------- -------
Total incurred 839 733
------- -------
Paid expenses related to:
Current year 274 236
Prior year 333 273
------- -------
Total paid 607 509
------- -------
Add: Reinsurance recoverable, December 31 71 53
------- -------
CLAIM RESERVES, DECEMBER 31 $ 1,746 $ 1,496
============================================================================
(k) FOREIGN CURRENCY TRANSLATION
Foreign currency translation gains and losses are reflected in Stockholders'
Equity. Balance sheet accounts are translated at the exchange rates in effect at
each year end and income statement accounts are translated at the average rates
of exchange prevailing during the year. The national currencies of international
operations are generally their functional currencies.
(l) 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
33%, 25%, and 23% 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 the
Company's Class A Common Stock. Pursuant to the Offering 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 promissory notes outstanding and the line of credit discussed in
Note 7 and the remaining $160 was contributed to the Company's insurance
subsidiaries to be used for growth in the Company's 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 the Company 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
HLI's stockholders.
On April 3, 1997, the Company reclassified the authorized shares of common
stock, par value $0.01 per share, of the Company into Class B Common Stock, par
value $0.01 per share ( the "Class B Common Stock" ), and authorized the Class A
Common Stock, par value $0.01 per share ( the "Class A Common Stock" ) and the
preferred stock, par value $0.01 per share ( the "Preferred Stock" ).
F-11
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INITIAL PUBLIC OFFERING (CONTINUED)
Holders of Class A Common Stock are entitled to receive ratably such dividends,
if any, as may be declared by the Board of Directors, subject to any
preferential dividend rights of any outstanding Preferred Stock, and generally
have identical voting rights and vote together (not as separate classes), except
that 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. Also, each
share of Class B Common Stock is convertible into a share of Class A Common
Stock (a) upon the transfer of such share of Class B Common Stock by the holder
thereof to a non-affiliate (except where the shares of Class B Common Stock so
transferred represent 50% or more of all the outstanding shares of common stock,
calculated without regard to the difference in voting rights between the classes
of common stock) or (b) in the event that the number of shares of outstanding
Class B Common Stock is less than 50% of all the common stock then outstanding.
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 $ 1,094 $ 1,040 $ 1,112
Interest income from policy loans 425 477 342
Income from other investments 35 32 9
- -----------------------------------------------------------------------------------------------------------------------------
Gross investment income 1,554 1,549 1,463
Less: Investment expenses 18 15 12
- -----------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME $ 1,536 $ 1,534 $ 1,451
=============================================================================================================================
(b) COMPONENTS OF NET REALIZED CAPITAL GAINS (LOSSES)
Fixed maturities $ (11) $ (214) $ 30
Equity securities 12 2 (6)
Real estate and other (1) (4) (26)
Less: Decrease in liability to policyholders for realized capital gains -- (3) (2)
- -----------------------------------------------------------------------------------------------------------------------------
NET REALIZED CAPITAL GAINS (LOSSES) $ -- $ (219) $ (4)
=============================================================================================================================
(c) NET UNREALIZED CAPITAL GAINS (LOSSES) ON EQUITY SECURITIES
Gross unrealized capital gains $ 22 $ 7 $ 4
Gross unrealized capital losses -- (1) (2)
- -----------------------------------------------------------------------------------------------------------------------------
Net unrealized capital gains 22 6 2
Deferred income tax expense 8 2 --
- -----------------------------------------------------------------------------------------------------------------------------
Net unrealized capital gains, net of tax 14 4 2
Balance - beginning of year 4 2 (5)
- -----------------------------------------------------------------------------------------------------------------------------
NET CHANGE IN UNREALIZED CAPITAL GAINS (LOSSES) ON EQUITY SECURITIES $ 10 $ 2 $ 7
=============================================================================================================================
(d) NET UNREALIZED CAPITAL GAINS (LOSSES) ON FIXED MATURITIES
Gross unrealized capital gains $ 461 $ 425 $ 581
Gross unrealized capital losses (88) (373) (598)
Unrealized capital (gains) losses credited to policyholders (30) (13) (53)
- -----------------------------------------------------------------------------------------------------------------------------
Net unrealized capital gains (losses) 343 39 (70)
Deferred income tax expense (benefit) 120 14 (24)
- -----------------------------------------------------------------------------------------------------------------------------
Net unrealized capital gains (losses), net of tax 223 25 (46)
Balance - beginning of year 25 (46) (725)
- -----------------------------------------------------------------------------------------------------------------------------
NET CHANGE IN UNREALIZED CAPITAL GAINS (LOSSES) ON FIXED MATURITIES $ 198 $ 71 $ 679
=============================================================================================================================
F-12
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS AND DERIVATIVE INSTRUMENTS (CONTINUED)
(e) FIXED MATURITY INVESTMENTS
As of December 31, 1997
--------------------------------------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Cost Gains Losses Fair Value
- ----------------------------------------------------------------------------------------------------------------------------------
U. S. gov't and gov't agencies and authorities
(guaranteed and sponsored) $ 239 $ 3 $ (1) $ 241
U. S. gov't and gov't agencies and authorities
(guaranteed and sponsored) - asset-backed 1,366 70 (36) 1,400
States, municipalities and political subdivisions 429 10 (1) 438
International governments 472 33 (3) 502
Public utilities 989 30 (3) 1,016
All other corporate including international 6,058 252 (29) 6,281
All other corporate - asset-backed 4,855 53 (10) 4,898
Short-term investments 1,394 - - 1,394
Certificates of deposit 668 10 (5) 673
Redeemable preferred stock 5 - - 5
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 16,475 $ 461 $ (88) $ 16,848
- ----------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1996
-----------------------------------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Cost Gains Losses Fair Value
- -----------------------------------------------------------------------------------------------------------------------------------
U. S. gov't and gov't agencies and authorities
(guaranteed and sponsored) $ 194 $ 13 $ (4) $ 203
U. S. gov't and gov't agencies and authorities
(guaranteed and sponsored) - asset-backed 2,167 165 (138) 2,194
States, municipalities and political subdivisions 423 6 (11) 418
International governments 380 19 (4) 395
Public utilities 967 13 (9) 971
All other corporate including international 5,477 137 (125) 5,489
All other corporate - asset-backed 4,151 57 (60) 4,148
Short-term investments 765 - - 765
Certificates of deposit 1,135 15 (22) 1,128
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 15,659 $ 425 $ (373) $ 15,711
- -----------------------------------------------------------------------------------------------------------------------------------
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 $ 2,997 $ 3,043
Over one year through five years 6,433 6,522
Over five years through ten years 3,928 3,994
Over ten years 3,117 3,289
- -----------------------------------------------------------------------------
TOTAL $ 16,475 $ 16,848
- -----------------------------------------------------------------------------
F-13
48
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 $5.2 billion,
$4.0 billion and $5.5 billion, gross realized capital gains of $175, $102 and
$111, gross realized capital losses (including writedowns) of $186, $316 and
$81, respectively. Sales of equity security investments for the years ended
December 31, 1997, 1996 and 1995 resulted in proceeds of $132, $74 and $42,
gross realized capital gains of $12, $2 and $0 and gross realized capital losses
of $0, $0 and $6, respectively.
