1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 9, 1997
REGISTRATION NO. 333-21865
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 3
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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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 NO.)
200 HOPMEADOW STREET
SIMSBURY, CONNECTICUT 06089
(860) 843-7716
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
GREGORY A. BOYKO
SENIOR VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND TREASURER
HARTFORD LIFE, INC.
200 HOPMEADOW STREET
SIMSBURY, CONNECTICUT 06089
(860) 843-7716
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
Copies to:
GEORGE W. BILICIC, JR., ESQ. MICHAEL S. WILDER, ESQ. ANDREW S. ROWEN, ESQ.
CRAVATH, SWAINE & MOORE THE HARTFORD FINANCIAL SERVICES SULLIVAN & CROMWELL
825 EIGHTH AVENUE GROUP, INC. 125 BROAD STREET
NEW YORK, NEW YORK 10019 HARTFORD PLAZA NEW YORK, NEW YORK 10004
(212) 474-1000 HARTFORD, CONNECTICUT 06115 (212) 558-4000
(860) 547-5000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: At such time
or times after the Registration Statement becomes effective, as determined by
market conditions.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] _____
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] _____
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [X]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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SUBJECT TO COMPLETION, DATED JUNE 9, 1997
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED , 1997
$650,000,000
HARTFORD LIFE, INC.
$200,000,000 % NOTES DUE , 2004
$200,000,000 % NOTES DUE , 2007
$250,000,000 % DEBENTURES DUE , 2027
[HARTFORD LOGO]
HARTFORD LIFE
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The % Notes Due , 2004 (the " % Notes"), the % Notes
Due , 2007 (the " % Notes") and the % Debentures Due
, 2027 (the " % Debentures" and, collectively with the %
Notes and the % Notes, the "Offered Debt Securities" or the "Securities")
will be unsecured obligations of Hartford Life, Inc. (the "Company"). Interest
on each of the % Notes, the % Notes and the % Debentures is payable
semiannually on and of each year, commencing
, 1997. Each series of Securities may be redeemed, in whole or in
part, at the option of the Company, at any time at a redemption price equal to
any accrued and unpaid interest plus the greater of the principal amount thereof
and an amount equal to Discounted Remaining Fixed Amount Payments, as defined in
"Description of the Securities -- Redemption" in this Prospectus Supplement. The
Securities will not be subject to any sinking fund. See "Description of the
Securities" in this Prospectus Supplement.
Each series of the Offered Debt Securities will be issued in fully
registered form only in denominations of $1,000 and any integral multiple
thereof. Such securities will be represented by global securities ("Global
Securities") registered in the name of The Depository Trust Company ("DTC") or
its nominee. Interests in the Global Securities will be shown on, and transfers
thereof will be effected only through, records maintained by DTC and its
participants. Except as described in "Description of Debt Securities -- Global
Debt Securities" in the accompanying Prospectus, Offered Debt Securities in
definitive form will not be issued.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH IT RELATES.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
INITIAL PUBLIC
OFFERING UNDERWRITING PROCEEDS TO
PRICE(1) DISCOUNT(2) COMPANY(1)(3)
---------------- ---------------- ----------------
Per % Note Due , 2004................... % % %
Total.................................................. $ $ $
Per % Note Due , 2007................... % % %
Total.................................................. $ $ $
Per % Debenture Due , 2027.............. % % %
Total.................................................. $ $ $
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(1) Plus accrued interest, if any, from , 1997.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
(3) Before deducting estimated expenses of $1,000,000 payable by the Company.
------------------------
Each series of the Securities offered hereby is offered by the Underwriters,
as specified herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that the
Securities will be ready for delivery in book-entry form only through the
facilities of DTC in New York, New York on or about , 1997, against
payment therefor in immediately available funds.
Underwriters of the % Notes Due , 2004
GOLDMAN, SACHS & CO.
A.G. EDWARDS & SONS, INC.
NATIONSBANC CAPITAL MARKETS, INC.
PAINEWEBBER INCORPORATED
SALOMON BROTHERS INC
Underwriters of the % Notes Due , 2007
GOLDMAN, SACHS & CO.
BANCAMERICA SECURITIES, INC.
CHASE SECURITIES INC.
FIRST CHICAGO CAPITAL MARKETS,
INC.
Underwriters of the % Debentures Due , 2027
GOLDMAN, SACHS & CO.
CITICORP SECURITIES, INC.
CREDIT SUISSE FIRST BOSTON
LEHMAN BROTHERS
J.P. MORGAN & CO.
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The date of this Prospectus Supplement is , 1997.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
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THROUGH AND INCLUDING , 1997, (THE 40TH DAY AFTER THE
DATE OF THIS PROSPECTUS SUPPLEMENT), ALL DEALERS EFFECTING TRANSACTIONS IN THE
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES OFFERED
HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN
SUCH SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THIS
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING" IN THIS
PROSPECTUS SUPPLEMENT.
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FOR NORTH CAROLINA RESIDENTS: THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE COMMISSIONER OF INSURANCE FOR THE STATE OF NORTH CAROLINA,
NOR HAS THE COMMISSIONER OF INSURANCE RULED UPON THE ACCURACY OR ADEQUACY OF
THIS DOCUMENT.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and consolidated financial statements incorporated herein
by reference to the Company's Form 10. See "Available Information" in the
accompanying Prospectus. Unless the context otherwise requires, the "Company"
means Hartford Life, Inc. and its consolidated subsidiaries. See "Glossary of
Selected Insurance and Other Terms" for the definitions of certain
insurance-related terms which are printed in boldface type the first time they
appear in this Prospectus Supplement.
Unless otherwise indicated, financial information, operating statistics and
ratios applicable to the Company set forth in this Prospectus Supplement are
based on United States generally accepted accounting principles ("GAAP") rather
than STATUTORY ACCOUNTING PRACTICES.
GENERAL
The Company is a leading insurance and financial services company with
operations that provide (i) annuity products such as individual VARIABLE
ANNUITIES and FIXED 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 identified below,
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, 1996, the eighth largest consolidated life insurance
company based on STATUTORY ASSETS as of December 31, 1995, and the largest
writer of group short-term disability benefit plans and the second largest
writer of group long-term disability insurance based on full-year 1995 new
PREMIUMS and PREMIUM EQUIVALENTS.
The Company's assets have grown at a compound annual growth rate of 36%,
from $23 billion in 1992 to $80 billion in 1996. The Company has achieved rapid
growth of assets by pursuing 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 (the "Stag Logo"), one
of the most recognized symbols in the financial services industry. During this
period, the Company has attained strong market positions for its principal
product offerings -- annuities, individual life insurance and employee benefits.
In particular, the Company holds the leading market position in the individual
variable annuity industry based on sales for the year ended December 31, 1996.
The Company's sales of individual variable annuities grew from $1.8 billion in
1992 to $9.3 billion in 1996, and, for the year ended December 31, 1996, the
Company had a 13% market share (according to information compiled by Variable
Annuities Research and Data Service ("VARDS")). During this period of growth,
the Company's separate account assets, which are generated principally by the
sale of annuities, grew from 36% of total assets at December 31, 1992 to 62% of
total assets at December 31, 1996. The Company believes that such asset growth
stems from various factors including the variety and quality of its product
offerings, the performance of its products, the effectiveness of its multiple
channel distribution network, the quality of its customer service and the
overall growth of the variable annuity industry and the stock and bond markets.
However, there is no assurance that the Company's historical growth rate will
continue.
Management believes the Company's substantial growth in assets, together
with management's effort to control expenses, has made the Company one of the
most efficient competitors in the insurance industry. In 1995, the Company had
the ninth lowest ratio of GENERAL INSURANCE EXPENSES to statutory assets, an
industry measure of operating efficiency, of the fifty largest U.S. life
insurers, based on statutory assets. The Company's ratio improved to .64% in
1996, from .72% in 1995 and 1.38% in 1992, as compared with the average ratio of
1.50% for the fifty largest U.S. life insurers for the year ended December 31,
1995, based on information compiled by A.M. Best Company, Inc. ("A.M. Best").
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ANALYSIS OF NET INCOME
As shown in the following table, the Company's operating results by segment
reflect: (i) strong results from its Annuity, Individual Life Insurance and
Employee Benefits segments, offset by (ii) results in its Guaranteed Investment
Contracts segment, from which management expects no material income or loss in
the future as described herein, and (iii) results in the Company's corporate
operation (the "Corporate Operation"). In response to the results in the
Guaranteed Investment Contracts segment in 1994, the Company undertook a
thorough review of the guaranteed investment contract market and determined to
substantially withdraw from the GENERAL ACCOUNT guaranteed rate contract ("GRC")
business in 1995. In 1996, the Company initiated certain asset sales and hedging
transactions to insulate itself from any ongoing income or loss associated with
the investment portfolio of Closed Book GRC (as defined below). Because the
Company does not expect any material income or loss from the Guaranteed
Investment Contracts segment in the years subsequent to 1996, management
believes that future earnings will be dependent on income from the Annuity,
Individual Life Insurance and Employee Benefits segments, net of the Corporate
Operation.
In the first quarter of 1997, net income increased by $24 million, or 62%,
to $63 million from $39 million in the first quarter of 1996 due to growth in
the Annuity, Individual Life Insurance and Employee Benefits segments of 30%,
22% and 13%, respectively, and the elimination of losses in the Guaranteed
Investment Contracts segment. These results were partially offset by higher
unallocated expense in the Corporate Operation primarily due to an increase in
interest expense related to the Pre-Offering Indebtedness. See "-- Company
Financing Plan".
FOR THE
THREE MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------- ---------------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ----- ---- --------
(IN MILLIONS)
Annuity................................... $ 35 $ 54 $ 84 $113 $ 145 $ 33 $ 43
Individual Life Insurance................. 17 21 27 37 44 9 11
Employee Benefits......................... 36 48 53 67 78 16 18
Guaranteed Investment Contracts(1)........ 21 30 1 (67) (225) (15) --
Corporate Operation(2).................... (16) (28) (14) 3 (18) (4) (10)
Unallocated net realized capital gains
(losses)(3)............................. 8 5 -- (3) -- -- 1
Cumulative effect of changes in accounting
principles(4)........................... (47) -- -- -- -- -- --
---- ---- ---- ---- ---- --- ----
Net income.............................. $ 54 $130 $151 $150 $ 24 $ 39 $ 63
==== ==== ==== ==== ==== === ====
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(1) The Company substantially withdrew from the general account GRC business in
1995. Management expects no material income or loss from the Guaranteed
Investment Contracts segment in the future as described herein.
(2) The Company maintains a Corporate Operation through which it reports items
that are not directly allocable to any of its business segments. Included in
the Corporate Operation are: (i) unallocated income and expense, (ii) the
Company's group medical business, which it exited in 1993, and (iii) certain
other items not directly allocable to any segment such as items related to
the ITT Spin-Off (as defined herein). For a discussion of the Corporate
Operation, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Results of Operations for the Years Ended
December 31, 1994, 1995 and 1996 -- Corporate Operation".
The following table details the components of the Corporate Operation:
FOR THE
THREE MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------- ---------------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ----- ---- --------
(IN MILLIONS)
Unallocated income and expense............ $(11) $ (3) $ (7) $(14) $ (18) $ (4) $(10)
Group medical business.................... (5) (25) (7) (1) 1 -- --
ITT Spin-Off related items and other...... -- -- -- 18 (1) -- --
---- ---- ---- ---- ---- --- ----
Total Corporate Operation....... $(16) $(28) $(14) $ 3 $ (18) $ (4) $(10)
==== ==== ==== ==== ==== === ====
(3) Represents net realized capital gains (losses) that are not allocable to any
of the Company's business segments.
(4) Reflects the cumulative effect of adoption of Statement of Financial
Accounting Standards ("SFAS") No. 106, Employers' Accounting for
Postretirement Benefits Other Than Pensions, and SFAS No. 112, Employers'
Accounting for Postemployment Benefits.
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SEGMENT ANALYSIS
Annuity net income has grown at a compound annual rate of 43%, from $35
million in 1992 to $145 million in 1996. This segment offers individual variable
annuities and fixed MVA annuities, deferred compensation and retirement plan
services, mutual funds, investment management services and other financial
products. As indicated above, the Company is the largest writer of individual
annuities (according to information compiled by Life Insurance Marketing and
Research Association ("LIMRA")) and the largest writer of individual variable
annuities (according to information compiled by VARDS). In 1996, the Company
sold $9.8 billion of individual annuities, of which $9.3 billion were individual
variable annuities; of the Company's total individual annuities, $6.6 billion
were sold through broker-dealers and $3.2 billion were sold through banks. The
Company's variable annuity product offerings include the Putnam Capital Manager
Variable Annuity and The Director, two of the four highest selling variable
annuity contracts in the United States for the year ended December 31, 1996.
These variable annuity products allow customers to save for retirement on a
tax-deferred basis through a variety of mutual funds provided by the Company.
The Company's fixed MVA annuity also provides customers a tax-deferred savings
vehicle with fixed rates for guaranteed periods. As of December 31, 1996, such
fixed rates ranged from 3.4% to 9.3% and averaged 6.53%, while the periods over
which such rates are to be paid ranged from one to ten years and averaged
approximately seven years. The Company has distribution arrangements to sell its
individual annuity products with approximately 1,350 national and regional
broker-dealers and approximately 450 banks. Management believes that it has
established a strong distribution franchise through its long-standing
relationships with the members of its bank and broker-dealer network and is
committed both to expanding sales through these established channels of
distribution and promoting new distributors for all its products and services.
Individual Life Insurance net income has grown at a compound annual rate of
27%, from $17 million in 1992 to $44 million in 1996. This segment, which
focuses on the high-end estate and business planning markets, sells a variety of
individual life insurance products, including VARIABLE LIFE and UNIVERSAL LIFE
INSURANCE policies. The Company believes that it is one of the leading
competitors in the high-end estate and business planning markets as indicated by
its relatively high average face value per POLICY. The Company has distribution
arrangements to sell its individual life insurance products in the United States
with approximately 137,000 licensed life insurance agents.
Employee Benefits net income has grown at a compound annual rate of 21%,
from $36 million in 1992 to $78 million in 1996. This segment sells group
insurance products, including group life and group disability insurance and
corporate-owned life insurance ("COLI"), and engages in certain international
operations. As indicated above, the Company is the largest writer of group
short-term disability benefit plans and the second largest writer of group
long-term disability insurance, as well as the fourth largest writer of group
life insurance, based on full-year 1995 new premiums and premium equivalents
(according to information reported to the Employee Benefits Plan Review
("EBPR")). Management believes that, as a result of the Company's name
recognition, the value-added nature of its managed disability products and its
effective claims administration, it is one of the leading sellers in the "large
case" group market (companies with over 1,000 employees) and that further growth
opportunities exist in the "small" and "medium case" group markets. The Company
uses an experienced group of employees to distribute its Employee Benefits
products through a variety of distribution outlets, including insurance agents,
brokers, associations and THIRD-PARTY ADMINISTRATORS.
Guaranteed Investment Contracts net income has declined from net income of
$21 million in 1992 to a net loss of $225 million in 1996. The results of this
segment have been primarily affected by prepayments substantially in excess of
assumed and historical levels of mortgage-backed securities ("MBSs") and
collateralized mortgage obligations ("CMOs") supporting a block of traditional
general account GRC written by the Company prior to 1995 ("Closed Book GRC").
The Company substantially withdrew from the general account GRC business in 1995
and now writes a limited amount of such business primarily as an accommodation
to customers. For example, in the first quarter of 1997 the Company wrote $13
million of general account GRC (most of which was renewals to existing
customers), representing an expected annual net income of less than $30,000. In
1996, the Company initiated certain asset sales and hedging transactions to
insulate itself from any ongoing income or loss associated with the Closed Book
GRC investment portfolio. The Company expects no material income or loss from
the Guaranteed Investment Contracts segment in the future. For a discussion of
Closed Book GRC and the risk of future losses, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Results of
Operations
S-5
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for the Years Ended December 31, 1994, 1995 and 1996 -- Comparison of Guaranteed
Investment Contracts Segment Results -- Closed Book GRC".
The Company maintains a Corporate Operation through which it reports items
that are not directly allocable to any of its business segments. The Corporate
Operation includes (i) unallocated income and expense, (ii) the Company's group
medical business, which it exited in 1993, and (iii) certain other items not
directly allocable to any business segment such as items related to the ITT
Spin-Off (as defined below).
The Company's principal insurance subsidiaries currently are rated "A+
(superior)" by A.M. Best and have claims-paying ability ratings of "AA" from
Standard and Poor's ("S&P") and "AA+" from Duff & Phelps Credit Rating Co.
("Duff & Phelps"), and one such insurance subsidiary, Hartford Life Insurance
Company ("Hartford Life"), has an insurance financial strength rating of "Aa3"
from Moody's Investors Service, Inc. ("Moody's").
The Company is a direct subsidiary of Hartford Accident and Indemnity
Company ("Hartford Accident and Indemnity") and an indirect subsidiary of The
Hartford Financial Services Group, Inc. (formerly known as ITT Hartford Group,
Inc.) ("The Hartford"). The Hartford is among the largest domestic and
international providers of commercial property-casualty insurance,
property-casualty REINSURANCE and personal lines (including homeowners and auto)
coverages. On December 19, 1995, ITT Industries, Inc. (formerly ITT Corporation)
("ITT") distributed all of 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.
BUSINESS STRATEGY
Management believes that its corporate strategies will maintain and enhance
its position as a market leader within the financial services industry and will
maximize stockholder value. In addition, the Company's strong positions in each
of its businesses, coupled with the growth potential management believes exists
in its markets, provide opportunities to increase sales of its 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. Management has
established the following strategic priorities for the Company:
LEVERAGE THE COMPANY'S MULTIPLE CHANNEL DISTRIBUTION NETWORK. Management
believes that the Company's multiple channel distribution network provides a
distinct competitive advantage in selling its products and services to a broad
cross-section of customers throughout varying economic and market cycles. The
Company has access to a variety of distribution outlets through which it sells
its products and services, including approximately 1,350 national and regional
broker-dealers, approximately 450 banks (including 21 of the 25 largest banks in
the United States), 137,000 licensed life insurance agents, 2,900 insurance
brokers, 244 third-party administrators and 165 associations. In particular, the
Company believes that the bank and broker-dealer network employed by its Annuity
segment is among the largest in the insurance industry. Management believes that
this extensive distribution system generally provides the Company with greater
opportunities to access its customer base than its competitors and allows the
Company to introduce new products and services quickly through this established
distribution network as well as new channels of distribution. For example, the
Company sells fixed MVA annuities, variable annuities, mutual funds, SINGLE
PREMIUM VARIABLE LIFE INSURANCE and Section 401(k) plan services through its
broker-dealer and bank distribution systems.
OFFER DIVERSE AND INNOVATIVE PRODUCTS. The Company provides its customers
a diverse mix of products and services aimed at serving their 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 outside money managers such as Wellington
Management Company, LLP ("Wellington"), Putnam Financial Services, Inc.
("Putnam") and Dean Witter InterCapital, Inc. ("Dean Witter"). The Company also
regularly develops and brings to market innovative products and services. For
example, the Company was the first major seller of individual annuities to
successfully develop and market 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 also was a leader in introducing the "managed
disability" approach to the group disability insurance market. This approach
focuses on early claimant intervention in an effort to facilitate a claimant's
return to work and to contain costs.
S-6
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CAPITALIZE ON ECONOMIES OF SCALE, CUSTOMER SERVICE AND TECHNOLOGY. As a
result of its growth and attention to maintaining low expenses, the Company
believes it has achieved advantageous economies of scale and operating
efficiencies in its businesses which together enable the Company to
competitively price its products for its distribution network and policyholders.
For example, as noted above, the Company is the eighth largest consolidated life
insurance company based on statutory assets as of December 31, 1995, with a
ratio (as of such date) of general insurance expenses to statutory assets that
is less than half the average ratio for the fifty largest U.S. life insurers. In
addition, the Company has reduced its individual annuity expenses as a
percentage of total individual annuity account value to 28 BASIS POINTS in 1996
from 43 basis points in 1992. In addition, the Company believes that it
maintains high-quality service for its customers and 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. In 1996, the Company received one of the
five Quality Tested Service Seals awarded by DALBAR Inc. ("DALBAR"), a
recognized independent research organization, for its achievement of the highest
tier of customer service in the variable annuity industry.
CONTINUE PRUDENT RISK MANAGEMENT. The Company's product designs, prudent
underwriting standards and risk management techniques protect it against
DISINTERMEDIATION risk and greater than expected MORTALITY and MORBIDITY. As of
December 31, 1996, the Company had limited exposure to disintermediation risk on
approximately 99% of its insurance liabilities through the use of NON-GUARANTEED
SEPARATE ACCOUNTS, MVA features, policy loans, SURRENDER CHARGES and non-
surrenderability provisions. With respect to the Company's individual annuities,
97% of the related total account value was subject to surrender charges as of
December 31, 1996. The Company also enforces disciplined claims management to
protect the Company against greater than expected mortality and morbidity. The
Company regularly monitors its underwriting, mortality and morbidity assumptions
to determine whether its experience remains consistent with these assumptions
and to ensure that the Company's product pricing remains appropriate.