(f) CONCENTRATION OF CREDIT RISK
The Company has invested in the securities of a single issuer, Merrill Lynch
Mortgage Investors, in an amount greater than 10% of stockholders' equity. The
amortized cost related to this investment was $230, the fair value was $231 and
the associated ratings varied from AAA to BBB. Excluding this investment and
investments in U.S. government and agencies, the Company has no other
significant concentration of credit risk in fixed maturities.
(g) DERIVATIVE INSTRUMENTS
Hartford Life 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. Hartford Life 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 Hartford Life 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 $7.7 billion and $10.9 billion ($5.6 billion
and $8.2 billion related to the Company's investments, $2.1 billion and $2.6
billion on the Company's liabilities) at December 31, 1997 and 1996,
respectively.
F-14
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS AND DERIVATIVE INSTRUMENTS (CONTINUED)
The table below provides a summary of derivative instruments held by Hartford
Life at December 31, 1997 and 1996, segregated by major investment and liability
category:
1997 AMOUNT HEDGED (NOTIONAL AMOUNTS)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Purchased Interest Foreign Total
Carrying Issued Caps Caps, Floors Futures Rate Currency Notional
ASSETS HEDGED Value & Floors and Options (2) Swaps Swaps (3) Amount
- -----------------------------------------------------------------------------------------------------------------------------------
Asset backed securities (excluding inverse
floaters and anticipatory) $ 6,222 $ 500 $ 1,419 $ 28 $ 343 $ - $ 2,290
Inverse floaters (1) 75 47 80 - 25 - 152
Anticipatory (4) - - - 19 236 - 255
Other bonds and notes 9,156 497 596 22 1,721 94 2,930
Short-term investments 1,395 - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES 16,848 1,044 2,095 69 2,325 94 5,627
Equity securities, policy loans and other
investments 4,122 - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $ 20,970 $ 1,044 $ 2,095 $ 69 $ 2,325 $ 94 $ 5,627
LONG TERM DEBT - - - - - - -
OTHER POLICY CLAIMS - 10 150 - 1,889 - 2,049
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL DERIVATIVES - NOTIONAL VALUE $ 1,054 $ 2,245 $ 69 $ 4,214 $ 94 $ 7,676
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL DERIVATIVES - FAIR VALUE $ (8) $ 23 $ - $ 37 $ (6) $ 46
- -----------------------------------------------------------------------------------------------------------------------------------
1996 AMOUNT HEDGED (NOTIONAL AMOUNTS)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Purchased Interest Foreign Total
Carrying Issued Caps Caps, Floors Futures Rate Currency Notional
ASSETS HEDGED Value & Floors and Options (2) Swaps Swaps (3) Amount
- -----------------------------------------------------------------------------------------------------------------------------------
Asset backed securities (excluding inverse
floaters and anticipatory) $ 5,939 $ 500 $ 2,454 $ - $ 941 $ - $ 3,895
Inverse floaters (1) 404 98 856 - 346 - 1,300
Anticipatory (4) - - - 287 105 - 392
Other bonds and notes 8,603 456 747 50 1,265 125 2,643
Short-term investments 765 - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES 15,711 1,054 4,057 337 2,657 125 8,230
Equity securities, policy loans and other
investments 4,119 - - - 19 - 19
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $ 19,830 $ 1,054 $ 4,057 $ 337 $ 2,676 $ 125 $ 8,249
LONG TERM DEBT - - - - - - -
OTHER POLICY CLAIMS - 10 150 - 2,468 - 2,628
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL DERIVATIVES - NOTIONAL VALUE $ 1,064 $ 4,207 $ 337 $ 5,144 $ 125 $ 10,877
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL DERIVATIVES - FAIR VALUE $ (10) $ 38 $ - $ - $ (9) $ 19
- -----------------------------------------------------------------------------------------------------------------------------------
(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, more than 59% and 71% , respectively, of
the notional futures contracts expire within one year.
(3) As of December 31, 1997 and 1996, more than 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
$2.7 of net deferred gains, which the Company expects to basis adjust in
1998. At December 31, 1996, the Company had $5.7 in net deferred gains for
futures, interest rate swaps and purchased options of which $5.9 was basis
adjusted in 1997.
F-15
50
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, Maturities/ December 31,
1996 Notional Terminations 1997 Notional
Amount Additions (1) Amount
- ----------------------------------------------------------------------------------------
BY DERIVATIVE TYPE
Caps $ 1,862 $ 33 $ 630 $ 1,265
Floors 3,399 32 1,532 1,899
Swaps/ Forwards 5,269 1,639 2,600 4,308
Futures 337 319 587 69
Options 10 125 - 135
- ----------------------------------------------------------------------------------------
TOTAL $ 10,877 $ 2,148 $ 5,349 $ 7,676
- ----------------------------------------------------------------------------------------
BY STRATEGY
Liability $ 2,628 $ 251 $ 830 $ 2,049
Anticipatory 392 428 565 255
Asset 2,380 1,164 1,090 2,454
Portfolio 5,477 305 2,864 2,918
- ----------------------------------------------------------------------------------------
TOTAL $ 10,877 $ 2,148 $ 5,349 $ 7,676
- ----------------------------------------------------------------------------------------
(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.
Fair value for long-term debt is based on external valuation using discounted
future cash flows at current market interest rates.
F-16
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying amount and fair values of Hartford Life'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 $16,848 $16,848 $15,711 $15,711
Equity securities 181 181 119 119
Policy loans 3,759 3,759 3,839 3,839
Mortgage loans -- -- 2 2
Investments in partnerships and trusts 59 74 66 68
Other 123 158 93 119
LIABILITIES
Other policy benefits $11,769 $11,755 $11,707 $11,469
Short-term debt 50 50 -- --
Long-term debt 650 674 -- --
Allocated Advances -- -- 893 893
- ------------------------------------------------------------------------------------------------------------
6. SEPARATE ACCOUNTS
Hartford Life maintained separate account assets and liabilities totaling $69.4
billion and $49.8 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 $58.7 billion and
$39.4 billion at December 31, 1997 and 1996, respectively, wherein the
policyholder assumes the investment risk, and guaranteed separate accounts
totaling $10.7 and $10.4 billion at December 31, 1997 and 1996, respectively,
wherein Hartford Life 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 $10.4 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 $3.2 billion in notional amounts as of December 31, 1997.
7. DEBT 1997 1996
------------------------------------------------------------------
Weighted Average Weighted Average
Amount Interest Rate Amount Interest Rate
- -----------------------------------------------------------------------------------------------------------
SHORT-TERM DEBT
Commercial paper $ 50 5.8% $ - -
Allocated advances from Parent - - 893 7.1%
- -----------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM DEBT $ 50 5.8% $ 893 7.1%
- -----------------------------------------------------------------------------------------------------------
LONG-TERM DEBT
Notes, due 2004 $ 200 7.0% $ - -
Notes, due 2007 200 7.2% - -
Notes, due 2027 250 7.8% - -
- -----------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT $ 650 7.4% $ - -
- -----------------------------------------------------------------------------------------------------------
F-17
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEBT (CONTINUED)
On February 7, 1997, the Company declared a dividend of $1,184 payable to HA&I.
As a result, the Company borrowed $1,084 on February 18, 1997, pursuant to a
$1,300 line of credit, with interest payable at the two-month Eurodollar rate
plus 15 basis points, which, together with a promissory note in the amount of
$100, was paid as a dividend to HA&I on February 20, 1997. Of the $1,184
dividend, $893 constituted a repayment of the portion of The Hartford's third
party indebtedness internally allocated, for financial reporting purposes, to
the Company's life insurance subsidiaries (the "Allocated Advances"). Such
Allocated Advances were not treated as liabilities or indebtedness for tax and
statutory accounting purposes. Cash received in respect to Allocated Advances
was used to support the growth of the life insurance subsidiaries and was
treated as surplus for statutory accounting purposes. In addition, on April 4,
1997, the Company declared and paid a dividend of $25 to its parent in the form
of a promissory note. Subsequently, $12 of this note was forgiven and treated as
a capital contribution from HA&I.
On February 14, 1997, the Company filed a shelf registration statement for the
issuance and sale of up to $1.0 billion in the aggregate of senior debt
securities, subordinated debt securities and preferred stock. On June 12, 1997,
the Company issued $650 of unsecured redeemable long-term debt in the form of
notes and debentures. Of this amount, $200 was in the form of 6.90% notes due
June 15, 2004, $200 of 7.10% notes due June 15, 2007, and $250 of 7.65%
debentures due June 15, 2027. Interest on each of the notes and debentures is
payable semi-annually on June 15 and December 15, of each year, commencing
December 15, 1997. The Company also issued $50 of short-term debt in the form of
commercial paper. Of the proceeds from these issuances, $670 was used to retire
the remaining balance on the $1,300 line of credit with the remainder being used
to fund business growth. Subsequently, the Company reduced the capacity of the
line of credit from $1,300 to $250, which will be primarily used to support the
commercial paper program.
8. INCOME TAX
The Company 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 the Company, 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%, 23% and 34% in
1997, 1996 and 1995, respectively.