BUILD ON BRAND NAME AND FINANCIAL STRENGTH. Management believes that the
combined effect of the above-mentioned strengths, The Hartford's 187-year
history and customer recognition of the Stag Logo have produced a distinguished
brand name for the Company. The Company's financial strength, characterized by
sound ratings and a balance sheet of well-protected liabilities and highly rated
assets, also has enhanced the Company's brand name within the financial services
industry. Management believes that brand awareness, an established reputation
and financial strength will continue to be important factors in maintaining
distribution relationships, enhancing investment advisory alliances and
generating new sales with customers.
RELATIONSHIP BETWEEN THE COMPANY AND THE HARTFORD
The Hartford is the controlling stockholder of the Company and beneficially
owns 100% of the outstanding Class B Common Stock, par value $.01 per share (the
"Class B Common Stock"). On May 28, 1997, the Company issued 26 million shares
of its Class A Common Stock, par value $.01 per share (the "Class A Common
Stock" and, together with the Class B Common Stock, the "Common Stock"), and
completed the initial public offering of its Class A Common Stock (the "Equity
Offerings"). The Hartford owns shares of Common Stock which represent
approximately 95.6% of the combined voting power of all the outstanding Common
Stock and approximately 81.4% of the economic interest in the Company. The
Hartford has advised the Company that its current intention is to continue to
hold all the shares of Class B Common Stock it beneficially owns. However, The
Hartford generally has no contractual obligation to retain its shares of Class B
Common Stock.
Following the completion of the offering of Securities made hereby (the
"Debt Offering"), The Hartford and the Company expect to elect two additional
directors of the Company who will be persons not currently or formerly
associated with The Hartford or the Company. The Board of Directors of the
Company (the "Board of Directors") will then consist of ten members, including
eight who are directors and/or officers of The Hartford. The Hartford will have
the ability to change the size and composition of the Company's Board of
Directors.
For additional information concerning the Company's relationship with The
Hartford, see "Certain Relationships and Transactions".
S-7
9
COMPANY FINANCING PLAN
Historically, for financial reporting purposes, The Hartford internally
allocated a portion of its third-party indebtedness (referred to as the
"Allocated Advances") to the Company's life insurance subsidiaries. Cash was
contributed to the life insurance subsidiaries in connection with certain of
such Allocated Advances. In February 1997, the Company (i) declared a dividend
of $1.184 billion payable to Hartford Accident and Indemnity, (ii) obtained a
line of credit from a syndicate of four banks (the "Line of Credit") in the
amount of $1.3 billion, (iii) borrowed $1.084 billion under the Line of Credit
and (iv) paid to Hartford Accident and Indemnity the $1.184 billion dividend,
which consisted of the $1.084 billion in cash borrowed under the Line of Credit
and $100 million in the form of a promissory note executed by the Company for
the benefit of Hartford Accident and Indemnity (the "$100 Million Promissory
Note"). $893 million of such dividend constituted a repayment of the Allocated
Advances. In addition, on April 4, 1997, the Company declared and paid a
dividend of $25 million to Hartford Accident and Indemnity in the form of a
promissory note executed by the Company for the benefit of Hartford Accident and
Indemnity (the "$25 Million Promissory Note" and, together with the $100 Million
Promissory Note, the "Promissory Notes"). The Line of Credit and the Promissory
Notes are hereinafter referred to as the "Pre-Offering Indebtedness".
The Company used the $687.4 million of net proceeds from the Equity
Offerings to make a capital contribution of $183 million to its life insurance
subsidiaries, to reduce the Pre-Offering Indebtedness by $504 million (including
the full repayment of the $100 Million Promissory Note) and for other general
corporate purposes. On May 28, 1997, Hartford Accident and Indemnity cancelled
$12 million of the aggregate principal amount payable by the Company to Hartford
Accident and Indemnity under the $25 Million Promissory Note.
The Company will use the net proceeds from the Debt Offering to further
reduce the Pre-Offering Indebtedness. For a description of certain transactions
effected prior to the Debt Offering and the actions taken concurrently with or
promptly after the Debt Offering, see "Company Financing Plan".
The closing of the offerings of the % Notes, the % Notes and the %
Debentures are not conditioned on one another.
S-8
10
CERTAIN FACTORS AFFECTING THE COMPANY
AND THE INSURANCE INDUSTRY
Prospective purchasers of the Offered Debt Securities should consider,
among other things, the following factors affecting the Company and the
insurance industry: (i) The Hartford's control of the Company through its
beneficial ownership of approximately 95.6% of the combined voting power of all
the outstanding Common Stock and approximately 81.4% of the economic interest in
the Company; (ii) the importance of the Company's ratings assigned by nationally
recognized statistical rating organizations and the impact of such ratings on
the Company's ability to compete with other insurance companies, financial
intermediaries and other financial institutions; (iii) the potentially negative
impact on the Company's results of operations of certain economic and market
factors, including the level of volatility in the markets in which the Company
invests and the overall investment returns provided thereby; (iv) the importance
of relationships the Company has with certain third parties in connection with
the distribution or investment management of the Company's annuity and life
insurance products; (v) the extensive regulation and supervision to which the
Company is subject, the various regulatory initiatives that may affect the
Company in the future and the other legal actions involving the Company; (vi)
the Company's primary reliance, as a holding company, on dividends from its
subsidiaries to meet debt payment obligations and the applicable regulatory
restrictions on the ability of the Company's subsidiaries to pay such dividends;
(vii) the potential impact on the Company's reported net income that could
result from the adoption of certain accounting standards by the Financial
Accounting Standards Board ("FASB"); and (viii) the competition the Company
faces from other life insurance companies, as well as certain banks, securities
brokerage firms, investment advisors and certain other financial intermediaries.
Reference also is made to the Company's Form 10 incorporated herein by reference
for a fuller discussion of such factors. See "Available Information" in the
accompanying Prospectus.
S-9
11
COMPANY FINANCING PLAN
The Company was formed in December 1996 to serve as the holding company for
Hartford Life and Accident Insurance Company ("Hartford Life and Accident") and
its subsidiaries. In connection with such formation, Hartford Accident and
Indemnity contributed its ownership of all the outstanding capital stock of
Hartford Life and Accident to the Company and the Company issued to Hartford
Accident and Indemnity all the outstanding shares of capital stock of the
Company. Subsequent to the initial capitalization of the Company, the following
transactions took place or will take place:
(1) Historically, for financial reporting purposes, The Hartford internally
allocated the Allocated Advances to the Company's life insurance subsidiaries.
Cash was contributed to the life insurance subsidiaries in connection with
certain of such Allocated Advances. In February 1997, the Company (i) declared a
dividend of $1.184 billion payable to Hartford Accident and Indemnity, (ii)
obtained the $1.3 billion Line of Credit, (iii) borrowed $1.084 billion under
the Line of Credit and (iv) paid to Hartford Accident and Indemnity the $1.184
billion dividend, which consisted of the $1.084 billion in cash borrowed under
the Line of Credit and the $100 Million Promissory Note. $893 million of such
dividend constituted a repayment of the Allocated Advances. In addition, on
April 4, 1997, the Company declared and paid a dividend of $25 million to
Hartford Accident and Indemnity in the form of the $25 Million Promissory Note.
(2) On May 28, 1997, the Company issued 26 million shares of its Class A
Common Stock and completed the Equity Offerings. The Company used the $687.4
million of net proceeds therefrom to make a capital contribution of $183 million
to its life insurance subsidiaries, to reduce the Pre-Offering Indebtedness by
$504 million (including the full repayment of the $100 Million Promissory Note)
and for other general corporate purposes. Also on such date, Hartford Accident
and Indemnity cancelled $12 million of the aggregate principal amount payable by
the Company to Hartford Accident and Indemnity under the $25 Million Promissory
Note.
(3) The Company will use the net proceeds of the Debt Offering to further
reduce the Pre-Offering Indebtedness. The closing of the offerings of the %
Notes, the % Notes and the % Debentures are not conditioned on one another.
Upon the completion of the Debt Offering, the Company will have $350
million of debt securities and/or preferred stock remaining available for sale
in the public markets pursuant to the shelf registration statement, which may be
issued at any time following the Debt Offering. See "Use of Proceeds",
"Capitalization" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources".
S-10
12
CAPITALIZATION
The table below sets forth the capitalization of the Company as of March
31, 1997 under the following circumstances: (i) on a historical basis (which
includes the borrowing of $1.084 billion under the Line of Credit and the
payment of a $1.184 billion dividend to Hartford Accident and Indemnity,
consisting of the $1.084 billion in cash borrowed under the Line of Credit and
the $100 Million Promissory Note, with $893 million of such dividend
constituting a repayment of the Allocated Advances); (ii) on a pro forma basis
to give effect to the reclassification of the 1,000 shares of authorized common
stock of the Company into 114,000,000 shares of Class B Common Stock and the
authorization of the Class A Common Stock and the declaration and payment to
Hartford Accident and Indemnity of a $25 million dividend in the form of the $25
Million Promissory Note (together, the "Pre-Offering Transactions"); (iii) on a
pro forma basis to give further effect to the issuance and sale in the Equity
Offerings of 26 million shares of Class A Common Stock at an initial public
offering price of $28.25 per share, the application of the $687.4 million of net
proceeds therefrom to make a capital contribution to the Company's insurance
subsidiaries, to reduce the Pre-Offering Indebtedness (including the full
repayment of the $100 Million Promissory Note) and for other general corporate
purposes and the cancellation of $12 million of the aggregate principal amount
payable by the Company to Hartford Accident and Indemnity under the $25 Million
Promissory Note; and (iv) as adjusted to give effect to the completion of the
Debt Offering and the application of the estimated net proceeds therefrom to
further reduce the Pre-Offering Indebtedness. As of March 31, 1997, the pro
forma ratio of total debt to total capital, excluding net unrealized losses on
investments, net of tax, of $93 million and after giving effect to the
completion of the Debt Offering, would be 29.1%. See "Use of Proceeds". To the
extent the Debt Offering is not consummated, the Pre-Offering Indebtedness of
the Company that would otherwise have been repaid from the net proceeds of the
Debt Offering will remain outstanding.
AS OF MARCH 31, 1997
---------------------------------------------------------------
PRO FORMA
FOR PRO FORMA AS
PRE-OFFERING FOR EQUITY ADJUSTED FOR
HISTORICAL TRANSACTIONS OFFERINGS DEBT OFFERING
---------- ------------- ----------- -----------------
(IN MILLIONS)
Borrowings under Line of Credit(1)............................. $1,084 $ 1,084 $ 693 $ 43
Short-term debt due parent(2).................................. 100 125 0 0
Long-term debt:
% Notes Due , 2004 offered hereby................ -- -- -- 200
% Notes Due , 2007 offered hereby................ -- -- -- 200
% Debentures Due , 2027 offered hereby........... -- -- -- 250
------ ------ ------ ------
Total debt................................................... $1,184 $ 1,209 $ 693 $ 693
------ ------ ------ ------
Stockholder's equity:
Preferred Stock, par value $.01 per share; 50,000,000 shares
authorized; no shares issued and outstanding............... -- -- -- --
Common stock, par value $.01 per share; 1,000 shares
authorized; 100 shares issued and outstanding,
historical................................................. -- -- -- --
Class A Common Stock, par value $.01 per share; 600,000,000
shares authorized; no shares issued and outstanding,
historical and pro forma for Pre-Offering Transactions;
26,000,000 shares issued and outstanding, pro forma for
Equity Offerings and as adjusted........................... -- -- -- --
Class B Common Stock, par value $.01 per share; 600,000,000
shares authorized; 114,000,000 shares issued and
outstanding, pro forma and as adjusted..................... -- 1 1 1
Capital surplus.............................................. 585 584 1,283 1,283
Net unrealized capital gains (losses) on investments, net of
tax........................................................ (93) (93) (93) (93)
Retained earnings............................................ 432 407 407 407
------ ------ ------ ------
Total stockholder's equity................................. 924 899 1,598 1,598
------ ------ ------ ------
Total capitalization................................... $2,108 $ 2,108 $ 2,291 $ 2,291
====== ====== ====== ======
- ---------------
(1) Represents $1.084 billion borrowed under the Line of Credit on February 18,
1997, with interest payable at the two-month Eurodollar rate, determined as
described below, plus 15 basis points (5.65% at the inception of the
borrowing) and principal payable on or before February 9, 1998. The
Eurodollar rate is determined by taking the average one, two, three or
six-month rate (based upon the applicable interest period selected by the
Company) at which deposits in U.S. dollars are offered by each of the four
participating lenders in London, England to prime banks in the London
interbank market, plus an applicable margin (based upon the Company's
current public debt ratings).
(2) Represents (i) the $100 Million Promissory Note executed by the Company for
the benefit of Hartford Accident and Indemnity, with interest payable at the
two-month Eurodollar rate, determined as described above with respect to the
Line of Credit, plus 15 basis points (initially 5.60% upon the execution of
the $100 Million Promissory Note) and principal payable on February 19,
1998, and (ii) the $25 Million Promissory Note executed by the Company for
the benefit of Hartford Accident and Indemnity, with interest payable at the
one-month Eurodollar rate, determined as described above with respect to the
Line of Credit, plus 15 basis points (initially 5.84% upon the execution of
the $25 Million Promissory Note) and principal payable on April 3, 1998.
S-11
13
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Offered Debt
Securities, estimated to be approximately $645.3 million (after deducting the
estimated expenses), will be used to reduce the Pre-Offering Indebtedness. The
Pre-Offering Indebtedness was incurred to pay a $1.184 billion dividend to
Hartford Accident and Indemnity, $893 million of such dividend constituting a
repayment of the Allocated Advances. The Pre-Offering Indebtedness to be repaid
has an interest rate of approximately 5.65% and matures in February 1998.
Upon the completion of the Debt Offering, the Company will have $350
million of debt securities and/or preferred stock remaining available for sale
in the public markets pursuant to the shelf registration statement, which may be
issued at any time following the Debt Offering. See "Capitalization" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources".
S-12
14
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated income statement data and balance sheet data set
forth below are derived in the relevant periods from the consolidated financial
statements and the notes thereto of the Company and its subsidiaries. The
Company's consolidated financial statements have been audited by Arthur Andersen
LLP, independent public accountants, as of December 31, 1995 and 1996, and for
each of the three years in the period ended December 31, 1996. The Company's
consolidated financial statements as of December 31, 1992, 1993 and 1994 and for
the years ended December 31, 1992 and 1993 were derived from audited
consolidated financial statements of certain of the Company's subsidiaries and
The Hartford and include all adjustments that management considers necessary for
a fair presentation of the data for such periods. The selected consolidated
income statement data and balance sheet data for the three months ended March
31, 1996 and 1997, presented below, were derived from the Company's unaudited
consolidated financial statements and include, in the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the financial information for such periods. The results of
operations for the three months ended March 31, 1997 are not necessarily
indicative of the results of operations to be expected for the full fiscal year.
This selected consolidated financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", the Company's consolidated financial statements, the notes thereto
and the other financial information included elsewhere in this Prospectus
Supplement, the accompanying Prospectus and incorporated herein by reference to
the Company's Form 10.
AS OF OR FOR
THE THREE MONTHS
AS OF OR FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
(IN MILLIONS,
(IN MILLIONS) UNAUDITED)
INCOME STATEMENT DATA
Revenues:
Premiums and other considerations................ $ 1,273 $ 1,755 $ 2,139 $ 2,643 $ 3,069 $ 941 $ 679
Net investment income............................ 1,038 1,160 1,403 1,451 1,534 362 375
Net realized capital gains (losses).............. 10 7 1 (4) (219) -- 1
------- ------- ------- ------- ------ -------
Total revenues................................. 2,321 2,922 3,543 4,090 4,384 1,303 1,055
------- ------- ------- ------- ------ -------
Benefits, claims and expenses:
Benefits, claims and claim adjustment expenses... 1,663 1,903 2,254 2,395 2,727 651 659
Amortization of deferred policy acquisition
costs.......................................... 74 188 149 205 241 66 83
Dividends to policyholders(1).................... 48 228 419 675 635 286 54
Interest expense(2).............................. 26 25 29 35 55 11 16
Other insurance expense.......................... 360 377 469 554 695 230 143
------- ------- ------- ------- ------ -------
Total benefits, claims and expenses............ 2,171 2,721 3,320 3,864 4,353 1,244 955
------- ------- ------- ------- ------ -------
Income before income tax expense................... 150 201 223 226 31 59 100
Income tax expense................................. 49 71 72 76 7 20 37
Income before cumulative effect of changes in
accounting principles............................ 101 130 151 150 24 39 63
Cumulative effect of changes in accounting
principles(3).................................... (47) -- -- -- -- -- --
------- ------- ------- ------- ------ -------
Net income..................................... $ 54 $ 130 $ 151 $ 150 $ 24 $ 39 $ 63
======= ======= ======= ======= ====== =======
BALANCE SHEET DATA
General account invested assets.................... $13,514 $15,866 $18,078 $20,072 $19,830 $19,593
Separate account assets(4)......................... 8,550 16,314 22,847 36,296 49,770 51,413
All other assets................................... 1,430 7,454 9,324 9,594 10,333 10,496
------- ------- ------- ------- ------
Total assets..................................... $23,494 $39,634 $50,249 $65,962 $79,933 $81,502
======= ======= ======= ======= ======
Policy liabilities................................. $13,040 $20,863 $25,208 $26,318 $26,239 $25,817
Separate account liabilities(4).................... 8,550 16,314 22,847 36,296 49,770 51,413
Allocated Advances from parent(2)(5)............... 375 425 525 732 893 --
All other liabilities.............................. 802 1,107 1,283 1,439 1,757 3,348
------- ------- ------- ------- ------
Total liabilities................................ $22,767 $38,709 $49,863 $64,785 $78,659 $80,578
======= ======= ======= ======= ======
Stockholder's equity(5)(6)......................... $ 727 $ 925 $ 386 $ 1,177 $ 1,274 $ 924
======= ======= ======= ======= ======
Stockholder's equity, excluding net unrealized
capital gains (losses), net of tax(5)............ $ 727 $ 931 $ 1,116 $ 1,221 $ 1,245 $ 1,017
======= ======= ======= ======= ======
S-13
15
As of or for
the Three Months
As of or for the Year Ended December 31, Ended March 31,
----------------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
(in millions,
(in millions) unaudited)
OTHER FINANCIAL DATA (AFTER TAX)
Analysis of Net Income:
Annuity......................................... $ 35 $ 54 $ 84 $ 113 $ 145 $ 33 $ 43
Individual Life Insurance....................... 17 21 27 37 44 9 11
Employee Benefits............................... 36 48 53 67 78 16 18
Guaranteed Investment Contracts................. 21 30 1 (67) (225) (15) --
Corporate Operation(7).......................... (16) (28) (14) 3 (18) (4) (10)
Unallocated net realized capital gains
(losses)(8)................................... 8 5 -- (3) -- -- 1
Cumulative effect of changes in accounting
principles(3)................................. (47) -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net income.................................. $ 54 $ 130 $ 151 $ 150 $ 24 $ 39 $ 63
======= ======= ======= ======= ======= ======= =======
Ratio of earnings to fixed charges(9)............. 5.5 7.2 7.0 6.2 1.5 5.5 6.5
SELECTED SEGMENT DATA
Annuity:
Individual annuity sales........................ $ 2,212 $ 4,232 $ 7,005 $ 6,947 $ 9,841 $ 2,240 $ 2,572
Group annuity sales............................. 326 370 366 495 634 90 165
ACCOUNT VALUE
General account............................... 3,779 4,767 5,499 6,892 7,411 6,950 7,522
GUARANTEED SEPARATE ACCOUNT(10)............... 2,663 3,989 7,026 8,996 9,130 8,790 9,189
Non-guaranteed separate account(11)........... 5,451 11,003 14,282 21,970 34,219 24,996 36,007
------- ------- ------- ------- ------- ------- -------
Total account value....................... $11,893 $19,759 $26,807 $37,858 50,760 $40,736 $52,718
======= ======= ======= ======= ======= ======= =======
Individual Life Insurance:
Individual life sales........................... $ 90 $ 96 $ 94 $ 107 $ 130 $ 22 $ 24
Account value
General account............................... 816 1,127 1,456 1,579 1,998 1,622 2,023
Separate account.............................. -- 736 836 979 1,238 1,034 1,307
------- ------- ------- ------- ------- ------- -------
Total account value....................... $ 816 $ 1,863 $ 2,292 $ 2,558 $ 3,236 $ 2,656 $ 3,330
======= ======= ======= ======= ======= ======= =======
Employee Benefits:
Group insurance premiums........................ $ 841 $ 856 $ 974 $ 1,103 $ 1,329 $ 290 $ 362
Group insurance RESERVES........................ 1,056 1,224 1,412 1,633 1,934 1,684 1,991
Total group insurance invested assets........... 1,046 1,212 1,400 1,617 1,917 1,668 1,973
COLI account value
General account............................... 864 1,549 2,308 3,566 4,028 3,923 3,853
Separate account.............................. -- -- 897 3,484 4,441 3,537 4,352
------- ------- ------- ------- ------- ------- -------
Total COLI account value.................. $ 864 $ 1,549 $ 3,205 $ 7,050 $ 8,469 $ 7,460 $ 8,205
======= ======= ======= ======= ======= ======= =======
Guaranteed Investment Contracts:
Guaranteed investment contract sales............ $ 1,608 $ 1,730 $ 1,732 $ 893 $ 169 $ 70 $ 41
Account value
General account............................... 5,673 6,216 7,257 5,722 4,124 5,318 3,758
Guaranteed separate account................... 182 193 124 346 408 415 428
------- ------- ------- ------- ------- ------- -------
Total account value....................... $ 5,855 $ 6,409 $ 7,381 $ 6,068 $ 4,532 $ 5,733 $ 4,186
======= ======= ======= ======= ======= ======= =======
STATUTORY DATA(12)
Gains from operations............................. $ 59 $ 61 $ 45 $ 175 $ 148
Gains (losses).................................... 70 10 29 (62) 23
------- ------- ------- ------- -------
Net income........................................ $ 129 $ 71 $ 74 $ 113 $ 171
======= ======= ======= ======= =======
Capital and surplus............................... $ 824 $ 956 $ 1,088 $ 1,224 $ 1,320
======= ======= ======= ======= =======
AS
ADJUSTED
FOR DEBT
HISTORICAL PRO FORMA (13) OFFERING
------ ---------------- ----------
(IN MILLIONS, EXCEPT PER SHARE DATA,
UNAUDITED)
CAPITALIZATION DATA AS OF MARCH 31, 1997
Borrowings under Line of Credit....................................... $1,084 $ 693 $ 43
Short-term debt due parent............................................ 100 -- --
Long-term debt........................................................ -- -- 650
Stockholder's equity(5)(6)............................................ 924 1,598 1,598
PRO FORMA PER SHARE DATA
As of or for the Three Months Ended March 31, 1997:
Net income(14)...................................................... $ 0.50 $ 0.50
Book value(15)...................................................... 11.42 11.42
As of or for the Year Ended December 31, 1996:
Net income(14)...................................................... $ 0.25 $ 0.25
Book value(15)...................................................... 11.84 11.84
S-14
16
(1) Growth in dividends to policyholders is a result of the November 1992
acquisition from Mutual Benefit Life Insurance Company of a block of
participating LEVERAGED COLI business and the subsequent growth in the
leveraged COLI business from 1993 to 1995. Policyholder dividends are
expected to decline in the future since sales of new leveraged COLI
policies have been terminated as a result of the Health Insurance
Portability and Accountability Act of 1996.
(2) For financial reporting purposes, the Company has treated certain amounts
previously allocated by The Hartford to the Company's life insurance
subsidiaries as Allocated Advances from parent. Such Allocated Advances
were not treated as liabilities or indebtedness for tax and statutory
accounting purposes. Cash received in respect of Allocated Advances from
parent was used to support the growth of the life insurance subsidiaries
and was treated as surplus for statutory accounting purposes. Interest
expense prior to December 31, 1996 represents the expense internally
allocated to the Company with respect to the Allocated Advances based on
The Hartford's actual (third party) external borrowing costs. Such interest
expense paid was treated as dividends for tax and statutory accounting
purposes. The increase in Allocated Advances from parent in 1995 was
attributable to the ITT Spin-Off.
(3) Reflects the cumulative effect of adoption of SFAS No. 106, Employers'
Accounting for Postretirement Benefits Other Than Pensions, and SFAS No.
112, Employers' Accounting for Postemployment Benefits.
(4) Includes both non-guaranteed and guaranteed separate accounts.
(5) The Company has received capital contributions and paid or accrued
dividends to its stockholder for the five-year period ended December 31,
1996 and for the three months ended March 31, 1996 and 1997, as set forth
in the table below. The capital contributions described below exclude those
amounts classified as Allocated Advances from parent. Dividends exclude
those amounts classified as interest expense with respect to the Allocated
Advances from parent and paid to The Hartford as described in note (2)
above.
FOR THE
THREE MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------------- ---------------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ---- -----
(IN MILLIONS,
(IN MILLIONS) UNAUDITED)
Capital contributions................ $ -- $100 $ 50 $180 $ -- $ -- $ --
Dividends............................ -- 24 17 226 -- -- 291
---- ---- ---- ---- ----- ----- -----
Net contributions................ $ -- $ 76 $ 33 $(46) $ -- $ -- $(291)
==== ==== ==== ==== ===== ===== =====
(6) Stockholder's equity beginning December 31, 1994 reflects the adoption of
SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities. See Note 2 of notes to consolidated financial statements of the
Company incorporated herein by reference.
(7) The Company maintains a Corporate Operation through which it reports items
that are not directly allocable to any of its business segments. Included
in the Corporate Operation are: (i) unallocated income and expense, (ii)
the Company's group medical business, which it exited in 1993, and (iii)
certain other items not directly allocable to any business segment such as
ITT Spin-Off related items. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Results of Operations for
the Years Ended December 31, 1994, 1995 and 1996 -- Corporate Operation".
The following table details the components of the Corporate Operation:
FOR THE
THREE MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------ -------------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ---- ----
(IN MILLIONS,
(IN MILLIONS) UNAUDITED)
Unallocated income and expense.................. $(11) $ (3) $ (7) $(14) $(18) $ (4) $(10)
Group medical business.......................... (5) (25) (7) (1) 1 -- --
ITT Spin-Off related items and other............ -- -- -- 18 (1) -- --
---- ---- ---- ---- ---- ---- ----
Total Corporate Operation................... $(16) $(28) $(14) $ 3 $(18) $ (4) $(10)
==== ==== ==== ==== ==== ==== ====
(8) Represents net realized capital gains (losses) that are not allocable to
any of the Company's business segments.
(9) For purposes of computing the ratio of earnings to fixed charges,
"earnings" consist of income from continuing operations before federal
income taxes and fixed charges. "Fixed charges" consist of interest expense
and an imputed interest component for rental expense.
(10) Guaranteed separate accounts represent policyholder funds that are
segregated from the general account of the Company and on which the Company
contractually guarantees a minimum return, subject, in most cases, to an
MVA feature if the relevant product is surrendered prior to the end of the
applicable guarantee period.
(11) Non-guaranteed separate accounts represent policyholder funds that are
segregated from the general account of the Company and as to which the
Company does not guarantee a minimum return.
S-15
17
(12) Statutory data has been derived from Annual Statements of Hartford Life and
Accident, Hartford Life and ITT Hartford Life and Annuity Insurance Company
filed with insurance regulatory authorities, each in accordance with
statutory accounting practices. Gains (losses) are net of IMR and taxes.
(13) The pro forma data as of or for the three months ended March 31, 1997
reflects the Pre-Offering Transactions, the completion of the Equity
Offerings and the cancellation of $12 million of the aggregate principal
amount payable by the Company to Hartford Accident and Indemnity under the
$25 Million Promissory Note, as if such transactions had occurred as of
such date. The pro forma data as of or for the year ended December 31, 1996
reflects the borrowing of $1.084 billion under the Line of Credit, the
execution of the $100 Million Promissory Note, the payment of $1.184
billion as a dividend to Hartford Accident and Indemnity ($893 million of
such dividend constituting a repayment of the Allocated Advances from
parent), the Pre-Offering Transactions, the completion of the Equity
Offerings and the above-referenced $12 million of debt cancellation, as if
such transactions had occurred as of such date.
(14) Pro forma and as adjusted net income per share data is calculated based
upon the 114 million shares of Class B Common Stock owned by The Hartford
immediately prior to the Equity Offerings plus an assumed issuance of 8.66
million shares (for the three months ended March 31, 1997) and 11.04
million shares (for the year ended December 31, 1996), as applicable, of
Class A Common Stock in the Equity Offerings (the number of shares which
would result in estimated net proceeds equal to the excess of the amount of
the February and April 1997 dividends over, with respect to the March 31,
1997 data, the earnings for the year ended December 31, 1996 and the three
months ended March 31, 1997 and the Allocated Advances from parent and,
with respect to the December 31, 1996 data, the earnings for the year ended
December 31, 1996 and the Allocated Advances from parent, as applicable)
and an additional assumed issuance of 7.56 million shares of Class A Common
Stock (the number of shares which would result in a reduction of the
Pre-Offering Indebtedness and Allocated Advances from parent by $200
million). Pro forma and as adjusted net income per share data is based upon
historical amounts adjusted to reflect a reduction in interest expense, net
of tax, from historical levels as a result of the completion of the Equity
Offerings.
(15) Pro forma and as adjusted book value per share data, as of March 31, 1997,
represents total stockholder's equity, as of such date, together with the
effect of the Pre-Offering Transactions, the $687.4 million of net proceeds
from the Equity Offerings and the cancellation of $12 million of the
aggregate principal amount payable by the Company to Hartford Accident and
Indemnity under the $25 Million Promissory Note. Pro forma and as adjusted
book value per share data, as of December 31, 1996, represents total
stockholder's equity, as of such date, together with the effect of the
borrowing of $1.084 billion under the Line of Credit, the execution of the
$100 Million Promissory Note, the payment of $1.184 billion as a dividend
to Hartford Accident and Indemnity ($893 million of such dividend
constituting a repayment of the Allocated Advances from parent), the
Pre-Offering Transactions, the $687.4 million of net proceeds from the
Equity Offerings and the above-referenced $12 million of debt cancellation.
S-16
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations of the Company is prepared as if the Company were a separate entity
for all periods presented and should be read in conjunction with the "Selected
Consolidated Financial Data", the Company's consolidated financial statements,
the notes thereto and the other financial information included elsewhere in this
Prospectus Supplement and the accompanying Prospectus and incorporated herein by
reference to the Company's Form 10.
GENERAL
The Company 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 an individual and group
basis. Prior to the completion of the Equity Offerings, the Company operated its
businesses as part of The Hartford.
The Company attempts to attain a pre-determined return on stockholder's
equity for each of its business segments. Management facilitates this
"bottom-line" approach by operating the Company as a series of micro-enterprises
within each of its business segments. These micro-enterprises are managed by
individuals with accountability for the profit or loss of the specific
operation. The Company assigns capital to each micro-enterprise based on
internal formulae and each of the managers is expected to earn the Company's
targeted return on the assigned capital.
The Company derives its revenues principally from (i) asset management fees
and mortality and expense fees on separate accounts, (ii) premiums, (iii) net
investment income on general account assets, including the general account
portion of variable annuities, and (iv) certain other fees earned by the
Company. The Company generates investment and mortality and expense fees
primarily from the separate account assets deposited with the Company through
the sale of individual annuities and variable life products. Premium revenues
are derived primarily from the sale of individual life, group life and group
disability insurance and COLI. The Company's operating expenses consist of
insurance benefits provided, interest credited on general account liabilities,
the cost of selling and servicing the various products sold by the Company,
including commissions to the various sales representatives (net of any
deferrals), and general business expenses.
The Company's profitability depends in large part upon (i) the amount of
its assets, (ii) the adequacy of its product pricing (which is primarily a
function of competitive conditions, management's ability to assess and manage
trends in mortality and morbidity experience as compared to the level of benefit
payments and its ability to maintain expenses within pricing assumptions), (iii)
the maintenance of the Company's target spreads between its customer CREDITED
RATES and its earned investment rates and (iv) the PERSISTENCY of its policies
and premiums (which determines the recoverability of the costs incurred in
selling a policy). External factors, such as the impact of legislation on the
Company's products, also affect the Company's profitability.
From time to time, the Company has acquired certain COLI and individual
life insurance and annuity blocks of businesses from distressed carriers. These
acquisitions have contributed to the Company's growth in assets. The Company
assumed COLI blocks of business of approximately $5.6 billion in 1992 and $300
million in 1993 from Mutual Benefit Life Insurance Company ("Mutual Benefit")
and individual life insurance and annuity policies of $3.2 billion in 1993 from
Fidelity Bankers Life Insurance Company ("Fidelity Bankers"), $434 million in
1994 from Pacific Standard Life Insurance Company ("Pacific Standard") and $77
million in 1996 from Investors Equity Life Insurance Company of Hawaii
("Investors Equity").
The Company's income prior to the cumulative effect of changes in the
Company's accounting principles grew from $101 million in 1992 to $151 million
in 1994, a compound annual growth rate of
S-17
19
22%, due in part to internal growth and the acquisitions discussed above. In
1995 and 1996, the Company's net income fell to $150 million and $24 million,
respectively, mainly due to losses within the Guaranteed Investment Contracts
segment. Because the Company does not expect any material income or loss from
the Guaranteed Investment Contracts segment in the years subsequent to 1996,
management believes that future earnings will be dependent on income from the
Annuity, Individual Life Insurance and Employee Benefits segments, net of the
Corporate Operation. Net income of these segments, net of the Corporate
Operation, was $150 million, $217 million and $249 million in 1994, 1995 and
1996, respectively, representing a compound annual growth rate over such period
of 29%.
The results of the Guaranteed Investment Contracts segment were materially
and adversely affected by lower investment rates and earnings in the investment
portfolio supporting such segment due to prepayments on MBSs and CMOs
substantially in excess of assumed and historical levels, as well as the
interest rate rise in 1994, which caused a mismatch in the duration of such
assets and liabilities. In 1995, the Company substantially withdrew from the
general account GRC business. In 1996, the Company initiated certain asset sales
and hedging transactions to insulate itself from any ongoing income or loss
associated with the Closed Book GRC investment portfolio. As a result, due to
the foregoing actions, management expects that the net income (loss) from this
segment in the years subsequent to 1996 will be immaterial. See "-- Results of
Operations for the Years Ended December 31, 1994, 1995 and 1996 -- Comparison of
Guaranteed Investment Contracts Segment Results -- Closed Book GRC".
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
COMPARISON OF CONSOLIDATED RESULTS
The following table details the Company's consolidated net income for the
three months ended March 31, 1996 and 1997.
FOR THE
THREE MONTHS
ENDED MARCH 31,
-----------------
1996 1997
------ ------
(IN MILLIONS,
UNAUDITED)
Revenues:
Premiums and other considerations...................................... $ 941 $ 679
Net investment income.................................................. 362 375
Net realized capital gains (losses).................................... -- 1
------ ------
Total revenues...................................................... 1,303 1,055
------ ------
Benefits, claims and expenses:
Benefits, claims and claim adjustment expenses......................... 651 659
Amortization of deferred policy acquisition costs...................... 66 83
Dividends to policyholders............................................. 286 54
Interest expense(1).................................................... 11 16
Other insurance expense................................................ 230 143
------ ------
Total benefits, claims and expenses................................. 1,244 955
------ ------
Income before income tax expense......................................... 59 100
Income tax expense....................................................... 20 37
------ ------
Net income.......................................................... $ 39 $ 63
====== ======
- ---------------
(1) For financial reporting purposes, the Company has treated certain amounts
previously allocated by The Hartford to the Company's life insurance
subsidiaries as Allocated Advances from parent. Such Allocated Advances were
not treated as liabilities or indebtedness for tax and statutory accounting
purposes. Cash received in respect of Allocated Advances from parent was
used to support the growth of the life insurance subsidiaries and was
treated as surplus for statutory accounting purposes. Interest expense prior
to December 31, 1996 represents the expense internally allocated to the
Company with respect to the Allocated Advances based on The Hartford's
actual (third party) external borrowing costs. Such interest expense paid
was treated as dividends for tax and statutory accounting purposes.
S-18
20
Revenues decreased $248 million, or 19%, to $1.055 billion in the first
quarter of 1997 from $1.303 billion in the first quarter of 1996 due to a
decrease in revenues from COLI of $365 million primarily due to significantly
less premiums from leveraged COLI as a result of the Health Insurance
Portability and Accountability Act of 1996 (the "HIPA Act of 1996"). This
legislation phases out the deductability of interest on policy loans under COLI
by 1998, thus eliminating all future sales of leveraged COLI. Leveraged COLI
will continue to contribute to the profitability of the Company (although such
contribution will be reduced in the future due to the effects of this
legislation). As a result, net income contributed by COLI may be lower in the
future (particularly during 1999 and later years). The decrease in COLI revenues
was partially offset by an increase in revenues of $117 million, or 15%, in the
Company's other operations, primarily due to a $79 million increase in group
insurance revenues and a $47 million increase in revenues from the Annuity
segment. Similar factors caused benefits, claims and expenses to decrease by
$289 million, or 23%, to $955 million in the first quarter of 1997 from $1.244
billion in the first quarter of 1996.
Net income increased $24 million, or 62%, to $63 million in the first
quarter of 1997 from $39 million in the first quarter of 1996 due to growth in
the Annuity, Individual Life Insurance and Employee Benefits segments of 30%,
22% and 13%, respectively, and the elimination of losses in the Guaranteed
Investment Contracts segment, partially offset by higher unallocated expense in
the Corporate Operation primarily due to an increase in interest expense of $5
million to $16 million in the first quarter of 1997 from $11 million in the
first quarter of 1996. This increase was primarily related to the Pre-Offering
Indebtedness.
COMPARISON OF SEGMENT RESULTS
The following table details the Company's net income by segment for the
three months ended March 31, 1996 and 1997.
FOR THE
THREE MONTHS
ENDED MARCH
31,
-------------
1996 1997
---- ----
(IN MILLIONS,
UNAUDITED)
Annuity...................................................................... $ 33 $ 43
Individual Life Insurance.................................................... 9 11
Employee Benefits............................................................ 16 18
Guaranteed Investment Contracts(1)........................................... (15) --
Corporate Operation(2)....................................................... (4) (10)
Unallocated net realized capital gains (losses)(3)........................... -- 1
--- ----
Net income................................................................. $ 39 $ 63
=== ====
- ---------------
(1) The Company substantially withdrew from the general account GRC business in
1995. Management expects no material income or loss from the Guaranteed
Investment Contracts segment in the future as described herein.
(2) The Company maintains a Corporate Operation through which it reports items
that are not directly allocable to any of its business segments. Included in
the Corporate Operation are: (i) unallocated income and expense, (ii) the
Company's group medical business, which it exited in 1993, and (iii) certain
other items not directly allocable to any segment such as items related to
the ITT Spin-Off. For a discussion of the Corporate Operation, see
"-- Results of Operations for the Years Ended December 31, 1994, 1995 and
1996 -- Corporate Operation".
(3) Represents net realized capital gains (losses) that are not allocable to any
of the Company's business segments.
S-19
21
The following tables detail the Annuity segment's sales, account value and
individual annuity sales by distribution channel as of or for the three months
ended March 31, 1996 and 1997.
AS OF OR FOR THE
THREE MONTHS
ENDED MARCH 31,
-----------------
1996 1997
------- -------
(IN MILLIONS,
UNAUDITED)
ANNUITY
Quarterly sales by product
Individual variable annuities....................................... $ 2,200 $ 2,452
Fixed MVA/Other individual annuities................................ 40 120
Mutual funds........................................................ -- 88
Group annuities..................................................... 90 165
Account value
Individual annuities
General account................................................... $ 2,576 $ 2,924
Guaranteed separate account....................................... 8,790 9,024
Non-guaranteed separate account................................... 21,259 31,666
------- -------
Total account value............................................ $32,625 $43,614
======= =======
Group annuities
Total account value............................................ $ 8,111 $ 9,104
Individual variable annuity total account value
Beginning total account value, January 1............................ $20,691 $32,397
Sales and other deposits.......................................... 2,200 2,457
Acquisitions...................................................... -- --
Market appreciation............................................... 842 (155)
Surrenders........................................................ (210) (444)
------- -------
Ending total account value, March 31................................ $23,523 $34,255
======= =======
Individual annuity sales by distribution channel
Broker-dealers...................................................... $ 1,509 $ 1,703
Banks............................................................... 731 869
------- -------
Total.......................................................... $ 2,240 $ 2,572
======= =======
The following tables detail the Individual Life Insurance segment's sales,
account value, insurance in force and revenues excluding a block of business
acquired from Investors Equity as of or for the three months ended March 31,
1996 and 1997.