Income tax expense is as follows:
For the years ended December 31,
------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------
Current $ 169 $ 134 $ 213
Deferred 5 (127) (137)
- ----------------------------------------------------------------------
INCOME TAX EXPENSE $ 174 $ 7 $ 76
- ----------------------------------------------------------------------
A reconciliation of the tax provision at the U.S. Federal statutory rate to the
provision (benefit) for income taxes is as follows:
For the years ended December 31,
-------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------
Tax provision at the U.S. Federal $ 168 $ 11 $ 79
statutory rate
Tax-exempt income - (2) (3)
Foreign tax credit - - (4)
Other 6 (2) 4
- -------------------------------------------------------------------------------------------
TOTAL $ 174 $ 7 $ 76
- -------------------------------------------------------------------------------------------
F-18
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAX (CONTINUED)
Deferred tax assets (liabilities) include the following at December 31:
1997 1996
-------------------------
Tax return deferred acquisition costs $ 651 $ 524
Financial statement deferred acquisition
costs and reserves (364) (260)
Employee benefits 13 15
Net unrealized capital gains on securities (128) (16)
Investments and other 225 280
- --------------------------------------------------------------------------
TOTAL $ 397 $ 543
- --------------------------------------------------------------------------
Income taxes paid to The Hartford were $45, $166 and $173 in 1997, 1996 and
1995, respectively. Hartford Life had a current tax payment of $52 due to The
Hartford at December 31, 1997 and a tax refund due from The Hartford of $59 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.
9. PRO FORMA EARNINGS PER SHARE
The Company adopted SFAS No. 128, "Earnings per Share", effective December 15,
1997. Basic earnings per share are computed based upon the weighted average
number of shares outstanding during the year. Diluted earnings per share include
the dilutive effect of outstanding options, using the treasury stock method, and
also contingently issuable shares. Under the treasury stock method, it is
assumed that options are exercised and the proceeds are used to purchase common
stock at the average market price for the period. The difference between the
number of shares assumed issued and number of shares purchased represents the
dilutive shares. Contingently issuable shares are included upon satisfaction of
certain conditions related to contingency.
Pro forma earnings per share amounts, on a basic and diluted basis, have been
calculated based upon the weighted average common shares deemed to be
outstanding during the respective periods. For periods prior to the closing of
the Company's IPO (May 22, 1997), outstanding shares are based upon 114 million
shares of Class B Common Stock owned by The Hartford plus an assumed issuance of
11 million shares of Class A Common Stock (the number of shares that, based upon
the IPO price and the underwriting discounts and expenses payable by the
Company, would result in net proceeds equal to the excess of the amount of the
February and April 1997 dividends over the 1996 earnings and the Allocated
Advances). For the period subsequent to the closing of the IPO, outstanding
shares are based upon 114 million shares of Class B Common Stock owned by The
Hartford plus approximately 26 million shares of Class A Common Stock owned by
the public. Pro forma earnings per share for periods prior to 1996 are not
presented as it would not be meaningful.
Pro forma effect has also been given for all periods presented for the
conversion of 1,000 shares of common stock, par value $0.01 per share, into 114
million shares of Class B Common Stock, par value $0.01 per share, which
occurred on April 3, 1997.
F-19
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. PRO FORMA EARNINGS PER SHARE (CONTINUED)
For the years ended December 31, 1997
---------------------------------------------------
Income Shares Per Share Amount
- ------------------------------------------------------------------------------------------------------------------------------------
PRO FORMA BASIC EARNINGS PER SHARE
Amounts available to common shareholders $ 306 134.0 $ 2.28
--------------------
Impact of options and contingently issuable shares - 0.1
---------------------------
PRO FORMA DILUTED EARNINGS PER SHARE
Amounts available to common shareholders plus assumed conversions $ 306 134.1 $ 2.28
- ------------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31, 1996
---------------------------------------------------
Income Shares Per Share Amount
- ------------------------------------------------------------------------------------------------------------------------------------
PRO FORMA BASIC EARNINGS PER SHARE
Amounts available to common shareholders $ 24 125.0 $ 0.19
---------------------
Impact of options and contingently issuable shares - -
--------------------------
PRO FORMA DILUTED EARNINGS PER SHARE
Amounts available to common shareholders plus assumed conversions $ 24 125.0 $ 0.19
- ------------------------------------------------------------------------------------------------------------------------------------
If earnings per share was calculated based upon 140 million weighted average
shares outstanding for all periods presented (representing the weighted average
shares outstanding at the time of the IPO, May 22, 1997) earnings per share
would have been $2.18 and $0.17 for the periods ended December 31, 1997 and
1996, respectively.
10. POSTRETIREMENT BENEFIT AND SAVINGS PLANS
(a) PENSION PLANS
Hartford Life'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 $10, $7 and $6 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 eligible to participate in The
Hartford's Investment and Savings Plan. Under this plan, designated
contributions, which may be invested in Class A Common Stock of Hartford Life or
certain other investments, are matched, up to 3% of compensation, by the
Company. The cost to Hartford Life for the above-mentioned plans was
approximately $5 in 1997.
F-20
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCK COMPENSATION PLANS
During the second quarter of 1997, the Company 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 HLI Class A Common Stock and treasury stock as reported in the Annual Report
on Form 10-K of the Company 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 the
Company'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 the Company'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, the Company established the HLI Employee
Stock Purchase Plan ("ESPP"). Under this plan, eligible employees of HLI may
purchase Class A Common Stock of the Company at a 15% discount from the lower of
the market price at the beginning or end of the quarterly offering period. The
Company may sell up to 2,700,000 shares of stock to eligible employees. The
Company sold 54,316 shares under the ESPP in 1997.
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretation in accounting for its stockbased compensation plans. Accordingly,
in the measurement of compensation expense the Company utilizes the excess of
market price over exercise price, on the first date that both the number of
shares and award price are known. For the year ended December 31, 1997,
compensation expense related to the Company's two stock based compensation plans
was immaterial. Had compensation cost for the Company's incentive stock plan and
ESPP been determined based on the fair value at the grant dates for awards under
those plans consistent with the method SFAS No. 123, the Company's net income
and earnings per share would have been reduced to the pro forma amounts
indicated below:
1997
- -------------------------------------------
Net income:
As reported $306
Pro forma 304
- -------------------------------------------
Pro forma basic earnings per share:
As reported $2.28
Pro forma 2.27
- -------------------------------------------
Pro forma diluted earnings per share:
As reported $2.28
Pro forma 2.27
- -------------------------------------------
Note: The pro forma disclosures are not representative of the effects on net
income and earnings per share in future years
F-21
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCK COMPENSATION PLANS (CONTINUED)
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes options-pricing model with the following weighted-average
assumptions used for grants in 1997: dividend yield of 1.0%, expected price
variability of 29%, risk-free interest rates of 6.4%, and an expected life of
five years.