AS OF OR FOR THE
THREE MONTHS
ENDED MARCH 31,
-----------------
1996 1997
------- -------
(IN MILLIONS,
UNAUDITED)
INDIVIDUAL LIFE
Quarterly sales by product
Variable life....................................................... $ 10 $ 15
Universal life/Interest-sensitive WHOLE LIFE........................ 11 8
TERM LIFE........................................................... 1 1
Other............................................................... -- --
------- -------
Total.......................................................... $ 22 $ 24
======= =======
Total account value.................................................... $ 2,656 $ 3,330
Total IN FORCE......................................................... $48,567 $52,277
Revenues excluding block of business acquisition from Investors
Equity.............................................................. $ 113 $ 118
S-20
22
The following tables detail the Employee Benefits segment's group insurance
premiums, group insurance reserves and COLI account value as of or for the three
months ended March 31, 1996 and 1997.
AS OF OR FOR THE
THREE MONTHS
ENDED MARCH 31,
-----------------
1996 1997
------- -------
(IN MILLIONS,
UNAUDITED)
EMPLOYEE BENEFITS
Group insurance premiums
Group disability.................................................... $ 106 $ 152
Group life.......................................................... 101 118
Other............................................................... 83 92
------- -------
Total.......................................................... $ 290 $ 362
======= =======
Group insurance reserves
Group disability.................................................... $ 1,048 $ 1,296
Group life.......................................................... 328 409
Other............................................................... 308 286
------- -------
Total.......................................................... $ 1,684 $ 1,991
======= =======
COLI account value
General account..................................................... $ 3,923 $ 3,853
Separate account.................................................... 3,537 4,352
------- -------
Total.......................................................... $ 7,460 $ 8,205
======= =======
The following tables detail the Guaranteed Investment Contracts segment's
sales and account value as of or for the three months ended March 31, 1996 and
1997.
AS OF OR FOR THE
THREE MONTHS
ENDED MARCH 31,
-----------------
1996 1997
------- -------
(IN MILLIONS,
UNAUDITED)
GUARANTEED INVESTMENT CONTRACTS
Guaranteed investment contract sales
General account..................................................... $ 28 $ 13
Separate account.................................................... 42 28
------- -------
Total.......................................................... $ 70 $ 41
======= =======
Account value
General account..................................................... $ 5,318 $ 3,758
Guaranteed separate account......................................... 415 428
------- -------
Total.......................................................... $ 5,733 $ 4,186
======= =======
S-21
23
COMPARISON OF ANNUITY SEGMENT RESULTS
The following table details the Annuity segment's net income for the three
months ended March 31, 1996 and 1997.
FOR THE
THREE MONTHS
ENDED MARCH
31,
-------------
1996 1997
---- ----
(IN MILLIONS,
UNAUDITED)
Revenues:
Premiums and other considerations........................................ $126 $164
Net investment income.................................................... 109 118
Net realized capital gains (losses)...................................... -- --
---- ----
Total revenues........................................................ 235 282
---- ----
Benefits, claims and expenses:
Benefits, claims and claim adjustment expenses........................... 105 118
Amortization of deferred policy acquisition costs........................ 44 55
Dividends to policyholders............................................... -- --
Other insurance expense.................................................. 35 42
---- ----
Total benefits, claims and expenses................................... 184 215
---- ----
Income before income tax expense........................................... 51 67
Income tax expense......................................................... 18 24
---- ----
Net income............................................................ $ 33 $ 43
==== ====
Revenues increased $47 million, or 20%, to $282 million in the first
quarter of 1997 from $235 million in the first quarter of 1996 primarily as a
result of an increase in individual annuity account value, particularly
individual variable annuity account value, which generated significantly higher
fee income. As of March 31, 1997, individual annuity account value increased by
$11.0 billion, or 34%, to $43.6 billion from $32.6 billion as of March 31, 1996.
The growth in account value was the result of strong sales over the past twelve
months, coupled with growth in the Company's separate accounts due to the rise
in the stock market in the fourth quarter of 1996. Annuity sales were $2.57
billion in the first quarter of 1997, as compared with $2.24 billion for the
first quarter of 1996, with variable annuities comprising $2.45 billion, or 96%,
of such amount. Similar factors resulted in an increase in benefits, claims and
expenses of $31 million, or 17%, to $215 million in the first quarter of 1997
from $184 million in the first quarter of 1996.
Net income increased $10 million, or 30%, to $43 million in the first
quarter of 1997 from $33 million in the first quarter of 1996 as the total
average account value for this segment increased $12.4 billion, or 32%, to $51.7
billion in the first quarter of 1997 from $39.3 billion in the first quarter of
1996.
S-22
24
COMPARISON OF INDIVIDUAL LIFE INSURANCE SEGMENT RESULTS
The following table details the Individual Life Insurance segment's net
income for the three months ended March 31, 1996 and 1997.
FOR THE
THREE MONTHS
ENDED MARCH 31,
---------------
1996 1997
---- ----
(IN MILLIONS,
UNAUDITED)
Revenues:
Premiums and other considerations........................................ $ 88 $ 78
Net investment income.................................................... 34 40
Net realized capital gains (losses)...................................... -- --
---- ----
Total revenues........................................................ 122 118
---- ----
Benefits, claims and expenses:
Benefits, claims and claim adjustment expenses........................... 70 55
Amortization of deferred policy acquisition costs........................ 21 26
Dividends to policyholders............................................... -- --
Other insurance expense.................................................. 18 20
---- ----
Total benefits, claims and expenses................................... 109 101
---- ----
Income before income tax expense........................................... 13 17
Income tax expense......................................................... 4 6
---- ----
Net income............................................................ $ 9 $ 11
==== ====
Revenues decreased $4 million, or 3%, to $118 million in the first quarter
of 1997 from $122 million in the first quarter of 1996 primarily as a result of
an assumption of a block of business from Investors Equity, which increased
revenues by $9 million in the first quarter of 1996, and a shift in the
Company's mix of business towards variable universal life insurance, which
generates less revenues than traditional life insurance. Similar factors
resulted in benefits, claims and expenses decreasing by $8 million, or 7%, to
$101 million in the first quarter of 1997 from $109 million in the first quarter
of 1996.
Net income increased $2 million, or 22%, to $11 million in the first
quarter of 1997 from $9 million in the first quarter of 1996 primarily due to
strong sales over the past twelve months, which increased the amount of
individual life insurance in force, and favorable mortality experience.
Individual life insurance sales were $24.4 million in the first quarter of 1997,
as compared with $22.5 million in the first quarter of 1996.
S-23
25
COMPARISON OF EMPLOYEE BENEFITS SEGMENT RESULTS
The following table details the Employee Benefits segment's net income for
the three months ended March 31, 1996 and 1997.
FOR THE
THREE MONTHS
ENDED MARCH 31,
---------------
1996 1997
---- ----
(IN MILLIONS,
UNAUDITED)
Revenues:
Premiums and other considerations........................................ $727 $435
Net investment income.................................................... 137 143
Net realized capital gains (losses)...................................... -- --
---- ----
Total revenues........................................................ 864 578
---- ----
Benefits, claims and expenses:
Benefits, claims and claim adjustment expenses........................... 376 416
Amortization of deferred policy acquisition costs........................ 1 2
Dividends to policyholders............................................... 286 54
Other insurance expense.................................................. 176 76
---- ----
Total benefits, claims and expenses................................... 839 548
---- ----
Income before income tax expense........................................... 25 30
Income tax expense......................................................... 9 12
---- ----
Net income............................................................ $ 16 $ 18
==== ====
Revenues decreased $286 million, or 33%, to $578 million in the first
quarter of 1997 from $864 million in the first quarter of 1996 due to a decrease
in revenues from COLI of $365 million. The decrease in COLI revenues resulted
from significantly less leveraged COLI premiums as a result of the HIPA Act of
1996. Such decrease was partially offset by a $79 million increase, or 25%, in
group insurance revenues. Similar factors resulted in benefits, claims and
expenses decreasing by $291 million, or 35%, to $548 million in the first
quarter of 1997 from $839 million in the first quarter of 1996.
Net income increased $2 million, or 13%, to $18 million in the first
quarter of 1997 from $16 million in the first quarter of 1996 primarily due to
growth in group insurance premiums and favorable morbidity experience. Premiums
from group insurance were $362 million in the first quarter of 1997, as compared
with $290 million in the first quarter of 1996.
S-24
26
COMPARISON OF GUARANTEED INVESTMENT CONTRACTS SEGMENT RESULTS
The following table details the Guaranteed Investment Contracts segment's
net loss for the three months ended March 31, 1996 and 1997.
FOR THE THREE
MONTHS ENDED
MARCH 31,
--------------
1996 1997
----- ----
(IN MILLIONS,
UNAUDITED)
Revenues:
Premiums and other considerations.......................................... $ 1 $ 1
Net investment income...................................................... 72 71
Net realized capital gains (losses)........................................ -- --
----- ---
Total revenues.......................................................... 73 72
----- ---
Benefits, claims and expenses:
Benefits, claims and claim adjustment expenses............................. 93 70
Amortization of deferred policy acquisition costs.......................... 1 --
Dividends to policyholders................................................. -- --
Other insurance expense.................................................... 2 2
----- ---
Total benefits, claims and expenses..................................... 96 72
----- ---
Loss before income tax expense............................................... (23) --
Income tax benefit........................................................... (8) --
----- ---
Net loss................................................................ $ (15) $--
===== ===
This segment had no net income in the first quarter of 1997, as compared
with a $15 million loss in the first quarter of 1996, consistent with
management's expectations that net income (loss) from Closed Book GRC in the
years subsequent to 1996 will be immaterial based on the Company's current
projections for the performance of the assets and liabilities associated with
Closed Book GRC.
S-25
27
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
SEGMENT DISCUSSION
The following table details the Company's net income by segment for the
five-year period ended December 31, 1996.
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- -----
(IN MILLIONS)
Annuity............................................... $ 35 $ 54 $ 84 $113 $ 145
Individual Life Insurance............................. 17 21 27 37 44
Employee Benefits..................................... 36 48 53 67 78
Guaranteed Investment Contracts....................... 21 30 1 (67) (225)
Corporate Operation(1)................................ (16) (28) (14) 3 (18)
Unallocated net realized capital gains (losses)(2).... 8 5 -- (3) --
Cumulative effect of changes in accounting
principles(3)....................................... (47) -- -- -- --
----- ---- ---- ---- ------
Net Income....................................... $ 54 $130 $151 $150 $ 24
===== ==== ==== ==== ======
- ---------------
(1) The Company maintains a Corporate Operation through which it reports items
that are not directly allocable to any of its business segments. Included in
the Corporate Operation are: (i) unallocated income and expense, (ii) the
Company's group medical business, which it exited in 1993, and (iii) certain
other items not directly allocable to any business segment such as ITT
Spin-Off related items. See "-- Results of Operations for the Years Ended
December 31, 1994, 1995 and 1996 -- Corporate Operation".
(2) Represents net realized capital gains (losses) that are not allocable to any
of the Company's business segments.
(3) Reflects the cumulative effect of adoption of SFAS No. 106, Employers'
Accounting for Postretirement Benefits Other Than Pensions, and SFAS No.
112, Employers' Accounting for Postemployment Benefits.
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 variety of products sold within this segment reflects the diverse
nature of the market. These products include individual variable annuities,
fixed MVA annuities, deferred compensation and retirement plan services for
municipal governments and corporations, STRUCTURED SETTLEMENT CONTRACTS and
other special purpose annuity contracts, investment management contracts and
mutual funds. The Annuity segment distributes its products primarily through
broker-dealers and financial institutions for individual sales, and through
employees of the Company for institutional sales. Account value in this segment
has grown from $12 billion in 1992 to $51 billion in 1996, which, along with
favorable expense trends, has resulted in an increase in this segment's net
income from $35 million in 1992 to $145 million in 1996, a compound annual
growth rate of 43%.
The Individual Life Insurance segment focuses on individuals' needs
regarding the transfer of wealth between generations, as well as the protection
of individuals and their families against lost earnings resulting from death.
The chief products sold in this market include both variable and fixed universal
life insurance-type contracts (including interest-sensitive whole life
insurance), as well as single premium variable life and term life insurance
products. The Individual Life Insurance segment distributes its products through
insurance agents, broker-dealers and financial institutions, typically assisted
by a dedicated group of Company employees. Life insurance in force has increased
from $29 billion in 1992 to $52 billion in 1996, of which $4.4 billion was
derived from acquisitions. The Company's growth in insurance in force, together
with favorable mortality results and a declining expense ratio, has resulted in
an increase in this segment's net income from $17 million in 1992 to $44 million
in 1996, a compound annual growth rate of 27%.
The Employee Benefits segment focuses on the needs of employers and
associations to purchase group insurance products. A significant amount of the
revenue and net income in this segment is derived from the sale of group life
insurance and group long-term and short-term disability products. This segment
also contains specialty businesses such as COLI, life/health reinsurance and
several international operations of the Company. The Employee Benefits segment
S-26
28
distributes its products through insurance agents and brokers, usually assisted
by a dedicated group of Company employees. Group insurance premiums have
increased from $841 million in 1992 to $1.329 billion in 1996, which, along with
favorable underwriting results, disciplined claims and expense management and
sales of COLI, have resulted in an increase in this segment's net income from
$36 million in 1992 to $78 million in 1996, a compound annual growth rate of
21%.
The Guaranteed Investment Contracts segment consists of GRC that are
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 GRC 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 to focus its distribution efforts on other products sold through other
segments. As a result, the Company has substantially withdrawn from the general
account GRC business. As discussed in "-- Results of Operations for the Years
Ended December 31, 1994, 1995 and 1996 -- Comparison of Guaranteed Investment
Contracts Segment Results", this segment has reported significant losses in
recent years. Management expects no material income or loss from the Guaranteed
Investment Contracts segment in the future.
The Company also maintains a Corporate Operation through which it reports
items that are not directly allocable to any of its business segments. Included
in the Corporate Operation are: (i) unallocated income and expense, (ii) the
Company's group medical business, which it exited in 1993, and (iii) certain
other items not directly allocable to any business segment such as ITT Spin-Off
related items. For a further discussion of the Corporate Operation, see
"-- Results of Operations for the Years Ended December 1994, 1995 and
1996 -- Corporate Operation".
COMPARISON OF CONSOLIDATED RESULTS
The following table details the Company's consolidated net income for the
three-year period ended December 31, 1996.
FOR THE YEAR ENDED DECEMBER
31,
----------------------------
1994 1995 1996
------ ------ ------
(IN MILLIONS)
Revenues:
Premiums and other considerations............................ $2,139 $2,643 $3,069
Net investment income........................................ 1,403 1,451 1,534
Net realized capital gains (losses).......................... 1 (4) (219)
------ ------ ------
Total revenues............................................ 3,543 4,090 4,384
------ ------ ------
Benefits, claims and expenses:
Benefits, claims and claim adjustment expenses............... 2,254 2,395 2,727
Amortization of deferred policy acquisitions costs........... 149 205 241
Dividends to policyholders(1)................................ 419 675 635
Interest expense(2).......................................... 29 35 55
Other insurance expense...................................... 469 554 695
------ ------ ------
Total benefits, claims and expenses....................... 3,320 3,864 4,353
------ ------ ------
Income before income tax expense............................... 223 226 31
Income tax expense............................................. 72 76 7
------ ------ ------
Net income................................................ $ 151 $ 150 $ 24
====== ====== ======
- ---------------
(1) Growth in dividends to policyholders is a result of the November 1992
acquisition from Mutual Benefit of a block of participating leveraged COLI
business and the subsequent growth in the leveraged COLI business from 1993
to 1995. Policyholder dividends are expected to decline in the future since
sales of new leveraged COLI policies have been terminated as a result of the
HIPA Act of 1996.
(2) For financial reporting purposes, the Company has treated certain amounts
previously allocated by The Hartford to the Company's life insurance
subsidiaries as Allocated Advances from parent. Such Allocated Advances were
not treated as liabilities or indebtedness for tax and statutory accounting
purposes. Cash received in respect of Allocated Advances from parent was
used to support the growth of the life insurance subsidiaries and was
treated as surplus for statutory accounting purposes. Interest expense prior
to December 31, 1996 represents the expense internally allocated to the
Company with respect to the Allocated Advances based on The Hartford's
actual (third party) external borrowing costs. Such interest expense paid
was treated as dividends for tax and statutory accounting purposes.
S-27
29
PREMIUMS AND OTHER CONSIDERATIONS. Premiums and other considerations
(including maintenance and expenses fees, COST OF INSURANCE charges and premiums
on traditional life, group life and group disability contracts) increased $426
million, or 16%, to $3.069 billion in 1996 from $2.643 billion in 1995. This
increase was principally the result of (i) a $216 million increase in the
Annuity segment due to a substantial increase in aggregate fees earned on a
larger block of separate account assets stemming from strong annuity sales and
market appreciation and (ii) a $167 million increase in the Employee Benefits
segment driven by an increase in group insurance premiums of $226 million in
1996 from strong group disability sales and renewals, partially offset by a
decline in COLI premiums from 1995 levels primarily due to the enactment of the
HIPA Act of 1996.
Premiums and other considerations increased $504 million, or 24%, to $2.643
billion in 1995 from $2.139 billion in 1994. This increase primarily reflects a
$505 million increase in the Employee Benefits segment, of which $376 million
was due to growth in the COLI business and the remainder of which was due to
increased group insurance premiums from strong group disability sales and
renewals.
NET INVESTMENT INCOME. Net investment income increased $83 million, or 6%,
to $1.534 billion in 1996 from $1.451 billion in 1995 due to growth in general
account assets, other than Closed Book GRC. Net investment income in Closed Book
GRC declined by $130 million as the average assets supporting Closed Book GRC
declined to $4.4 billion in 1996 from $6.2 billion in 1995. Excluding Closed
Book GRC, net investment income increased $213 million, or 19%, to $1.327
billion in 1996 from $1.114 billion in 1995.
Net investment income increased $48 million, or 3%, to $1.451 billion in
1995 from $1.403 billion in 1994 also due to growth in general account assets,
other than Closed Book GRC. Net investment income in Closed Book GRC declined by
$144 million as the average assets supporting Closed Book GRC declined to $6.2
billion in 1995 from $6.7 billion in 1994. Excluding Closed Book GRC, net
investment income increased $192 million, or 21%, to $1.114 billion in 1995 from
$922 million in 1994.
NET REALIZED CAPITAL GAINS (LOSSES). In 1996, the Company's net realized
capital losses were $219 million due to Closed Book GRC. For additional
information on the losses related to Closed Book GRC, see "-- Comparison of
Guaranteed Investment Contracts Segment Results -- Closed Book GRC". The
Company's net realized capital losses in 1995 and net realized capital gains in
1994 were immaterial.
BENEFITS, CLAIMS AND CLAIM ADJUSTMENT EXPENSES. Benefits, claims and claim
adjustment expenses increased $332 million, or 14%, to $2.727 billion in 1996
from $2.395 billion in 1995. This increase was caused primarily by (i) a $311
million increase in the Employee Benefits segment chiefly due to increased
blocks of group disability and COLI business and (ii) a $99 million increase in
the Annuity segment principally due to increased interest credited on general
account liabilities, including the general account portion of the individual
variable annuity products, partially offset by a decline of $124 million in
Closed Book GRC as the average assets supporting Closed Book GRC declined to
$4.4 billion in 1996 from $6.2 billion in 1995.
Benefits, claims and claim adjustment expenses increased $141 million, or
6%, to $2.395 billion in 1995 from $2.254 billion in 1994. This increase
principally reflects (i) a $173 million increase in the Employee Benefits
segment primarily due to an increase in the COLI block of business to $7.1
billion in 1995 from $3.2 billion in 1994 and (ii) a $27 million increase in the
Annuity segment due to increased interest credited on the growth in general
account liabilities, including the general account portion of the individual
variable annuity products, partially offset by (iii) the one-time effect of the
reserves assumed in connection with the Pacific Standard acquisition in 1994,
thereby creating a one-time increase in such expenses in 1994, and (iv) a
decline of $50 million in Closed Book GRC as the average assets supporting
Closed Book GRC declined to $6.2 billion in 1995 from $6.7 billion in 1994.
S-28
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AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS. In connection with the
sale of individual life and annuity contracts, the Company defers certain policy
acquisition costs ("DPAC"), records such costs as assets and amortizes such
costs against earnings over the estimated life of the contracts. The
amortization of DPAC increased $36 million, or 18%, to $241 million in 1996 from
$205 million in 1995 primarily due to increased sales and total account value in
the Annuity segment. In 1996, approximately 70% of the Company's DPAC related to
its individual annuity business. The amortization of DPAC increased $56 million,
or 38%, to $205 million in 1995 from $149 million in 1994 primarily due to an
increase in assets in the Annuity segment and an increase in the individual life
insurance in force.
DIVIDENDS TO POLICYHOLDERS. The Company's dividends to policyholders arise
out of the Company's leveraged COLI business, a substantial portion of which was
written on a participating basis. Dividends to policyholders decreased $40
million, or 6%, to $635 million in 1996 from $675 million primarily due to the
elimination of sales of leveraged COLI as a result of the enactment of the HIPA
Act of 1996. Dividends to policyholders increased $256 million, or 61%, to $675
million in 1995 from $419 million in 1994 primarily due to the substantial
growth of the COLI block of business from 1994.
INTEREST EXPENSE. Interest expense increased $20 million, or 57%, to $55
million in 1996 from $35 million in 1995 primarily due to an increase in
Allocated Advances from parent of $207 million at December 31, 1995 and $75
million at June 30, 1996. Interest expense increased $6 million, or 21%, to $35
million in 1995 from $29 million in 1994 mainly due to an increase in Allocated
Advances from parent of $100 million in 1994. The increase in Allocated Advances
from parent in June 1996 was in respect of a capital contribution by The
Hartford to support the Company's business growth. Allocated Advances from
parent increased in 1995 as a result of the increase of indebtedness of The
Hartford associated with transactions in connection with the ITT Spin-Off, a
portion of which indebtedness was allocated internally by The Hartford to the
Company as Allocated Advances.
OTHER INSURANCE EXPENSE. Other insurance expense, including premium taxes,
commissions and other general expenses, net of deferral, increased $141 million,
or 25%, to $695 million in 1996 from $554 million in 1995, primarily reflecting
increased blocks of group disability and COLI and strong individual annuity and
individual life insurance sales.
Other insurance expense increased $85 million, or 18%, to $554 million in
1995 from $469 million in 1994 primarily reflecting factors largely similar to
those described in the preceding paragraph as well as additional growth in the
Individual Life Insurance segment due to the Pacific Standard acquisition in
1994.
INCOME TAX EXPENSE. Income tax expense decreased $69 million in 1996 to $7
million in 1996 from $76 million in 1995 as a result of the charges associated
with Closed Book GRC. See "-- Comparison of Guaranteed Investment Contracts
Segment Results -- Closed Book GRC". Income tax expense increased $4 million to
$76 million in 1995 from $72 million in 1994 due to higher pre-tax income in the
Annuity, Individual Life Insurance and Employee Benefits segments, partially
offset by a decline in Closed Book GRC within the Guaranteed Investment
Contracts segment. The Company's effective tax rate is below the statutory tax
rate of 35% primarily due to the availability of the corporate dividends
received deduction.
NET INCOME. Net income decreased $126 million to $24 million in 1996 from
$150 million in 1995, chiefly reflecting a $158 million decrease owing to the
Guaranteed Investment Contracts segment, partially offset by growth in the
Company's three other business segments. Net income was essentially unchanged in
1995 at $150 million from $151 million in 1994 primarily due to a $68 million
decrease in the Guaranteed Investment Contracts segment, essentially offset by
growth in the Company's three other business segments.
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COMPARISON OF ANNUITY SEGMENT RESULTS
The following table details the Annuity segment's net income for the
three-year period ended December 31, 1996.
FOR THE YEAR ENDED
DECEMBER 31,
------------------------
1994 1995 1996
---- ---- ------
(IN MILLIONS)
Revenues:
Premiums and other considerations................................ $264 $323 $ 539
Net investment income............................................ 330 397 434
Net realized capital gains (losses).............................. -- -- --
----- ----- -----
Total revenues................................................ 594 720 973
----- ----- -----
Benefits, claims and expenses:
Benefits, claims and claim adjustment expenses................... 290 317 416
Amortization of deferred policy acquisition costs................ 90 117 174
Dividends to policyholders....................................... -- -- --
Other insurance expense.......................................... 85 118 159
----- ----- -----
Total benefits, claims and expenses........................... 465 552 749
----- ----- -----
Income before income tax expense................................... 129 168 224
Income tax expense................................................. 45 55 79
----- ----- -----
Net income.................................................... $ 84 $113 $ 145
===== ===== =====
Revenues increased $253 million, or 35%, to $973 million in 1996 from $720
million in 1995. This increase was principally the result of a $216 million
increase in premiums and other considerations, reflecting a substantial increase
in aggregate fees earned due to the Company's growing block of separate account
assets. The average separate account assets of this segment increased to $37.2
billion in 1996 from $26.1 billion in 1995 primarily due to sales of individual
annuities of approximately $10 billion in 1996 and $7 billion in 1995, as well
as strong market appreciation in both 1996 and 1995. In addition, the average
general account invested assets of this segment increased to $7.2 billion in
1996 from $6.2 billion in 1995 largely as a result of growth in the general
account portion of the individual variable annuity products of the Company. The
growth in this segment in 1996 also resulted in an increase in total benefits,
claims and expenses of $197 million, or 36%, to $749 million in 1996 from $552
million in 1995. The 37% growth in average account value in 1996, coupled with
an overall reduction in individual annuity expenses as a percentage of total
individual annuity account value to 28 basis points in 1996 from 31 basis points
in 1995, has contributed to the growth in net income of $32 million, or 28%, to
$145 million in 1996 from $113 million in 1995. Similar factors generated an
increase in 1995, as compared with 1994, in revenues of $126 million, or 21%,
average general account invested assets of $1.1 billion, or 21%, average
separate account assets of $8.0 billion, or 44%, total benefits, claims and
expenses of $87 million, or 19%, net income of $29 million, or 35%, and a
reduction in individual annuity expenses as a percentage of total individual
annuity account value to 31 basis points in 1995 from 35 basis points in 1994.
S-30
32
COMPARISON OF INDIVIDUAL LIFE INSURANCE SEGMENT RESULTS
The following table details the Individual Life Insurance segment's net
income for the three-year period ended December 31, 1996.
FOR THE YEAR ENDED
DECEMBER 31,
---------------------------
1994 1995 1996
----- ----- -----
(IN MILLIONS)
Revenues:
Premiums and other considerations................................ $ 277 $ 266 $ 313
Net investment income............................................ 113 142 159
Net realized capital gains (losses).............................. 1 -- --
---- ---- ----
Total revenues................................................ 391 408 472
---- ---- ----
Benefits, claims and expenses:
Benefits, claims and claim adjustment expenses................... 252 217 266
Amortization of deferred policy acquisition costs................ 52 72 63
Dividends to policyholders....................................... -- -- 1
Other insurance expense.......................................... 47 61 74
---- ---- ----
Total benefits, claims and expenses........................... 351 350 404
---- ---- ----
Income before income tax expense................................... 40 58 68
Income tax expense................................................. 13 21 24
---- ---- ----
Net income.................................................... $ 27 $ 37 $ 44
==== ==== ====
Revenues increased $64 million, or 16%, to $472 million in 1996 from $408
million in 1995. This increase was chiefly due to a $47 million increase in
premiums and other considerations, reflecting the cost of insurance charges and
variable life insurance fees applied to a larger block of business as insurance
in force increased to $52 billion in 1996 from $48 billion in 1995. Total
benefits, claims and expenses increased $54 million, or 15%, to $404 million in
1996 from $350 million in 1995. This increase also reflects the increase in the
block of individual life insurance business. Additionally, in recent years,
mortality results have been favorable. The combination of growth of the
Company's business and favorable mortality experience resulted in an increase in
net income in this segment of $7 million, or 19%, to $44 million in 1996 from
$37 million in 1995.
In addition, two other events, along with those mentioned above, influenced
the results of 1995 as compared with 1994. In 1994, the Company assumed $218
million of individual life insurance reserves from Pacific Standard. This
affected both revenues and total benefits, claims and expenses for 1994.
Expenses were also positively influenced by the consolidation of the
professional functions previously performed in Minneapolis, Minnesota into the
Company's Simsbury, Connecticut operations. The combination of this acquisition,
internal Company growth, expense management and favorable mortality experience
caused net income in this segment to increase $10 million, or 37%, to $37
million in 1995 from $27 million in 1994.
S-31
33
COMPARISON OF EMPLOYEE BENEFITS SEGMENT RESULTS
The following table details the Employee Benefits segment's net income for
the three-year period ended December 31, 1996.
FOR THE YEAR ENDED
DECEMBER 31,
----------------------------
1994 1995 1996
------ ------ ------
(IN MILLIONS)
Revenues:
Premiums and other considerations............................ $1,543 $2,048 $2,215
Net investment income........................................ 443 467 618
Net realized capital gains (losses).......................... -- -- --
------ ------ ------
Total revenues............................................ 1,986 2,515 2,833
------ ------ ------
Benefits, claims and expenses:
Benefits, claims and claim adjustment expenses............... 1,200 1,373 1,684
Amortization of deferred policy acquisition costs............ 3 4 4
Dividends to policyholders(1)................................ 419 675 634
Other insurance expense...................................... 283 362 396
------ ------ ------
Total benefits, claims and expenses....................... 1,905 2,414 2,718
------ ------ ------
Income before income tax expense............................... 81 101 115
Income tax expense............................................. 28 34 37
------ ------ ------
Net income................................................ $ 53 $ 67 $ 78
====== ====== ======
- ---------------
(1) Growth in dividends to policyholders is a result of the November 1992
acquisition from Mutual Benefit of a block of participating leveraged COLI
business and the subsequent growth in the leveraged COLI business from 1993
to 1995. Policyholder dividends are expected to decline in the future since
sales of new leveraged COLI policies have been terminated as a result of the
HIPA Act of 1996.
Revenues increased $318 million, or 13%, to $2.833 billion in 1996 from
$2.515 billion in 1995. This increase was largely the result of (i) a $167
million increase in premiums and other considerations, reflecting a $226 million
increase in group insurance premiums from strong group disability sales and
renewals, partially offset by a decline in leveraged COLI premiums primarily due
to the enactment of the HIPA Act of 1996, and (ii) a $151 million increase in
net investment income primarily due to an increase in the Company's COLI account
value. Total benefits, claims and expenses increased $304 million, or 13%, to
$2.718 billion in 1996 from $2.414 billion in 1995. This increase generally
reflected an increased block of group disability business and other group
insurance and an increase in the Company's COLI block of business, partially
offset by a $41 million decrease in dividends to policyholders primarily due to
the elimination of sales of leveraged COLI as a result of the enactment of the
HIPA Act of 1996. This legislation phases out the deductibility of interest on
policy loans under COLI by 1998, thus eliminating all future sales of leveraged
COLI. Leveraged COLI will continue to contribute to the profitability of the
Company (although such contribution will be reduced in the future due to the
effects of this legislation). As a result, net income contributed by COLI may be
lower in the future (particularly during 1999 and later years). Expenses in the
group insurance business, as a percentage of premiums, have declined over the
past several years. This trend, along with favorable mortality and morbidity
experience, as well as the factors mentioned above, resulted in an increase in
net income in this segment of $11 million, or 16%, to $78 million in 1996 from
$67 million in 1995.
The Company had $306 million and $867 million of leveraged COLI sales in
1994 and 1995, respectively, which significantly affected the results of 1995
compared with 1994. Revenues increased $529 million, or 27%, in 1995 primarily
due to a $353 million increase related to COLI premiums. Total benefits, claims
and expenses increased $509 million, or 27%, in 1995 of which $344 million
related to COLI. The additional growth in COLI, coupled with factors similar to
those discussed above for 1996 compared with 1995, caused net income in this
segment to increase $14 million, or 26%, to $67 million in 1995 from $53 million
in 1994.
S-32
34
In general, the growth in COLI account value has been a significant
component of earnings for the Employee Benefits segment over the past three
years, representing $26 million, or 33%, in 1996, $22 million, or 33%, in 1995
and $16 million, or 30%, in 1994 of this segment's total earnings.
During 1994, 1995 and 1996, leveraged COLI sales generated revenues of $892
million, $1.226 billion and $1.298 billion, respectively, which represented 25%,
30% and 30% of the Company's total revenues.
COMPARISON OF GUARANTEED INVESTMENT CONTRACTS SEGMENT RESULTS
GENERAL. The following table details the Guaranteed Investment Contracts
segment's net income (loss) for the three-year period ended December 31, 1996.
FOR THE YEAR ENDED
DECEMBER 31,
------------------------
1994 1995 1996
---- ----- -----
(IN MILLIONS)
Revenues:
Premiums and other considerations............................... $ -- $ 1 $ 2
Net investment income........................................... 481 377 251
Net realized capital losses..................................... -- -- (219)
-----
-
------ ------
Total revenues............................................... 481 378 34
-----
-
------ ------
Benefits, claims and expenses:
Benefits, claims and claim adjustment expenses.................. 467 453 332
Amortization of deferred policy acquisition costs............... 4 12 1
Dividends to policyholders...................................... -- -- --
Other insurance expense......................................... 8 16 47
-----
-
------ ------
Total benefits, claims, and expenses......................... 479 481 380
-----
-
------ ------
Income (loss) before income tax expense (benefit)................. 2 (103) (346)
Income tax expense (benefit)...................................... 1 (36) (121)
-----
-
------ ------
Net income (loss)............................................ $ 1 $ (67) $(225)
====== ====== ======
The results of this segment have been materially and adversely affected by
lower investment rates and earnings from the investment portfolio supporting
Closed Book GRC due to prepayments on MBSs and CMOs substantially in excess of
assumed and historical levels. Closed Book GRC also was negatively affected by
an interest rate rise in 1994 which caused a mismatch in the duration of the
related assets and liabilities.
In 1995, the Company substantially withdrew from the general account GRC
business and now writes a limited amount of such business primarily as an
accommodation to customers. In 1996, the Company initiated certain asset sales
and hedging transactions to insulate itself from any ongoing income or loss
associated with the Closed Book GRC investment portfolio. As a result of the
foregoing actions, management expects that the net income (loss) from this
segment will be immaterial in the years subsequent to 1996.
Revenues decreased $344 million to $34 million in 1996 from $378 million in
1995 due to $219 million in net realized capital losses and a decline in net
investment income of $126 million. The net realized capital losses were the
result of asset sales and an other than temporary impairment charge in respect
of certain assets within the Closed Book GRC investment portfolio which
contributed $84 million and $135 million, respectively, of net realized capital
losses. Net investment income declined as the assets of this segment declined to
$4.5 billion in 1996 from $6.1 billion in 1995. This decline in assets also was
the principal cause of the decrease in benefits, claims and expenses of $101
million to $380 million in 1996 from $481 million in 1995. In addition,
amortization of DPAC was lower in 1996 because the unamortized DPAC asset for
all policies sold prior to January 1995 was fully amortized in 1995.
S-33
35
Revenues decreased $103 million to $378 million in 1995 from $481 million
in 1994 primarily due to lower net investment income on the assets supporting
this segment as result of the MBS and CMO prepayments discussed above. Benefits,
claims and expenses of $481 million in 1995 were essentially flat as compared
with 1994 as a decline in assets to $6.1 billion in 1995 from $7.3 billion in
1994 was offset by higher credited rates on policies sold in 1994 due to the
rise in the general level of interest rates, higher expenses and the DPAC
amortization discussed above.
CLOSED BOOK GRC. Closed Book GRC contains a segregated portfolio of assets
monitored and managed by the Company on a liquidating basis; however, such
designation as a "segregated" portfolio is only for internal management purposes
and has no legal or regulatory effect. As of December 31, 1996, Closed Book GRC
had general account assets of $3.6 billion and general account liabilities of
$3.6 billion. Closed Book GRC assets consisted of $2.7 billion of fixed maturity
securities (including $21 million of MBSs and $1.03 billion of CMOs), a $471
million market-neutral portfolio based on London interbank offered quotations
for U.S. dollar deposits ("LIBOR") and $432 million of cash or short-term
instruments. Of the $3.6 billion in Closed Book GRC liabilities remaining as of
December 31, 1996, the scheduled maturity is as follows: $1.2 billion, or 33%,
in 1997, $1.1 billion, or 31%, in 1998, $0.8 billion, or 22%, in 1999 and $0.5
billion, or 14%, thereafter.
Although the Closed Book GRC asset portfolio as a whole is duration matched
with its liabilities, certain investments continue to have a longer maturity
than their corresponding liabilities and will need to be liquidated prior to
maturity in order to meet the specific liability commitments. To protect the
existing value of these investments, the Company entered into various interest
rate swap, cap and floor transactions in late September 1996 with the objective
of offsetting the market price sensitivity of hedged assets to changes in
interest rates. The interest rate swap transactions primarily require the
Company to pay fixed rates and receive variable rates. The swaps mature between
1997 and 2003. The interest rate caps mature between 1997 and 2000 and have a
weighted average strike price of 7.49% (ranging from 4.5% to 8.8%). The interest
rate floors mature between 1997 and 2001 and have a weighted average strike
price of 5.62% (ranging from 3.7% to 6.75%). The caps and floors were entered
into to support certain portfolio assets that are subject to prepayment or
payment extension risk. As a result of the hedges, the Company substantially
eliminated further fluctuation in the fair value of these investments due to
interest rate changes, thereby substantially reducing the likelihood of any
further loss on the assets due to such changes.
During 1996, Closed Book GRC incurred a $51 million after-tax loss from
operations as a result of negative interest spread, as compared with an
after-tax loss from operations of $68 million in 1995. With the initiation of
the hedge transactions discussed above, which eliminated the possibility that
the fair value of Closed Book GRC investments would recover to their current
amortized cost prior to sale, an other than temporary impairment loss of $82
million, after tax, was determined to have occurred and was recorded in
September 1996. An additional other than temporary impairment loss of $6
million, after tax, occurred in the fourth quarter of 1996 bringing the total
1996 impairment to $88 million. Also, during the third quarter of 1996, Closed
Book GRC had asset sales resulting in proceeds of approximately $500 million and
a realized loss of $55 million, after tax. The asset sales were undertaken as a
result of liquidity needs and favorable market conditions for certain
securities. Other charges of $32 million, after tax, which primarily reflect an
interest accrual on potential tax assessments, also were recorded in the third
quarter of 1996. The interest accrual reflects the Company's assessment of the
probable outcome of a United States Internal Revenue Service (the "Internal
Revenue Service") examination of the tax treatment of certain hedges employed in
respect of the products included in Closed Book GRC.
In response to the losses associated with Closed Book GRC, the Company
instituted an improved risk management process. The Company, among other
actions, established a separate risk management unit and increased the frequency
with which its material portfolios are reviewed. See "Business -- Investment
Operations -- General". Management expects that the net income (loss) from
Closed Book GRC in the years subsequent to 1996 will be immaterial based on the
Company's current projections for the performance of the assets and liabilities
associated with Closed Book GRC, the Company's expectations regarding future
sales of assets from the Closed
S-34
36
Book GRC investment portfolio from time to time in order to make the necessary
payments on maturing Closed Book GRC liabilities and the stabilizing effect of
the hedge transactions. To date, such asset sales have been consistent with the
Company's expectations. There are no legal or regulatory restrictions that
affect the Company's ability to sell any of its general account assets to
satisfy any obligations in respect of Closed Book GRC liabilities. In
determining the projected Closed Book GRC net income in years subsequent to
1996, the Company assumed that yield spreads implicit in market values would be
consistent with historic trends. In addition, the Company assumed that there
would be no material credit losses in respect of assets supporting Closed Book
GRC. However, no assurance can be given that, under certain unanticipated
economic circumstances which result in the Company's assumptions proving
inaccurate, further losses in respect of Closed Book GRC will not occur in the
future.
CORPORATE OPERATION
GENERAL. The Corporate Operation includes (i) unallocated income and
expense, (ii) the Company's group medical business, which it exited in 1993, and
(iii) certain other items not directly allocable to any business segment such as
ITT Spin-Off related items.
The following table details the components of the Corporate Operation
(after tax) for the three-year period ended December 31, 1996:
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------
1994 1995 1996
---- ---- -----
(IN MILLIONS)
Unallocated income and expense..................................... (7) (14) (18)
Group medical business............................................. (7) (1) 1
ITT Spin-Off related items and other............................... -- 18 (1)
---- ---- -----
Total Corporate Operation................................ $(14) $ 3 $ (18)
===== ===== ======
UNALLOCATED INCOME AND EXPENSE. The Company includes in the Corporate
Operation net investment income on assets representing surplus not assigned to
any of its business segments, interest expense on Allocated Advances and certain
other revenues and expenses not specifically allocable to any of its business
segments. Excluding the impact of the other items described under "-- Group
Medical Business" and "-- Other", the Corporate Operation experienced a net loss
of $7 million, $14 million and $18 million in 1994, 1995, and 1996,
respectively. The increase in the net loss experienced by the unallocated income
and expense component of the Corporate Operation was principally due to the
increase in interest expense reported over 1994, 1995 and 1996, which was
partially offset by increased net investment income on capital contributions
made to the Company's life insurance subsidiaries.
In connection with the 1997 increase in the Company's indebtedness as a
result of the borrowing under the Line of Credit, the execution of the $100
Million Promissory Note and the $25 Million Promissory Note and the issuance of
the Securities offered hereby, interest expense is expected to increase in 1997
as compared with prior years.