A summary of the status of the Company's option plan as of December 31, 1997 and
changes through the period ended December 31, 1997 are presented below:
INCENTIVE STOCK PLAN
(shares in thousands)
Weighted
Average
Exercise
Shares Price
- ------------------------------------------------------------------------------------------------
Outstanding at beginning of year - -
Granted 450,377 $31.52
Exercised - -
Cancelled (27,865) 31.31
-------
Outstanding at end of year 422,512 $31.54
- ------------------------------------------------------------------------------------------------
Exercisable at end of year 136,532 $31.14
Weighted average fair value of options granted $10.93
- ------------------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding
(shares in thousands) at December 31, 1997:
Options Outstanding
---------------------------------------------------------------------------------
Range of Number Outstanding at Weighted Average Remaining Weighted Average
Exercise Prices December 31, 1997 Contractual Life Exercise Price
- --------------------------------------------------------------------------------------------------------
$30.06 - $39.13 422,512 9.4 $31.54
- --------------------------------------------------------------------------------------------------------
12. REINSURANCE
Hartford Life cedes insurance to other insurers in order to limit its maximum
loss. Such transfer does not relieve Hartford Life of its primary liability.
Hartford Life also assumes insurance from other insurers. Failure of reinsurers
to honor their obligations could result in losses to Hartford Life. Hartford
Life 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 $ 3,352 $ 3,077 $ 2,348
Assumed 165 405 608
Ceded (354) (413) (313)
- --------------------------------------------------------------------------------------------------
NET PREMIUMS AND OTHER CONSIDERATIONS $ 3,163 $ 3,069 $ 2,643
- --------------------------------------------------------------------------------------------------
Life reinsurance recoveries, which reduce death and other benefits, approximated
$205, $239 and $162 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.
Hartford Life has no other significant reinsurance-related concentrations of
credit risk.
F-22
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. 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 $53, $45, and $51 in 1997, 1996 and 1995,
respectively. Management believes that the methods used are reasonable. Included
in other liabilities is $80 and $61 due The Hartford as of December 31, 1997 and
1996, respectively.
14. STATUTORY RESULTS
For the years ended December 31,
-------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------
Statutory net income $ 223 $ 171 $ 113
- -----------------------------------------------------------------------------
Statutory surplus $ 1,672 $ 1,320 $ 1,224
- -----------------------------------------------------------------------------
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 $167.
The domestic insurance subsidiaries of Hartford Life prepare their statutory
financial statements in accordance with accounting practices prescribed by the
State of Connecticut and the State of New Jersey Insurance Departments.
Prescribed statutory accounting practices include publications of the National
Association of Insurance Commissioners, as well as state laws, regulations, and
general administrative rules.
15. COMMITMENTS AND CONTINGENT LIABILITIES
(a) LITIGATION
Hartford Life 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,
$12 and $13 in 1997, 1996 and 1995, respectively, of which $5, $6, and $7 were
estimated to be creditable against premium taxes.
F-23
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
(c) LEASES
The rent paid to Hartford Fire for space occupied by the Company was $13 in
1997, and $11 in 1996 and 1995. Future minimum rental commitments are as
follows:
1998 $14
1999 14
2000 22
2001 22
2002 22
Thereafter 154
- --------------------------------------------
TOTAL $248
- --------------------------------------------
Rental expense is recognized on a level basis over the term of the sublease,
which expires on December 31, 2009, and amounted to approximately $16 in 1997
and $14 in 1996 and 1995.
16. BUSINESS SEGMENT INFORMATION
The Company 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 (a) unallocated income and expense, (b) the Company's group medical
business, which it exited in 1993, and (c) 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-24
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED )
16. 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 $ 1,271 $ 973 $ 720
Individual Life Insurance 510 472 408
Employee Benefits 2,644 2,833 2,515
Guaranteed Investment Contracts 239 34 378
Corporate Operation 35 72 69
- ----------------------------------------------------------------------------------------------
TOTAL REVENUES $ 4,699 $ 4,384 $ 4,090
- ----------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE
(BENEFIT)
Annuity $ 314 $ 224 $ 168
Individual Life Insurance 87 68 58
Employee Benefits 138 115 101
Guaranteed Investment Contracts - (346) (103)
Corporate Operation (59) (30) 2
- ----------------------------------------------------------------------------------------------
TOTAL INCOME BEFORE INCOME TAX EXPENSE $ 480 $ 31 $ 226
- ----------------------------------------------------------------------------------------------
ASSETS
Annuity $ 69,452 $ 52,967 $ 39,673
Individual Life Insurance 5,151 3,968 3,173
Employee Benefits 20,186 16,297 15,137
Guaranteed Investment Contracts 3,347 4,533 6,069
Corporate Operation 2,844 2,168 1,910
- ----------------------------------------------------------------------------------------------
TOTAL ASSETS $ 100,980 $ 79,933 $ 65,962
- ----------------------------------------------------------------------------------------------
17. QUARTERLY RESULTS FOR 1997 AND 1996 (UNAUDITED)
Three Months Ended
------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
------------------------------------------------------------------------------
1997 1996 1997 1996 1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Revenues $1,055 $1,303 $1,042 $987 $1,058 $ 817 $1,544 $1,277