GROUP MEDICAL BUSINESS. The Company also previously marketed group medical
insurance to its customers. The Company exited this business in 1993. Management
had determined that the projected future return on assigned capital for the
group medical business was inadequate. This decision allowed the Company to
focus its group insurance operation on group life and group disability coverage.
All known material obligations related to the Company's exit from the group
medical business expired as of December 31, 1996. The Company's group medical
business reported a net loss of $7 million and $1 million in 1994 and 1995,
respectively, and net income of $1 million in 1996.
OTHER. In addition, the effects of an insurance guaranty fund adjustment of
$10 million in 1995 made to reflect lower than expected insolvencies in the
insurance industry and the impact of certain assets and liabilities assumed by
the Company in 1995 in connection with the ITT Spin-Off impacted the results of
the Company's Corporate Operation. Prior to 1995, as a response to certain
significant
S-35
37
insolvencies experienced in the life insurance industry during the late 1980s
and early 1990s, the Company took an approach which incorporated an assumption
that more companies experiencing financial difficulties would be formally
determined to be insolvent, resulting in increased assessments based on the
Company's premiums. As more historical data became available from outside
sources such as the National Organization of Life and Health Guaranty
Associations, the Company re-estimated reserves based on specific state
assessment data and determined that $10 million of such reserves could be
released.
INTERCOMPANY ARRANGEMENTS
The Company's relationship with The Hartford generally is governed by a
series of agreements entered into in connection with the Equity Offerings. These
agreements generally maintain the relationship between the Company and The
Hartford in a manner consistent in all material respects with past practice. As
a result, management believes that none of these arrangements will have a
material impact on the results of operations and liquidity of the Company. In
general, these arrangements are intended to remain in effect for so long as The
Hartford continues to maintain controlling beneficial ownership of the Company.
Under the terms of a master intercompany agreement between the Company, The
Hartford and, with respect to certain sections thereof, Hartford Fire Insurance
Company ("Hartford Fire") (the "Master Intercompany Agreement"), the Company and
The Hartford have agreed to provide to each other services largely similar to
those which they provided prior to the completion of the Equity Offerings. In
addition, The Hartford has agreed to license to the Company and certain of its
subsidiaries all the trade names, service marks, logos (including the Stag Logo)
and other trademarks currently used by the Company in its domestic and
international operations. Furthermore, the Master Intercompany Agreement (i)
requires the Company to obtain prior written approval from The Hartford with
respect to certain corporate activities, (ii) provides for the assumption of
liabilities and cross-indemnities allocating liabilities between the parties and
(iii) grants certain registration rights to The Hartford and any other
transferee in respect of at least 5% of the then outstanding Common Stock
(together, the "Rights Holders"). The Master Intercompany Agreement contains
various termination provisions, including the ability of either party to
terminate the agreement with respect to the provision of services, upon six
months' written notice, in the event that The Hartford ceases to own 50% or more
of the combined voting power of the Company's then outstanding securities
eligible to vote in the election of directors of the Company (other than
securities having such power only upon the occurrence of a default or any other
extraordinary contingency) (the "Voting Stock"). See "Certain Relationships and
Transactions -- Intercompany Arrangements -- Master Intercompany Agreement".
A tax sharing agreement (the " Tax Sharing Agreement") provides that The
Hartford and its subsidiaries, including the Company, will file a consolidated
federal income tax return and that The Hartford has all the rights of a parent
of a consolidated group. However, The Hartford and its subsidiaries will make
payments to each other such that the amount of taxes each such party pays
generally would be that amount it would be required to pay as a separate filer.
As the controlling beneficial owner of the Company, The Hartford controls all
the tax decisions in respect of the Company. The Tax Sharing Agreement will
terminate when the Company ceases to be a subsidiary of The Hartford. See
"Certain Relationships and Transactions -- Intercompany Arrangements -- Tax
Sharing Agreement and Tax Consolidation".
Certain investment management agreements (the "Investment Management
Agreements") provide that the investment staff of The Hartford will implement
the investment strategies of the Company and act as advisor to certain of the
Company's non-guaranteed separate accounts and mutual funds for a fee based on
the actual costs of providing such services. During their respective initial
three-year terms, the Investment Management Agreements generally are not
terminable by The Hartford and are terminable by the Company, upon six months'
written notice, only if The Hartford fails to satisfy certain performance
benchmarks. In general, either party may terminate any of the Investment
Management Agreements upon and after the end of the initial three-year term,
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upon 180 days' prior written notice. The Investment Management Agreements
relating to the Company's mutual funds are terminable at any time. See "Certain
Relationships and Transactions -- Intercompany Arrangements -- Investment
Management Agreements".
The Company subleases its headquarters from Hartford Fire which currently
leases it from a third party pursuant to a sale-leaseback arrangement. Hartford
Fire retains the right to purchase the facility and the renewal option in
respect of such arrangement (such sublease, the "Simsbury Sublease"). The rental
payments are fixed (but not level) over the term of the lease and sublease. See
"Certain Relationships and Transactions -- Intercompany Arrangements -- Simsbury
Sublease".
LIQUIDITY AND CAPITAL RESOURCES
HOLDING COMPANY
Management believes that the liquidity requirements of the Company will be
met by funds from the operations of its subsidiaries. As a holding company, the
Company's principal source of funds is dividends from its operating
subsidiaries. For financial reporting purposes, the Company has treated certain
amounts previously allocated by The Hartford to the Company's life insurance
subsidiaries as Allocated Advances. Such Allocated Advances were not treated as
liabilities or indebtedness for tax and statutory accounting purposes. Cash
received in respect of Allocated Advances was used to support the growth of the
life insurance subsidiaries and was treated as surplus for statutory accounting
purposes. In return, the Company paid The Hartford certain dividends (so treated
for tax and statutory accounting purposes) based on The Hartford's actual (third
party) external borrowing costs. In general, the Company seeks to maintain a
conservative liquidity position and actively manages its capital levels,
asset/liability matching and the diversification, duration and credit quality of
its investments to ensure that it is able to meet its obligations.
Prior to the completion of the Equity Offerings, The Hartford provided
capital, including the Allocated Advances, to the Company's insurance
subsidiaries. Currently, the Company intends to independently address any
capital requirements that may arise. However, for so long as The Hartford
maintains a controlling interest in the Company, any deterioration in the
financial condition or ratings of The Hartford (as well as the Company) could
have the effect of increasing the Company's borrowing costs and/or impairing its
access to the capital markets. In addition, The Hartford has the ability,
through its controlling beneficial ownership of the Company and the terms of the
Master Intercompany Agreement, to limit or otherwise restrict the Company's
ability to raise common or preferred equity capital or incur debt. See "Certain
Relationships and Transactions -- Intercompany Arrangements -- Master
Intercompany Agreement".
The following table sets forth the historical amounts of capital
contributed by The Hartford to the Company and the related dividends accrued or
paid or interest expense paid by the Company to The Hartford in respect thereof.
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(IN MILLIONS)
Capital contributed................................ $ -- $100 $ 50 $180 $ --
Cash received in respect of Allocated
Advances(1)...................................... -- 50 100 -- 115
Dividends accrued or paid.......................... -- 24 17 226 --
Interest accrued and paid.......................... 26 25 29 35 55
---- ---- ---- ---- ----
Net Capital................................... $(26) $101 $104 $(81) $ 60
==== ==== ==== ==== ====
- ---------------
(1) Excludes non-cash Allocated Advances of $207 million in 1995 and $46 million
in 1996.
The payment of dividends to the Company from its life insurance
subsidiaries is subject to certain regulatory restrictions. The payment of
dividends by Connecticut-domiciled life insurers is
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limited under the insurance holding company laws of Connecticut. The Company
adheres to these laws which require notice to and approval by the Connecticut
Insurance Commissioner for the declaration or payment of any dividend that,
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 gain from operations for the
twelve-month period ending on the December 31 last preceding, in each case
determined under statutory insurance accounting practices. In addition, if any
dividend of a Connecticut-domiciled insurer exceeds the insurer's earned
surplus, it requires the approval of the Connecticut Insurance Commissioner.
Based on these limitations and 1996 statutory results, the Company would be able
to receive $132 million in dividends in 1997 from Hartford Life and Accident,
the Company's direct wholly owned subsidiary, without obtaining the approval of
the Connecticut Insurance Commissioner. See "Business -- Insurance
Regulation -- General Regulation at State Level".
On February 20, 1997, the Company made a payment of $1.184 billion as a
dividend to Hartford Accident and Indemnity. $893 million of such dividend
constituted a repayment of the Allocated Advances. This dividend was paid with
the $1.084 billion in cash borrowed by the Company under the Line of Credit,
with interest payable at the two-month Eurodollar rate, determined as described
below, plus 15 basis points (5.65% at the inception of the borrowing) and
principal payable on or before February 9, 1998, and the $100 Million Promissory
Note, with interest payable at the two-month Eurodollar rate, determined as
described below with respect to the Line of Credit, plus 15 basis points
(initially 5.60% upon the execution of the $100 Million Promissory Note) and
principal payable on February 19, 1998. Under the terms of the Line of Credit,
the Eurodollar rate is determined by taking the average one, two, three or
six-month rate (based upon the applicable interest period selected by the
Company) at which deposits in U.S. dollars are offered by each of the four
participating lenders in London, England to prime banks in the London interbank
market, plus an applicable margin (based upon the Company's current public debt
ratings). The Line of Credit includes covenants that limit mergers, liens and
dividends, as well as financial covenants that require minimum levels of
consolidated statutory surplus, risk based capital and net worth, and certain
other terms and provisions that are normal and customary for agreements of this
type. In particular, for so long as the Line of Credit remains outstanding, its
provisions limit the payment of cash dividends by the Company for, among other
things, the aggregate amount of cash dividends and distributions received by the
Company from its insurance subsidiaries. In addition, on April 4, 1997, the
Company made an additional payment of $25 million as a dividend to Hartford
Accident and Indemnity. The dividend was paid in the form of the $25 Million
Promissory Note, with interest payable at the one-month Eurodollar rate,
determined as described above with respect to the Line of Credit, plus 15 basis
points (initially 5.84% upon the execution of the $25 Million Promissory Note)
and principal payable on April 3, 1998. See "Company Financing Plan".
On May 28, 1997, the Company issued 26 million shares of its Class A Common
Stock and completed the Equity Offerings. The Company used the net proceeds
therefrom of $687.4 million to make a capital contribution of $183 million to
its life insurance subsidiaries, to reduce the Pre-Offering Indebtedness by $504
million (including the full repayment of the $100 Million Promissory Note) and
for general corporate purposes. Also on such date, Hartford Accident and
Indemnity cancelled $12 million of the aggregate principal amount payable by the
Company to Hartford Accident and Indemnity under the $25 Million Promissory
Note. The Company intends to use the net proceeds of the Debt Offering to
further reduce the borrowing under the Line of Credit. See "Capitalization". The
Company believes that, after giving effect to all of the foregoing transactions,
it will have sufficient liquidity to service its debt obligations. Furthermore,
the Company believes that because each of the transactions described in this and
the foregoing paragraph took place at the holding company level (i.e., at the
Company), they will have no impact on the statutory surplus of the Company's
insurance subsidiaries, other than an increase in statutory surplus to the
extent of capital contributions received from the Company in respect of the
Equity Offerings.
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The Company's fixed maturity investments are classified as
"available-for-sale" and, accordingly, are reflected in the Company's
consolidated financial statements at fair value with the corresponding impact
included as a component of stockholder's equity. Changes in interest rates,
accordingly, can have a significant impact on stockholder's equity. The effect
of Statement of Financial Accounting Standards ("SFAS") No. 115 on stockholder's
equity, which represents the net unrealized capital gain (loss), net of tax, on
fixed maturity investments, was a decrease of $725 million (including a
cumulative adjustment with respect to the adoption of SFAS No. 115 which
increased stockholder's equity by $103 million) as of December 31, 1994 and an
increase of $679 million and $71 million as of December 31, 1995 and 1996,
respectively.
Based on the Company's historic cash flow and current financial results,
management believes that the cash flow from the Company's operating activities
over the next year will provide sufficient liquidity for the operations of the
Company, as well as provide sufficient funds to enable the Company to make
dividend payments, satisfy debt service obligations and pay other operating
expenses. Management also believes that the completion of the Equity Offerings
has strengthened, and the continued execution of its business strategy for the
Company will further strengthen, the financial position of the Company. Although
the Company currently anticipates that it will be able to make dividend
payments, satisfy debt service obligations and pay other operating and capital
expenses for the foreseeable future, the Company can give no assurances as to
whether the net cash provided primarily by dividends from Hartford Life and
Accident and its other subsidiaries will provide sufficient funds for the
Company to do so.
OPERATING SUBSIDIARIES
The principal sources of funds for the Company's operating subsidiaries are
premiums, net investment income and other considerations, as well as maturities
and sales of invested assets. These funds are used primarily to pay policy
benefits, dividends to policyholders, claims, operating expenses, interest,
commissions and dividends to stockholders, as well as to purchase new
investments. The Company's life insurance and group disability products involve
long-term liabilities that in general have reasonably predictable payout
patterns. However, the Company's annuity products involve liabilities that are
less certain as to payout timing and may be subject to unexpected increases in
surrenders, which would result in increased liquidity needs. Accordingly,
asset/liability management is important to maintaining appropriate liquidity for
the Company's operations. The Company's investment strategies are designed to
reasonably match the yields and estimated durations of its investments with the
contractual obligations of its policies. The Company acquires investments that
management believes will provide a predictable spread between investment
earnings and amounts credited to policyholders and contractholders and will
allow the Company to maintain sufficient liquidity in its investment portfolio
in order to adequately satisfy policy and contract commitments under a broad
range of adverse economic circumstances. In addition, the Company closely
monitors market and other economic conditions that might affect the value and
duration of its assets and the persistency of its liabilities. For a discussion
of the Company's investment operations, see "Business -- Investment Operations".
The Company maintained cash and short-term investments totaling $895
million, $1.2 billion, $837 million and $960 million as of December 31, 1994,
1995 and 1996 and March 31, 1997, respectively, and believes that its investment
policies combined with the terms of its life insurance and annuity contracts are
adequate to support its liquidity needs. Investment grade, public fixed maturity
securities (including securities sold pursuant to Rule 144A of the Securities
Act ("Rule 144A")) represented 99.5% of the Company's general account and
guaranteed separate account investment portfolios at December 31, 1996. For a
discussion of the Company's investment operations, see "Business -- Investment
Operations".
Interest rate fluctuations can affect the duration of contractual
obligations as well as the value and duration of the assets supporting these
obligations and expose the Company to disintermediation risk. The Company can
respond to interest rate fluctuations in a number of ways, including
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changing investment strategies for new cash flows, adjusting interest crediting
rates (subject to policy limitations in some instances) and adjusting the price
on any new products.
In addition, the Company closely evaluates and monitors the risk of early
policyholder and contractholder surrender. Management believes that it has
minimized the potential impact of surrenders, particularly with respect to its
annuity business, by protecting approximately 99% of its insurance liabilities
as of December 31, 1996 against early surrender through the use of non-
guaranteed separate accounts, MVA features, policy loans, surrender charges and
non-surrenderability provisions as detailed in the following table.
FOR THE YEAR ENDED DECEMBER 31, 1996
-------------------------------------------------
AMOUNT OF PERCENTAGE OF TOTAL
INSURANCE LIABILITIES INSURANCE LIABILITIES
--------------------- ---------------------
(IN BILLIONS)
Non-guaranteed separate accounts..................... $38.1 56%
MVA feature.......................................... 17.1 25
Policy loans(1)...................................... 4.0 6
Non-surrenderability................................. 3.9 6
----- ---
Subtotal........................................ 63.1 93
Surrender charges on remaining liabilities........... 4.2 6
----- ---
Total........................................... $67.3 99%
===== ===
- ---------------
(1) Policy loans primarily relate to the Company's leveraged COLI business in
which the Company earns a stated spread on assets that are loaned to the
related policyholder.
In particular, the Company uses surrender charges to limit the ability of
individual and group annuity policyholders to withdraw from such contracts. The
following table summarizes the Company's annuity policy reserves as of December
31, 1996 and 1995 based on such policyholders' ability to withdraw funds.
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------
1995 1996
---------------------- ----------------------
PERCENTAGE PERCENTAGE
POLICY OF TOTAL POLICY OF TOTAL
RESERVES RESERVES RESERVES RESERVES
------- ---------- ------- ----------
(IN MILLIONS)
Not subject to discretionary withdrawal..... $ 1,363 3% $ 1,807 3%
Subject to discretionary withdrawal with
adjustment:
With MVA.................................. 37,445 86 48,160 89
At contract value, less surrender charge
of 5% or more.......................... 1,743 4 1,592 3
Subject to discretionary withdrawal at
contract value with no surrender charge or
surrender charge of less than 5%.......... 2,863 7 2,628 5
------- ---- ------- ----
Total annuity policy reserves.......... $43,414 100% $54,187 100%
======= ==== ======= ====
Life insurance policies also are subject to surrender; however, they are
less susceptible to surrender than annuity contracts because policyholders must
generally undergo a new underwriting process and incur new policy acquisition
costs in order to obtain new life insurance policies.
Surrenders and other fund withdrawals on all insurance liabilities,
including liabilities related to Closed Book GRC, totaled $3.0 billion, $5.2
billion and $5.8 billion, and benefits totaled $1.1 billion, $1.2 billion and
$1.2 billion, in each of 1994, 1995 and 1996, respectively. Surrenders and other
fund withdrawals totaled $1.4 billion and $1.5 billion, and benefits totaled
approximately $400 million and
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$500 million, during the three months ended March 31, 1996 and 1997,
respectively. Such surrenders and other fund withdrawals and benefits were met
with cash from operations and required no significant sale of fixed maturity
assets.
The Company's asset for DPAC reflects those portions of acquisition costs,
including commissions and certain underwriting expenses associated with
acquiring insurance products, which are deferred and amortized over the lesser
of the estimated or actual contract life. As of December 31, 1996, DPAC was $2.8
billion, having grown from $836 million as of December 31, 1992, principally
owing to the growth in sales of the Company's annuity products. As of March 31,
1997, DPAC was $2.9 billion. In determining its DPAC deferral and amortization,
the Company believes it sets its amortization and lapse assumptions and other
key variables at reasonable and conservative levels, deferring only those
acquisition expenses that are within pricing allowables (which is a measure of
the amount of expenses permissible for deferral consistent with the Company's
target returns over the expected life of a product). In contrast, GAAP generally
allows companies to defer recoverable acquisition expenses independent of
expected return. These assumptions and the recoverability of the asset are
periodically monitored by the Company's internal actuarial and accounting
professionals, with adjustments made, where appropriate, in accordance with SFAS
No. 60 and SFAS No. 97. Approximately 70% of the Company's DPAC asset relates to
the Company's individual annuity block of business. The DPAC asset in respect of
the individual variable and fixed MVA annuity products has a weighted average
life of less than nine years and approximately six years, respectively, at the
time of sale. By comparison, the Company imposes surrender charges, on a
declining basis, for seven years, although its fixed MVA annuities sold with a
five or six year rate guarantee may be surrendered without penalty at the end of
the guarantee period.
To date, the Company's experience has been favorable, in the aggregate,
compared with the assumptions used in its internal DPAC amortization models. The
Company believes that its product design, its relationships with its wholesalers
and retail distributors and the quality of its customer service have been
contributing factors to this positive variance. However, if lapse levels were to
substantially rise, the Company could determine that accelerated DPAC
amortization would be necessary.
For a discussion of potential material adverse effects to the Company's
business, financial condition and results of operations in connection with any
further downgrade in the ratings of the Company's insurance subsidiaries, see
"Business -- Ratings".
RECENT ACCOUNTING PRONOUNCEMENTS
For a discussion of certain enacted changes and recently proposed
accounting principles, see notes to consolidated financial statements
incorporated herein by reference to the Company's Form 10 and
"Business -- Investment Operations -- Asset/Liability Management
Strategies -- Portfolio Hedging".
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BUSINESS
GENERAL
The Company is a leading insurance and financial services company with
operations that provide (i) annuity products such as individual variable
annuities and fixed 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 new sales for the year
ended December 31, 1996 (according to information compiled by LIMRA and VARDS,
respectively), the eighth largest consolidated life insurance company based on
statutory assets as of December 31, 1995, and the largest writer of group
short-term disability benefit plans and the second largest writer of group
long-term disability insurance based on full-year 1995 new premiums and premium
equivalents (according to information reported to EBPR).
The Company's assets have grown at a compound annual growth rate of 36%,
from $23 billion in 1992 to $80 billion in 1996. The Company has achieved rapid
growth of assets by pursuing 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 Stag Logo, one of the most recognized
symbols in the financial services industry. During this period, the Company has
attained strong market positions for its principal product
offerings -- annuities, individual life insurance and employee benefits. In
particular, the Company holds the leading market position in the individual
variable annuity industry based on sales for the year ended December 31, 1996.