Benefits, claims and claim
adjustment expenses $ 659 $ 651 $ 612 $690 $ 596 $ 711 $ 804 $ 675
Net income $ 63 $ 39 $ 73 $ 43 $ 83 $(114) $ 87 $ 56
Pro forma basic earnings per share $ 0.51 $ 0.31 $ 0.56 $0.34 $ 0.59 (0.91) $ 0.62 $ 0.45
Pro forma diluted earnings per share $ 0.51 $ 0.31 $ 0.56 $0.34 $ 0.59 $(0.91) $ 0.62 $ 0.45
Weighted average common shares outstanding 125 125 131 125 140 125 140 125
Weighted average common shares outstanding and
dilutive potential common shares 125 125 131 125 140 125 140 125
- -----------------------------------------------------------------------------------------------------------------------------------
F-25
60
HARTFORD LIFE, INC. AND SUBSIDIARIES
SCHEDULE I
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN AFFILIATES
(In millions) As of December 31, 1997
------------------------------------------------------------------
Amount at which
shown on Balance
Type of Investment Cost Fair Value Sheet
- -----------------------------------------------------------------------------------------------------------------------------------
FIXED MATURITIES
Bonds and Notes
U. S. gov't and gov't agencies and authorities
(guaranteed and sponsored) $ 239 $ 241 $ 241
U. S. gov't and gov't agencies and authorities
(guaranteed and sponsored) - asset-backed 1,366 1,400 1,400
States, municipalities and political subdivisions 429 438 438
International governments 472 502 502
Public utilities 989 1,016 1,016
All other corporate including international 6,058 6,281 6,281
All other corporate - asset-backed 4,855 4,898 4,898
Short-term investments 1,394 1,394 1,394
Certificates of deposit 668 673 673
Redeemable preferred stock 5 5 5
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES 16,475 16,848 16,848
- -----------------------------------------------------------------------------------------------------------------------------------
EQUITY SECURITIES
Common Stocks
Public utilities - - -
Banks, trusts and insurance companies - - -
Industrial and miscellaneous 167 181 181
Nonredeemable preferred stocks - - -
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL EQUITY SECURITIES 167 181 181
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES AND EQUITY SECURITIES 16,642 17,029 17,029
- -----------------------------------------------------------------------------------------------------------------------------------
REAL ESTATE - - -
OTHER INVESTMENTS
Mortgage loans on real estate - - -
Policy loans 3,759 3,759 3,759
Investments in partnerships and trusts 59 74 59
Futures, options and miscellaneous 123 158 123
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER INVESTMENTS 3,941 3,991 3,941
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $ 20,583 $ 21,020 $ 20,970
- -----------------------------------------------------------------------------------------------------------------------------------
S-1
61
HARTFORD LIFE, INC. AND SUBSIDIARIES
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF HARTFORD LIFE, INC.
(REGISTRANT)
(In millions) As of December 31,
--------------------------
CONDENSED BALANCE SHEETS 1997 1996
- -----------------------------------------------------------------------------------------
ASSETS
Other assets $ 14 $ 46
Investment in affiliates 2,832 2,121
- -----------------------------------------------------------------------------------------
TOTAL ASSETS 2,846 2,167
- -----------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debt 50 -
Long-term debt 650 -
Allocated Advances from parent - 893
Other liabilities 2 -
- -----------------------------------------------------------------------------------------
TOTAL LIABILITIES 702 893
TOTAL STOCKHOLDERS' EQUITY 2,144 1,274
- -----------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,846 $ 2,167
- -----------------------------------------------------------------------------------------
(In millions)
CONDENSED STATEMENTS OF INCOME For the years ended December 31,
----------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------
Earnings of subsidiaries $ 538 $ 86 $ 261
Interest expense 58 55 35
- -----------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 480 31 226
Income tax expense 174 7 76
- -----------------------------------------------------------------------------------------
NET INCOME $ 306 $ 24 $ 150
- -----------------------------------------------------------------------------------------
S-2
62
HARTFORD LIFE, INC. AND SUBSIDIARIES
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF HARTFORD LIFE, INC. (CONTINUED)
(REGISTRANT)
(In millions)
CONDENSED STATEMENTS OF CASH FLOWS For the years ended December 31,
--------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 306 $ 24 $ 150
Undistributed earnings (279) (5) (150)
Change in other assets and liabilities (11) - -
- --------------------------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES 16 19 -
- --------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital contribution to subsidiary (180) (115) -
- --------------------------------------------------------------------------------------
CASH USED FOR INVESTING ACTIVITIES (180) (115) -
- --------------------------------------------------------------------------------------
FINANCING ACTIVITIES
(Decrease) increase in Allocated Advances (893) 115 -
Increase in short-term debt 50 - -
Increase in long-term debt 650 - -
Dividends paid (329) (19) -
Net proceeds from the sale of Class A common
stock 687 - -
Acquisition of treasury stock (1) - -
- --------------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES 164 96 -
- --------------------------------------------------------------------------------------
Net change in cash - - -
Cash - beginning of year - - -
- --------------------------------------------------------------------------------------
CASH - END OF YEAR $ - $ - $ -
- --------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
NET CASH ACTIVITY DURING THE YEAR FOR:
Interest expense paid $ 55 $ 55 $ 35
Tax refund received $ 17 $ - $ -
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING
ACTIVITIES:
Capital contribution $ 12 $ - $ 180
Dividends paid $ - $ - $ 207
Increase in Allocated Advances for fixed
assets $ - $ 46 $ -
Capital contribution to subsidiaries $ 46 $ - $ -
S-3
63
HARTFORD LIFE, INC. AND SUBSIDIARIES
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(In millions)
Future Policy
Benefits,
Unpaid Claims Other
Deferred and Claim Policy
Policy Claims Claims and Premiums Net
Acquisition Adjustment Benefits and Other Investment
Segment Costs Expenses Payable Considerations Income
- ----------------------------------------------------------------------------------------------------------------------------
1997
Annuity $ 2,479 $ 2,028 $ 6,839 $ 769 $ 502
Individual Life Insurance 861 566 2,180 339 171
Employee Benefits 21 2,317 9,338 2,051 593
Guaranteed Investment Contracts - - 2,782 2 237
Corporate Operation - 28 - 2 33
- ----------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS $ 3,361 $ 4,939 $ 21,139 $ 3,163 $ 1,536
- ----------------------------------------------------------------------------------------------------------------------------
1996
Annuity $ 2,033 $ 1,507 $ 6,101 $ 539 $ 434
Individual Life Insurance 748 514 2,133 313 159
Employee Benefits 18 1,937 9,895 2,215 618
Guaranteed Investment Contracts 1 - 4,124 2 251
Corporate Operation - 28 - - 72
- ----------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS $ 2,800 $ 3,986 $ 22,253 $ 3,069 $ 1,534
- ----------------------------------------------------------------------------------------------------------------------------
1995
Annuity $ 1,559 $ 1,314 $ 5,705 $ 323 $ 397
Individual Life Insurance 630 569 1,940 266 142
Employee Benefits 29 1,643 9,399 2,048 467
Guaranteed Investment Contracts 1 - 5,720 1 377
Corporate Operation - 28 - 5 68
- ----------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS $ 2,220 $ 3,554 $ 22,764 $ 2,643 $ 1,451
- ----------------------------------------------------------------------------------------------------------------------------
(In millions)
Benefits, Amortization
Claims and of Deferred
Net Realized Claim Policy
Capital Adjustment Acquisition Dividends to Other
Segment Gains(Losses) Expenses Costs Policyholders Expenses*
- -----------------------------------------------------------------------------------------------------------------------------------
1997
Annuity $ - $ 445 $ 250 $ - $ 262
Individual Life Insurance - 251 87 1 84
Employee Benefits - 1,705 8 240 553
Guaranteed Investment Contracts - 232 - - 7
Corporate Operation - 38 - - 56
- -----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS $ - $ 2,671 $ 345 $ 241 $ 962
- -----------------------------------------------------------------------------------------------------------------------------------
1996
Annuity $ - $ 416 $ 174 $ - $ 159
Individual Life Insurance - 266 63 1 74
Employee Benefits - 1,684 4 634 396
Guaranteed Investment Contracts (219) 332 1 - 47
Corporate Operation - 29 (1) - 74
- -----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS $ (219) $ 2,727 $ 241 $ 635 $ 750
- -----------------------------------------------------------------------------------------------------------------------------------
1995
Annuity $ - $ 317 $ 117 $ - $ 118
Individual Life Insurance - 217 72 - 61
Employee Benefits - 1,373 4 675 362
Guaranteed Investment Contracts - 453 12 - 16
Corporate Operation (4) 35 - - 32
- -----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS $ (4) $ 2,395 $ 205 $ 675 $ 589
- -----------------------------------------------------------------------------------------------------------------------------------
* Includes interest expense.
S-4
64
HARTFORD LIFE, INC. AND SUBSIDIARIES
SCHEDULE IV
REINSURANCE
Ceded to Assumed Percentage of
Gross Other From Other Net Amount
(In millions) Amount Companies Companies Amount Assumed to Net
- ---------------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1997
LIFE INSURANCE IN FORCE $ 396,736 $ 172,928 $ 42,729 $ 266,537 16.0%
- ---------------------------------------------------------------------------------------------------------------------------------
INSURANCE REVENUES
Life insurance and annuities 2,340 273 58 2,125 2.7%
Accident and health insurance 1,012 81 107 1,038 10.3%
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INSURANCE REVENUES $ 3,352 $ 354 $ 165 $ 3,163 5.2%
- ---------------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1996
Life insurance in force $ 300,783 $ 89,388 $ 46,040 $ 257,435 17.9%
- ---------------------------------------------------------------------------------------------------------------------------------
INSURANCE REVENUES
Life insurance and annuities 2,338 326 183 2,195 8.3%
Accident and health insurance 739 87 222 874 25.4%
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INSURANCE REVENUES $ 3,077 $ 413 $ 405 $ 3,069 13.2%
- ---------------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1995
Life insurance in force $ 328,130 $ 109,829 $ 18,805 $ 237,106 7.9%
- ---------------------------------------------------------------------------------------------------------------------------------
INSURANCE REVENUES
Life insurance and annuities 1,653 247 471 1,877 25.1%
Accident and health insurance 695 66 137 766 17.9%
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INSURANCE REVENUES $ 2,348 $ 313 $ 608 $ 2,643 23.0%
- ---------------------------------------------------------------------------------------------------------------------------------
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65
HARTFORD LIFE, INC. AND SUBSIDIARIES
SCHEDULE V
VALUATION AND QUALIFYING ACCOUNTS
Charged to
Balance Costs and Translation Write-offs/ Balance
January 1, Expenses Adjustment Payments/Other December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
1997
Accumulated depreciation of plant, property and
equipment $ 101 $ 17 $ - $ (6) $ 112
1996
Accumulated depreciation of plant, property
and equipment $ 8 $ - $ - $ 93 $ 101
1995
Accumulated depreciation of plant, property
and equipment $ 8 $ - $ - $ - $ 8
- -----------------------------------------------------------------------------------------------------------------------------------
S-6
66
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, INC.