The Company's sales of individual variable annuities grew from $1.8 billion in
1992 to $9.3 billion in 1996, and, for the year ended December 31, 1996, the
Company had a 13% market share (according to information compiled by VARDS).
During this period of growth, the Company's separate account assets, which are
generated principally by the sale of annuities, grew from 36% of total assets at
December 31, 1992 to 62% of total assets at December 31, 1996. The Company
believes that such asset growth stems from various factors including the variety
and quality of its product offerings, the performance of its products, the
effectiveness of its multiple channel distribution network, the quality of its
customer service and the overall growth of the variable annuity industry and the
stock and bond markets. However, there is no assurance that the Company's
historical growth rate will continue.
Management believes the Company's substantial growth in assets, together
with management's effort to control expenses, has made the Company one of the
most efficient competitors in the insurance industry. In 1995, the Company had
the ninth lowest ratio of general insurance expenses to statutory assets, an
industry measure of operating efficiency, of the fifty largest U.S. life
insurers, based on statutory assets. The Company's ratio improved to .64% in
1996, from .72% in 1995 and 1.38% in 1992, as compared with the average ratio of
1.50% for the fifty largest U.S. life insurers for the year ended December 31,
1995, based on information compiled by A.M. Best.
The Company is a newly-organized holding company formed in December 1996,
which holds virtually all the annuity, individual life insurance and employee
benefits operations of The Hartford. In addition, The Hartford owns certain life
insurance operations internationally (through wholly owned subsidiaries in
Spain, the United Kingdom and The Netherlands) acquired in connection with the
acquisition of companies primarily engaged in property-casualty insurance. The
Company is a direct subsidiary of Hartford Accident and Indemnity and an
indirect subsidiary of Hartford Fire. Hartford Fire is a direct wholly owned
subsidiary of Nutmeg Insurance Company, which is a direct wholly owned
subsidiary of The Hartford. The Hartford is among the largest domestic and
international providers of commercial property-casualty insurance,
property-casualty reinsurance and personal lines (including homeowners and auto)
coverages. On December 19, 1995, ITT distributed all the outstanding shares of
capital stock of The Hartford to ITT stockholders of record on such date in
connection with the ITT Spin-Off. As a result of the ITT Spin-Off, The Hartford
became an independent, publicly traded company.
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INDUSTRY OVERVIEW
The life insurance and annuity industries recently have been influenced by
certain savings trends and demographic factors. The United States Census Bureau
reports that the number of individuals aged 45 to 64, which represents the
Company's primary market, will grow from 55.7 million in 1996 to 71.1 million in
2005, making this age group the fastest growing segment of the U.S. population.
In addition, the Bureau of Labor Statistics forecasts that individuals in the
United States will live approximately 18.6 years beyond the age of their
retirement. These emerging demographic trends have significantly influenced the
growth of the Company as, in management's view, the "baby boomer" segment of the
population has become increasingly concerned about retirement and the public's
confidence in the ability of government-provided retirement benefits to meet
retirement needs diminishes. The Company also has benefited as employer-provided
defined benefit plans and other non-cash compensation have become used
increasingly as a means to facilitate savings for retirement. Moreover, as the
overall population ages, the Company believes that individuals will focus their
attention on efficiently transferring wealth between generations. As a result,
management believes that an increasing number of individuals will be attracted
to the Company's variety of savings-oriented insurance products, with
tax-advantaged status, in order to both fund their retirement years and protect
accumulated savings.
In addition, management believes that group life and group disability
insurance will continue to be an important employee benefit due to the growing
emphasis in recent years on the non-cash component of employee compensation. The
Company also believes that the continued growth of small businesses may result
in the overall growth of in force group insurance for the insurance industry.
Management expects that an increased demand for high-quality services in the
group insurance industry will result in continued growth in the Company's sales,
particularly if the Company successfully expands the range of services offered
in connection with its group disability products.
BUSINESS STRATEGY
Management believes that its corporate strategies will maintain and enhance
its position as a market leader within the financial services industry and will
maximize stockholder value. In addition, the Company's strong positions in each
of its businesses, coupled with the growth potential management believes exists
in its markets, provide opportunities to increase sales of its 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. Management has
established the following strategic priorities for the Company:
LEVERAGE THE COMPANY'S MULTIPLE CHANNEL DISTRIBUTION NETWORK. Management
believes that the Company's multiple channel distribution network provides a
distinct competitive advantage in selling its products and services to a broad
cross-section of customers throughout varying economic and market cycles. The
Company has access to a variety of distribution outlets through which it sells
its products and services, including approximately 1,350 national and regional
broker-dealers, approximately 450 banks (including 21 of the 25 largest banks in
the United States), 137,000 licensed life insurance agents, 2,900 insurance
brokers, 244 third-party administrators and 165 associations. In particular, the
Company believes that the bank and broker-dealer network employed by its Annuity
segment is among the largest in the insurance industry. Management believes that
this extensive distribution system generally provides the Company with greater
opportunities to access its customer base than its competitors and allows the
Company to introduce new products and services quickly through this established
distribution network as well as new channels of distribution. For example, the
Company sells fixed MVA annuities, variable annuities, mutual funds, single
premium variable life insurance and Section 401(k) plan services through its
broker-dealer and bank distribution systems.
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OFFER DIVERSE AND INNOVATIVE PRODUCTS. The Company provides its customers
a diverse mix of products and services aimed at serving their 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 outside money managers such as Wellington, Putnam
and Dean Witter. The Company also regularly develops and brings to market
innovative products and services. For example, the Company was the first major
seller of individual annuities to successfully develop and market 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 also was a
leader in introducing the "managed disability" approach to the group disability
insurance market. This approach focuses on early claimant intervention in an
effort to facilitate a claimant's return to work and to contain costs.
CAPITALIZE ON ECONOMIES OF SCALE, CUSTOMER SERVICE AND TECHNOLOGY. As a
result of its growth and attention to maintaining low expenses, the Company
believes it has achieved advantageous economies of scale and operating
efficiencies in its businesses which together enable the Company to
competitively price its products for its distribution network and policyholders.
For example, as noted above, the Company is the eighth largest consolidated life
insurance company based on statutory assets as of December 31, 1995, with a
ratio (as of such date) of general insurance expenses to statutory assets that
is less than half the average ratio for the fifty largest U.S. life insurers. In
addition, the Company has reduced its individual annuity expenses as a
percentage of total individual annuity account value to 28 basis points in 1996
from 43 basis points in 1992. In addition, the Company believes that it
maintains high-quality service for its customers and 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. In 1996, the Company received one of the
five Quality Tested Service Seals awarded by DALBAR, a recognized independent
research organization, for its achievement of the highest tier of customer
service in the variable annuity industry.
CONTINUE PRUDENT RISK MANAGEMENT. The Company's product designs, prudent
underwriting standards and risk management techniques protect it against
disintermediation risk and greater than expected mortality and morbidity. As of
December 31, 1996, the Company had limited exposure to disintermediation risk on
approximately 99% of its insurance liabilities through the use of non-guaranteed
separate accounts, MVA features, policy loans, surrender charges and
non-surrenderability provisions. With respect to the Company's individual
annuities, 97% of the related total account value was subject to surrender
charges as of December 31, 1996. The Company also enforces disciplined claims
management to protect the Company against greater than expected mortality and
morbidity. The Company regularly monitors its underwriting, mortality and
morbidity assumptions to determine whether its experience remains consistent
with these assumptions and to ensure that the Company's product pricing remains
appropriate.
BUILD ON BRAND NAME AND FINANCIAL STRENGTH. Management believes that the
combined effect of the above-mentioned strengths, The Hartford's 187-year
history and customer recognition of the Stag Logo have produced a distinguished
brand name for the Company. The Company's financial strength, characterized by
sound ratings and a balance sheet of well-protected liabilities and highly rated
assets, also has enhanced the Company's brand name within the financial services
industry. Management believes that brand awareness, an established reputation
and financial strength will continue to be important factors in maintaining
distribution relationships, enhancing investment advisory alliances and
generating new sales with customers.
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Annuity
GENERAL
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 fixed and variable annuities, certain deferred
compensation and retirement plan services, mutual funds, investment management
services and certain other financial products. Growth in the Company's assets
has been driven by its sale of variable annuities. Sales of individual annuities
were approximately $9.8 billion in 1996, bringing individual annuity total
account value to $41.7 billion as of December 31, 1996. Of the total individual
annuity account value, $32.4 billion relates to variable annuities and $9.0
billion relates to fixed MVA annuities held in guaranteed separate accounts. Of
the Company's $32.4 billion variable annuities in force, $29.9 billion, or 92%,
is held in non-guaranteed separate accounts, as of December 31, 1996. In
contrast, the next nine largest writers in the United States of variable
annuities held an average of 70% of their variable annuities in force in
non-guaranteed separate accounts, as of December 31, 1996, based on the
Company's analysis of information compiled by VARDS. The following table sets
forth the total account value by product and annual sales for the principal
product offerings in the Annuity segment.
Annuity Segment Account Value and Annual Sales
As of or for the Year Ended December 31,
---------------------------------------------------
1992 1993 1994 1995 1996
------- -------- -------- -------- --------
(in millions)
Account Value
Individual annuities
General account............................. $ 614 $ 1,255 $ 1,714 $ 2,439 $ 2,783
Guaranteed separate account(1).............. 2,663 3,989 7,026 8,996 8,960
Non-guaranteed separate account(2).......... 3,578 8,670 11,594 18,466 29,907
------ ------- ------- ------- -------
Total account value...................... $ 6,855 $ 13,914 $ 20,334 $ 29,901 $ 41,650
====== ======= ======= ======= =======
Group annuities
General account............................. $ 3,165 $ 3,512 $ 3,785 $ 4,453 $ 4,628
Guaranteed separate account(1).............. -- -- -- -- 170
Non-guaranteed separate account(2).......... 1,873 2,333 2,688 3,504 4,312
------ ------- ------- ------- -------
Total account value...................... $ 5,038 $ 5,845 $ 6,473 $ 7,957 $ 9,110
====== ======= ======= ======= =======
ANNUAL SALES BY PRODUCT(3)
Individual variable annuities................. $ 1,838 $ 4,055 $ 4,097 $ 4,868 $ 9,327
Fixed MVA/Other individual annuities.......... 374 177 2,908 2,079 514
Mutual funds.................................. -- -- -- -- 21
Group annuities............................... 326 370 366 495 634
- ---------------
(1) Guaranteed separate accounts represent policyholder funds that are
segregated from the general account of the Company and on which the Company
contractually guarantees a minimum return, subject, in most cases, to an MVA
feature if the relevant product is surrendered prior to the end of the
applicable guarantee period. The assets are carried at fair value.
Investment income and net realized capital gains and losses are not included
in the Company's Consolidated Statements of Income. Revenues to the Company
from the guaranteed separate accounts consist of investment earnings in
excess of guaranteed amounts.
(2) Non-guaranteed separate accounts represent policyholder funds that are
segregated from the general account of the Company and as to which the
Company does not guarantee a minimum return. The assets are carried at fair
value. Investment income and net realized capital gains and losses accrue
directly to the policyholders and are therefore not included in the
Company's Consolidated Statements of Income. Revenues to the Company from
the separate accounts consist of mortality and expense charges and other
investment fees.
(3) Annual sales data excludes asset transfers between different products sold
by the Company.
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INDIVIDUAL ANNUITIES
The Company is the market leader in the annuity industry and sells both
variable and fixed products, with single and flexible premium payment options,
through a wide distribution network of broker-dealers and other financial
institutions. Of the Company's total sales of individual annuities in 1996, 95%
were variable annuities and 5% were fixed MVA and other individual annuities.
The Company believes that its variable annuities have been particularly well
received due to the Company's product offerings, fund performance, successful
utilization of external wholesaling organizations, relationships with
broker-dealers and banks and quality of customer service, as well as the
relatively low level of interest rates and strong stock and bond market
appreciation. VARDS ranked the Company the number one writer of individual
variable annuities for the year ended December 31, 1996 with a 13% market share
based on sales. At present, the Company has approximately 950,000 individual
annuity contracts in force. The Company earns fees for managing annuity assets
(based on its total account value) and maintaining policyholders' accounts.
Each policyholder has a variety of equity and fixed income fund options
within the Company's different products. Deposits of varying amounts may be made
at regular or irregular intervals. The assets underlying the Company's variable
annuities are principally managed by Wellington, Putnam, Dean Witter and the
investment staff of The Hartford. For a discussion of the Investment Management
Agreements that the Company has entered into with The Hartford, see "Certain
Relationships and Transactions -- Intercompany Arrangements -- Investment
Management Agreements". 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 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, in each of the past five years, the Company has
achieved such earnings.
Variable annuity products have advantages for the Annuity segment in
comparison with traditional fixed annuity products. For 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. Management believes that the
investment performance of its separate accounts in recent years has created a
competitive advantage in the sale of its separate account products which makes
these products attractive to potential customers.
The growth of the Company's individual variable annuity account value has
been considerable for the past several years due to strong sales, acquisitions,
market appreciation and low levels of surrenders. The following table
illustrates the growth in individual variable annuity account value from the
beginning to the end of each calendar year listed below and the principal
factors that caused the increase in account value for each such year.
INDIVIDUAL VARIABLE ANNUITY TOTAL ACCOUNT VALUE
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1992 1993 1994 1995 1996
------- ------- -------- -------- --------
(IN MILLIONS)
Beginning Total Account Value........ $ 2,169 $ 4,096 $ 9,742 $ 13,078 $ 20,691
Sales and Other Deposits........... 1,876 4,444 4,186 5,024 9,647
Acquisitions....................... -- 827 -- -- --
Market Appreciation................ 209 724 (131) 3,440 3,406
Surrenders......................... (158) (349) (719) (851) (1,347)
------ ------ ------- ------- -------
Ending Total Account Value........... $ 4,096 $ 9,742 $ 13,078 $ 20,691 $ 32,397
====== ====== ======= ======= =======
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48
The Company has made a strategic decision to align itself with a select
group of high-quality independent money managers which have an interest in the
continued growth in sales of the Company's products. Two of the four largest
variable annuities (Putnam Capital Manager Variable Annuity and The Director) in
the annuity industry, for the year ended December 31, 1996, are managed in part
by Putnam and Wellington, respectively, each of which was selected by management
as part of this strategy. The Company believes these relationships, and the name
recognition of Wellington, Putnam and the Company's other independent money
managers, greatly enhance the marketability of its annuities and strength of its
product offerings.
The following table illustrates the performance of certain of the funds
available in respect of the Putnam Capital Manager Variable Annuity and The
Director. The historical performance of these funds is not an indication of
future performance.
SEPARATE ACCOUNT PERFORMANCE(1)
ONE-YEAR FIVE-YEAR
ANNUALIZED ANNUALIZED
FUND TYPE OF FUND ASSETS RETURN RETURN
- ------------------------------------ ----------------- ------------- ---------- ----------
(IN MILLIONS)
Putnam Capital Manager Variable
Annuity
Putnam VT Growth & Income......... Growth & Income $ 5,551 21.92% 15.97%
Putnam VT Voyager................. Aggressive Growth 3,161 12.94 16.03
Putnam VT New Opportunities....... Aggressive Growth 1,486 10.17 N/A
International
Putnam VT Global Growth........... Stock 1,322 17.18 12.11
Putnam VT High Yield.............. High Yield 761 12.81 13.48
All other Putnam Capital Manager
Variable Annuity non-guaranteed
separate accounts.............. 3,143
------
Total Putnam Capital Manager
Variable Annuity non-
guaranteed separate
accounts..................... 15,424
------
The Director
Advisers.......................... Balanced 5,126 16.59% 12.09%
Capital Appreciation.............. Growth 2,773 20.70 17.89
Stock............................. Growth 2,339 24.37 15.54
International
International Opportunities....... Stock 886 12.93 10.03
Dividend and Growth............... Growth & Income 816 22.91 N/A
All other Director non-guaranteed
separate accounts.............. 1,636
------
Total Director non-guaranteed
separate accounts............ 13,576
------
All other non-guaranteed separate
account assets.................... 907
------
Total variable annuity general
account assets............... 2,490
------
Total individual variable
annuity assets............... $32,397
======
- ---------------
(1) The information included herein has been compiled by the Company, as of
December 31, 1996, for the five largest mutual funds available within the
Putnam Capital Manager Variable Annuity and The Director products (the two
most popular variable annuity contracts sold by the Company).
S-47
49
Fixed MVA annuities are fixed rate annuity contracts that guarantee that a
specific sum of money will be paid in the future, either as a lump sum or as
monthly income, to an ANNUITANT. In the event that a policyholder surrenders a
policy prior to the end of a 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 (provided that the
Company has appropriately matched its portfolio of assets supporting its fixed
MVA annuities). The amount of such payments will not fluctuate due to adverse
changes in the Company's investment return, mortality experience or expenses.
The Company's primary fixed MVA annuities are CRC(R) and The Hartford Saver(R)
and The Hartford Saver Plus(R) annuities (together, the "Saver Annuities"),
which have terms of one, three, five, six, seven, eight, nine or ten years and
an average term of approximately seven years. As of December 31, 1996, interest
rates on these contracts ranged from 3.4% to 9.3% and averaged 6.53%. CRC is a
yield-to-maturity product with guaranteed principal and interest payments and an
MVA feature (and, in general, surrender charges) triggered in the event of the
early surrender of the policy. The assets related to CRC are held in a separate
account by the Company but the guaranteed rate is supported by the general
account of the Company. The Saver Annuities are yield-to-maturity products
similar to CRC that cap the MVA feature, thereby guaranteeing a minimum rate of
return minus any surrender charge. As a result of the design of its fixed MVA
annuities, the Company allocates less capital in respect of fixed MVA annuities
than would be required for other fixed annuity products. The Company offers its
fixed MVA annuities with terms designed to provide for a spread sufficient to
meet its internal return-on-equity goals. As a result, the Company achieves a
net investment spread on its fixed MVA annuities that is generally lower than
the net investment spreads now earned by its peers for fixed annuities without
MVA features. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- General".
In 1995, the Company, in conjunction with Pacific Mutual Life Insurance
Company, formed American Maturity Life Insurance Company ("AML") (of which the
Company owns 60%) in order to enter into a ten-year exclusive arrangement with
the American Association of Retired Persons ("AARP") to sell annuities to its 33
million members through direct mail and advertising. The Company believes this
relationship improves the Company's access to the growing market of senior
Americans. The Company initially offered a fixed MVA annuity to AARP members,
but there have been only limited sales of such product by AML due to the present
interest rate environment. However, in 1997, the Company has begun to offer AARP
members a variable annuity product in an effort to better realize the benefits
of this relationship.
DEFERRED COMPENSATION AND RETIREMENT PLAN SERVICES
The Company believes that it is among the leading 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"). At present, the Company administers
approximately 900 Section 457 plans for governmental entities, of which the
Company is the exclusive provider for 750 of such plans. These plans cover
approximately 200,000 individuals. Traditionally, Section 457 plan assets 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 such Section 457 plans. Generally, the Company manages the fixed
income funds offered in Section 457 plans administered by the Company.
Wellington, Fidelity Distributors Corporation, Twentieth Century Investors
Research Corporation and certain other mutual fund companies act as advisors to
the equity funds offered in Section 457 plans administered by the Company. See
"Certain Relationships and Transactions -- Intercompany
Arrangements -- Investment Management Agreements". The Section 457 savings and
retirement plan market is a mature one in which, in the belief of management,
any future growth principally will be achieved through the
S-48
50
acquisition of business from competing companies and through increased
contributions from existing participants and individuals eligible to be
participants.
The Company also provides products and services to plans created under
Section 401(k) and 403(b) of the Internal Revenue Code. Management believes that
opportunities exist to expand its operations by building on the Company's
distribution strength in the individual annuity and Section 457 markets. The
Company also sees opportunities to market these products and services to small
employers, which management expects to be the fastest growing area of the
market.
The deferred compensation and retirement plan services products form the
majority of the Company's group annuity account value. In 1996, the Company
earned approximately 20 basis points, after tax, on its average group annuity
account value.
MUTUAL FUNDS AND OTHER INVESTMENT MANAGEMENT SERVICES
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 managed by Wellington. The other two
funds are fixed income funds managed by the Company. See "Certain Relationships
and Transactions -- Intercompany Arrangements -- Investment Management
Agreements". The Company has entered into agreements with over 150 financial
services firms to distribute these mutual funds. However, because the Company is
a recent entrant into the mutual fund business, there can be no assurance as to
the Company's success in this business. Also, the Company manages institutional
funds and provides certain other investment management services.
STRUCTURED SETTLEMENT CONTRACTS AND OTHER SPECIAL PURPOSE ANNUITY CONTRACTS
The Company also sells structured settlement contracts. These contracts
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. Approximately 40% of the
Company's structured settlement contract sales relate to claims in respect of
policies sold by agents of The Hartford's property-casualty insurance operations
(who are paid an expense allowance). The remaining structured settlement
contract sales are made through specialty brokers. The Company also markets
other annuity contracts for special purposes such as the funding of terminated
defined benefit pension plans.