By: Gregory A. Boyko
----------------------------------------
Gregory A. Boyko
Senior Vice President,
Chief Financial Officer and Treasurer
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 and Director March 27, 1998
- ---------------------------
Ramani Ayer
/s/ Lowndes A. Smith Chief Executive Officer, March 27, 1998
- --------------------------- President and Director
Lowndes A. Smith
/s/ Gregory A. Boyko Senior Vice President,
- --------------------------- Chief Financial Officer and
Gregory A. Boyko Treasurer
/s/ Gail Deegan Director March 27, 1998
- ---------------------------
Gail Deegan
/s/ Donald R. Frahm Director March 27, 1998
- ---------------------------
Donald R. Frahm
/s/ Paul G. Kirk, Jr. Director March 27, 1998
- ---------------------------
Paul G. Kirk, Jr.
/s/ Robert E. Patricelli Director March 27, 1998
- ---------------------------
Robert E. Patricelli
/s/ H. Patrick Swygert Director March 27, 1998
- ---------------------------
H. Patrick Swygert
/s/ Deroy C. Thomas Director March 27, 1998
- ---------------------------
Deroy C. Thomas
/s/ Gordon I. Ulmer Director March 27, 1998
- ---------------------------
Gordon I. Ulmer
/s/ David K. Zwiener Director March 27, 1998
- ---------------------------
David K. Zwiener
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67
HARTFORD LIFE, INC. AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
EXHIBITS INDEX
EXHIBIT #
- ---------
3.01 Amended and Restated Certificate of Incorporation of Hartford Life,
Inc. (the "Company") was filed as Exhibit 3.1 to the Company's
Registration Statement on Form S-1 dated February 10, 1997
(Registration No. 333-21459) and is incorporated herein by
reference.
3.02 Amended By-Laws of the Company, amended effective December 18,
1997, are filed herewith.
4.01 Amended and Restated Certificate of Incorporation and By-Laws of
the Company (included as Exhibits 3.01 and 3.02, respectively).
4.02 Senior Indenture, dated as of May 19, 1997, between the Company and
Citibank, N.A., as trustee, with respect to the Company's 6.90%
Notes due June 15, 2004, 7.10% Notes due June 15, 2007, and 7.65%
Debentures due June 15, 2027, was filed as Exhibit 4.3 to the
Company's Registration Statement on Form S-3 (Amendment No. 2)
dated May 23, 1997, and is incorporated herein by reference.
10.1 Master Intercompany Agreement among the Company, The Hartford
Financial Services Group, Inc. (formerly known as ITT Hartford
Group, Inc.) ("The Hartford") and with respect to Articles VI and
XII, Hartford Fire Insurance Company, was filed as Exhibit 10.1 to
the Company's Form 10-Q filed for the quarterly period ended June
30, 1997 and is incorporated herein by reference.
10.2 Tax Sharing Agreement among The Hartford and its subsidiaries,
including the Company, was filed as Exhibit 10.2 to the Company's
Form 10-Q filed for the quarterly period ended June 30, 1997 and is
incorporated herein by reference.
10.3 Management Agreement among Hartford Life Insurance Company and The
Hartford Investment Management Company, was filed as Exhibit 10.3
to the Company's Form 10-Q filed for the quarterly period ended
June 30, 1997 and is incorporated herein by reference.
10.4 Management Agreement among certain subsidiaries of the Company and
Hartford Investment Services, Inc., was filed as Exhibit 10.4 to
the Company's Form 10-Q filed for the quarterly period ended June
30, 1997 and is incorporated herein by reference.
10.5 Sublease Agreement between Hartford Fire Insurance Company and the
Company, was filed as Exhibit 10.5 to the Company's Form 10-Q filed
for the quarterly period ended June 30, 1997 and is incorporated
herein by reference.
10.6 Promissory Note dated February 20, 1997, executed by the Company
for the benefit of Hartford Accident and Indemnity Company, was
filed as Exhibit 10.9 to the Company's Registration Statement on
Form S-1 (Amendment No. 2) dated April 24, 1997 (Registration No.
333-21459) and is incorporated herein by reference.
10.7 1997 Hartford Life, Inc. Incentive Stock Plan, as amended, is filed
herewith.
10.8 1997 Hartford Life, Inc. Deferred Restricted Stock Unit Plan, was
filed as Exhibit 10.8 to the Company's Form 10-Q filed for the
quarterly period ended June 30, 1997 and is incorporated herein by
reference.
10.9 1997 Hartford Life, Inc. Restricted Stock Plan for Non-Employee
Directors, was filed as Exhibit 10.9 to the Company's Form 10-Q
filed for the quarterly period ended June 30, 1997 and is
incorporated herein by reference.
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68
10.10 Promissory Note dated April 4, 1997, executed by the Company for
the benefit of Hartford Accident and Indemnity Company, was filed
as Exhibit 10.16 to the Company's Registration Statement on Form
S-1 (Amendment No. 2) dated April 24, 1997 (Registration No.
333-21459) and is incorporated herein by reference.
10.11 Employment Agreement dated July 1, 1997 between the Company and The
Hartford and Lowndes A. Smith was filed as exhibit 10.02 to the
Hartford's Form 10-Q filed for the quarter ended September 30,
1997, and is incorporated herein by reference.
10.12 Form of Employment Protection Agreement between the Company and
three executive officers of the Company is filed herewith.
12 Computation of Ratio of Earnings to Fixed Charges is filed
herewith.
21 Subsidiaried of the Company is filed herewith.
23 Consent of Arthur Andersen LLP to the incorporation by reference
into the Company's Registration Statements on Form S-8 and Form S-3
of the Report of Arthur Andersen LLP contained in this Form 10-K
regarding the audited financial statements is filed herewith.
27 Financial Data Schedule is filed herewith.
II-3