The Company reported revenues of $43.7 million, $69.2 million and $74.8
million from structured settlement and other special purpose annuity contracts,
representing 1.2%, 1.7% and 1.7% of its total revenues, in 1994, 1995 and 1996,
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 with variable costs in an effort to achieve the broadest distribution
possible in the geographic areas in which the Company operates. The success of
the Company's marketing and distribution system depends on its product
offerings, fund performance, successful utilization of external wholesaling
organizations, relationship with broker-dealers and banks (through which the
sale of the Company's individual annuities to customers is consummated) and
quality of customer service. See "-- Information Systems; Customer Service;
Research and Development".
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51
In general, the Company sells approximately 70% of its individual annuities
through broker-dealers and 30% of its individual annuities through banks.
Management is engaged in continuous efforts to maintain and develop strong
relationships with the broker-dealers and banks that sell the Company's
products. The following table sets forth the Company's individual annuity sales
by distribution channel for the five years ended December 31, 1996.
INDIVIDUAL ANNUITY SALES BY DISTRIBUTION CHANNEL
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
1992 1993 1994 1995 1996
------ ------ ------ ------ ------
(IN MILLIONS)
Broker-dealers..................................... $1,548 $3,124 $5,433 $5,125 $6,637
Banks(1)........................................... 664 1,108 1,572 1,822 3,204
------ ------ ------ ------ ------
Total......................................... $2,212 $4,232 $7,005 $6,947 $9,841
====== ====== ====== ====== ======
- ---------------
(1) Includes sales by banks which are made through their affiliated
broker-dealers.
The Company maintains a network of approximately 1,350 broker-dealers and
approximately 450 banks (including 21 of the 25 largest banks in the United
States) through the use of wholesaling organizations, principally Planco
Financial Services, Inc. ("Planco") and Essex National Securities, Inc.
("Essex"), and strategic alliances with Putnam and Dean Witter to sell its
individual annuity products. The number of broker-dealers and banks in this
network has more than doubled since 1992. Planco, Essex, Putnam and Dean Witter
generated approximately 40%, 7%, 48% and 5%, respectively, of the Company's
total individual annuity sales in 1996. The agreements governing 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 periodically
negotiates renewal terms for these relationships and there can be no assurance
that such renewal terms will remain acceptable to the Company or such parties.
Should one or more of these relationships terminate, on a short-term basis or
otherwise, there could be a material disruption in sales.
The Putnam relationship commenced in 1988, Planco in 1986, Essex in 1990
and Dean Witter in 1994. Putnam is an investment management firm that sells the
Company's individual variable annuity products, which are based on
Putnam-managed funds, through broker-dealers and banks. Planco, a privately held
independent wholesaling organization, distributes certain of the Company's
products to broker-dealers and banks. Essex, a registered broker-dealer,
wholesales a number of the Company's products to banks and other financial
institutions. Dean Witter sells a proprietary variable annuity created by the
Company based on Dean Witter-managed funds through its own network of
broker-dealers, as well as the Company's CRC product.
The Company also uses this distribution network to sell products other than
individual annuities. Putnam and Planco sell single premium variable life
products through broker-dealers and Planco sells Section 401(k) plan services
and is the exclusive broker-dealer wholesaler for the Company's family of mutual
funds. In addition to Planco, the Annuity segment 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. Structured settlements are sold through The
Hartford's property-casualty insurance operations and certain specialty brokers
using a small group of internal personnel. Special purpose annuity contracts are
sold through different organizations and distribution mechanisms depending on
the ultimate use of the annuity contract.
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52
INDIVIDUAL LIFE INSURANCE
GENERAL
The Individual Life Insurance segment sells a variety of individual life
insurance products. The Company's in force life insurance consists of a variety
of variable life, universal life, interest-sensitive whole life and term life
insurance policies. The Company's business also includes traditional whole life,
which was sold in prior years, and modified guaranteed life, which was acquired
in the Fidelity Bankers and Pacific Standard acquisitions. The Company presently
has policies in force for approximately 500,000 customers. The Company focuses
in this segment particularly on the high-end estate and business planning
markets and believes it is one of the leading competitors in these markets based
on its relatively high average face value per policy. NEW ANNUALIZED WEIGHTED
PREMIUMS of individual insurance life policies reached $130 million in 1996, $75
million of which was variable life, $46 million of which was universal life,
traditional or interest-sensitive whole life and $7 million of which was term
life. The Company also has recently begun to develop its single premium variable
life business, which accounted for $20 million of the $75 million of variable
life sales in 1996. In addition, through this segment the Company sells
individual disability coverage for loss of income for professionals, corporate
executives, business owners and administrative support personnel in the event of
a disabling accident or illness. The Company has only recently entered the
individual disability market and its current business in this area is
immaterial.
The following table illustrates, for the five years ended December 31,
1996, sales of individual life insurance and changes in individual life
insurance account value and aggregate life insurance in force, with internal
growth and acquisitions separately identified.
INDIVIDUAL LIFE INSURANCE SEGMENT ANNUAL SALES, ACCOUNT VALUE AND IN FORCE
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
(IN MILLIONS)
ANNUAL SALES(1)
Variable life.............................. $ -- $ 1 $ 10 $ 27 $ 75
Universal life/Interest-sensitive whole 77 80 72 71 46
life....................................
Term life.................................. 11 13 10 7 7
Other...................................... 2 2 2 2 2
------- ------- ------- ------- -------
Total................................. $ 90 $ 96 $ 94 $ 107 $ 130
======= ======= ======= ======= =======
ACCOUNT VALUE
Internal
Variable life.............................. $ -- $ 4 $ 20 $ 158 $ 604
Universal life/Interest-sensitive whole 708 872 1,066 1,265 1,534
life....................................
Other...................................... 108 115 119 117 109
------- ------- ------- ------- -------
Total................................. $ 816 $ 991 $ 1,205 $ 1,540 $ 2,247
======= ======= ======= ======= =======
Acquisitions(2)
Universal life/Interest-sensitive whole $ -- $ 136 $ 251 $ 197 $ 208
life....................................
Modified guaranteed life................... -- 736 836 821 781
------- ------- ------- ------- -------
Total................................. $ -- $ 872 $ 1,087 $ 1,018 $ 989
======= ======= ======= ======= =======
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53
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
(IN MILLIONS)
IN FORCE
Internal
Variable life.............................. $ -- $ 158 $ 700 $ 1,645 $ 4,946
Universal life/Interest-sensitive whole 21,208 25,243 27,751 30,416 31,012
life....................................
Term life.................................. 8,098 10,705 11,711 11,507 11,623
Other...................................... 114 125 131 144 155
------- ------- ------- ------- -------
Total................................. $29,420 $36,231 $40,293 $43,712 $47,736
======= ======= ======= ======= =======
Acquisitions(2)
Universal life/Interest-sensitive whole $ -- $ 1,583 $ 2,784 $ 2,578 $ 2,560
life....................................
Term life.................................. -- 96 428 365 369
MODIFIED GUARANTEED LIFE................... -- 1,416 1,715 1,624 1,478
------- ------- ------- ------- -------
Total................................. $ -- $ 3,095 $ 4,927 $ 4,567 $ 4,407
======= ======= ======= ======= =======
- ---------------
(1) Individual life insurance sales are recorded as new annualized weighted
premiums, except that, prior to 1994, some of the related data is recorded
on a paid weighted premium basis, which only records premium collected, and
thus is not directly comparable.
(2) This data reflects the individual life insurance portion of the Fidelity
Bankers, Pacific Standard and Investors Equity blocks of business
assumptions.
PRODUCTS
VARIABLE LIFE. Variable life insurance provides a return linked to an
underlying portfolio. The Company allows policyholders to determine their
desired asset mix among a variety of mutual funds. As the total 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. Variable life policies
represented 58% of new annualized weighted premiums for individual life
insurance products for the year ended December 31, 1996. The Company's variable
life insurance portfolio also includes products with a second-to-die feature.
These products are distinguished from other variable life insurance products in
that two lives are insured rather than one, and the policy proceeds are paid
upon the second death of the two insureds. Second-to-die policies are used in
individual estate planning, often to fund estate taxes for a married couple.
UNIVERSAL AND INTEREST-SENSITIVE WHOLE LIFE. 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. These policies provide policyholders
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 insurance policies represented 35% of new
annualized weighted premiums for individual life insurance products for the year
ended December 31, 1996. The Company also sells universal life insurance
policies with a second-to-die feature similar to that of the variable life
insurance product described above.
OTHER. The Company also offers individual term life and individual
disability insurance, although the Company has a limited presence in these
markets. However, management believes there may be opportunities to successfully
sell term insurance through banks and broker-dealers and is currently developing
term insurance products to sell through these distribution channels. Also, the
Company's individual disability insurance product is offered in a guaranteed
renewable contract, designed to minimize the Company's risk by allowing for
future premium increases in the event of greater than expected morbidity.
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54
MARKETING AND DISTRIBUTION
The Individual Life Insurance distribution system is segregated into two
product types: those products designed for high-end estate and business planning
and those products designed for protection against lost income from death to
cover basic needs such as mortgage payments (referred to as "middle income"
sales). 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 approximately 137,000 licensed life insurance agents. High-end sales
also occur in certain regions of the United States through the ELAR partners
("ELAR"), a group of independent life insurance marketing organizations, each of
which maintains a separate marketing agreement with the Company. The middle
income sales force is led by a group of internal employees who use lead
generation techniques to sell insurance through a collection of independent
sales organizations. The success of the Company's marketing efforts in its
Individual Life Insurance segment primarily depends on the breadth and quality
of its life insurance products, the competitiveness of its pricing, its
relationships with its third-party distributors and the quality of its customer
service. See "-- Information Systems; Customer Service; Research and
Development". Approximately 74% of the Company's new sales of individual life
insurance policies (measured by new annualized weighted premiums) in 1996 were
consummated through the Company's internal estate and business planning sales
force and ELAR in conjunction with life insurance professionals, The Hartford's
property-casualty agents and broker-dealers, 11% were sold to the middle income
market through licensed life insurance agents and 15% were single premium
variable life insurance contracts sold through the bank and broker-dealer
distribution network of the Annuity segment. Approximately $12 million, or 9%,
of the Company's 1996 sales in the Individual Life Insurance segment were
consummated through The Hartford's property-casualty agents.
EMPLOYEE BENEFITS
GENERAL
The Employee Benefits segment consists of two areas of operation: Group
Insurance and 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 and
special risk coverage 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 COLI business, life/health
reinsurance operations and international operations.
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55
The following table sets forth, for the five years ended December 31, 1996,
net earned premiums for group insurance products, reserves for group insurance
products and the COLI account value held in the Company's general account and
separate accounts.
EMPLOYEE BENEFITS SEGMENT PREMIUMS, RESERVES AND ACCOUNT VALUE
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------
1992 1993 1994 1995 1996
------ ------ ------ ------ ------
(IN MILLIONS)
GROUP INSURANCE PREMIUMS
Group Disability...................... $ 252 $ 285 $ 352 $ 419 $ 551
Group Life............................ 274 291 308 361 432
Other................................. 315 280 314 323 346
------ ------ ------ ------ ------
Total............................ $ 841 $ 856 $ 974 $1,103 $1,329
====== ====== ====== ====== ======
GROUP INSURANCE RESERVES
Group Disability...................... $ 549 $ 691 $ 857 $1,030 $1,268
Group Life............................ 220 270 294 325 389
Other................................. 287 263 261 278 277
------ ------ ------ ------ ------
Total............................ $1,056 $1,224 $1,412 $1,633 $1,934
====== ====== ====== ====== ======
COLI ACCOUNT VALUE
General Account....................... $ 864 $1,549 $2,308 $3,566 $4,028
Separate Account...................... -- -- 897 3,484 4,441
------ ------ ------ ------ ------
Total............................ $ 864 $1,549 $3,205 $7,050 $8,469
====== ====== ====== ====== ======
GROUP INSURANCE
The Company provides life, disability and other group insurance coverage to
large and small employers across the United States. The Company estimates that
this aggregate coverage is maintained for the benefit of over 15 million
individuals. The Company had approximately $1.3 billion of premiums for group
insurance in 1996, of which $432 million is attributable to group life insurance
coverage and $551 million is attributable to group disability coverage (and of
which $23 million of such group life insurance premiums and $78 million of such
disability premiums related to the acquisition of a block of business from North
American Life Assurance Company of Toronto ("NAL")). The Company sells its
product line to employers through brokers and consultants and to multiple
employer groups through its relationships with trade associations. Management
believes that the comparative quality of its underwriting and claims management
provides a competitive advantage in the group disability insurance business. In
addition, all group life insurance policies sold by the Company are term
insurance, generally with one- to two-year rate guarantees. This allows the
Company to make adjustments in rates or terms of its policies in order to
minimize the adverse effect of various market trends.
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. As of December 31, 1996, the Company had
approximately 530 group disability contracts in force in the large case market,
covering an estimated 3 million employees. Management believes that further
opportunities exist in the "small" and "medium case" group markets due to the
Company's name recognition and reputation and managed disability and claims
administration capabilities. The Company intends to continue to expand its
operations in both the small and medium case markets. As of December 31, 1996,
the Company had sold approximately 22,500 and 585 group disability contracts in
the small and medium case markets, respectively, covering an estimated 600,000
and 335,000 employees, respectively. The Company's efforts in the group
disability area focus on early intervention, return-to-work programs, reduction
of long-term disability claims and successful rehabilitation. The
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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).
Managed disability coverage is the flagship product for the Company's group
disability insurance operations. The Company emphasizes early claimant
intervention in this coverage in an effort to facilitate a disabled claimant's
return to work and to contain costs. The Company's newest generation of managed
disability is the Ability Assurance(R) program in which the Company offers an
expanded set of services to disabled employees of the Company's group disability
customers. Management believes its individualized approach to claim servicing,
as well as its incentive to control costs, leads to an overall reduction in the
cost of group disability coverage for employers and thus provides an important
competitive advantage.
GROUP SHORT-TERM DISABILITY. Short-term disability benefit plans provide a
weekly benefit amount (typically 60% to 70% of the employees earned income up to
a specified maximum benefit) to insured employees when they are unable to work
due to an accident or an illness. Most of these benefit plans begin providing
benefits immediately for accidents, or typically following a one-week waiting
period for sickness, and continue providing benefits for a limited term,
generally 52 weeks or less. Short-term disability, excluding the NAL block of
business, accounted for $104 million, or 8%, of net earned premiums from group
insurance products for the year ended December 31, 1996.
GROUP LONG-TERM DISABILITY. 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 begin providing benefits following 90- or 180-day waiting periods 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.
Premiums for long-term disability coverage are based upon expected claim
incidence rates and duration of claims of the insured group, as well as
assumptions concerning operating expenses and future interest rates. Long-term
disability, excluding the NAL block of business, accounted for $369 million, or
28%, of net earned premiums from group insurance products for the year ended
December 31, 1996.
GROUP TERM LIFE. 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 works to distinguish itself from its competitors by
offering 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.
Premiums for group life insurance coverage are based upon the expected mortality
of the insured group, as well as operating expense and interest rate
assumptions. Group term life insurance, excluding the NAL block of business,
accounted for $409 million, or 31%, of net earned premiums from group insurance
products for the year ended December 31, 1996.
OTHER. 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 Specialty Insurance Operations unit consists of a collection of niche
businesses, including International Corporate Marketing Group ("ICMG"), which
contains the Company's COLI operations, ITT Hartford International Life
Reassurance Corporation ("HLRe"), a specialty reinsurer, and the Company's
international operations.
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The Company is a leader in the COLI market and provides coverage for
approximately 400,000 individuals. COLI is life insurance purchased by a company
on the life of its employees, with the company named as the beneficiary under
the policy. Through the purchase of COLI, corporations have been able to use the
favorable tax treatment of life insurance to fund a variety of employee benefit
liabilities such as post-retirement health care and non-qualified benefit
programs. In 1992, the Company acquired the $5.6 billion COLI business of Mutual
Benefit, an insurance company presently in insolvency proceedings. Under two
coinsurance agreements between the Company and Mutual Benefit whereby Mutual
Benefit reinsured the Company for $3.5 billion of the purchased business and
certain newly written business, Mutual Benefit was required to secure the
coinsured liabilities by depositing assets at least equal to 100% of the
coinsured liabilities in certain trust accounts held for the benefit of the
Company. These trust accounts were established in 1992 in an amount equal to
$3.5 billion. The assets held in the two trust accounts comprise cash, Mutual
Benefit's interest in policy loans on the coinsured business, certain
investment-grade bonds and other securities that the trustee is permitted to
hold under the terms of the trust agreements. The terms of these coinsurance
agreements were approved by the New Jersey state court overseeing the insolvency
of Mutual Benefit. Mutual Benefit subsequently assigned its rights and
obligations under such coinsurance agreements, as well as the bulk of its
business, to MBL Life Assurance Corporation ("MBL"). Mutual Benefit is currently
subject to a final order of liquidation and, pending the disposition of certain
assets unrelated to the Company, is expected to be dissolved. In addition, the
rehabilitation plan under which MBL is operating the business assumed from
Mutual Benefit, including the coinsurance arrangements, has been approved by the
court. As a result of the security provided by these court-approved trusts,
management believes that the Company is not affected by the outcome of Mutual
Benefit's insolvency proceedings.
The Company retained the Mutual Benefit dedicated COLI staff and formed
ICMG, 60% of which is owned by the Company and 40% of which is owned by MBL. The
Company has the right to acquire the remaining 40% of ICMG in November 1997 by
paying MBL 40% of ICMG's earnings (which are substantially the same as its cash
flow) over the following five years.
Until the passage of the HIPA Act of 1996, the Company sold two principal
types of COLI, leveraged and variable. The HIPA Act of 1996 phases out the
deductibility of interest on policy loans under COLI by 1998, thus eliminating
all future sales of leveraged COLI. Leveraged COLI is a fixed premium life
insurance policy owned by a company or a trust sponsored by a company. The
proceeds from such a policy help to fund general corporate liabilities such as
deferred compensation plans or post-retirement obligations. This general account
policy provides cash flow flexibility and optimizes certain tax advantages for a
company or trust by allowing it to borrow the policy cash value and receive
certain interest deductions on such policy loans. The Company's leveraged COLI
product has been an important contributor to its profitability in recent years
and will continue to contribute to the profitability of the Company although
such contribution will be reduced in the future due to the effects of this
legislation. 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.
In 1993, the Company also purchased HLRe (formerly known as American
Skandia Life Reinsurance Corporation), a specialty insurance subsidiary that
focuses on life/health reinsurance markets, especially the COLI market, from
American Skandia Life Assurance Corporation. The leveraged COLI business of HLRe
has been adversely affected by the HIPA Act of 1996 in a manner similar to the
Company's ICMG COLI business. The Company recently signed an agreement to sell
its conventional block of reinsurance to Cologne Life Reinsurance Company. This
transaction, which the Company expects to close during 1997, will not have a
material effect on the Company's results of operations.
The Company recently initiated an international expansion strategy to
diversify its risk exposure and expand its business opportunities in
international markets. In June 1994, the Company consummated its initial
international investment outside North America by forming ITT Hartford
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Sudamericana Holding, S.A. ("HSH"), a joint venture with a group of Argentine
insurance executives, of which the Company owns 60%. Through this joint venture,
the Company operates several subsidiaries devoted to life insurance, retirement
annuities, life insurance brokerage and pensions. In 1995, the Company expanded
its activities in Argentina by initiating reinsurance coverage for Argentina's
developing life insurance market. In 1996, HSH and Banco de Galicia y Buenos
Aires, S.A. formed a joint venture to operate an insurance business in a number
of countries throughout South America. The Company also recently has formed two
Brazilian joint ventures, Icatu Hartford Capitalizacao, S.A. and Icatu Hartford
Seguros, S.A., each with Itaborai 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. Management views each
of these international joint ventures as a long-term project. As of December 31,
1996, the Company had invested less than $100 million of start-up capital in all
its existing international operations. The Company plans to pursue other
international opportunities in Latin America from time to time as it deems
appropriate.
MARKETING AND DISTRIBUTION
The Company uses an experienced group of Company employees to distribute
its group insurance products and services through a variety of distribution
outlets. These channels include insurance agents, brokers, associations and
third-party administrators. The Company sells its COLI products through Company
employees working with brokers and consultants specializing in the COLI market.
The success of the Company's distribution efforts in the group insurance and
specialty insurance markets primarily depends on the variety and quality of its
product offerings, the Company's relationships with its third-party distributors
and the quality of its customer service, particularly in the case of its
disability products. See "-- Information Systems; Customer Service; Research and
Development". In addition, the Company benefits from its historical and ongoing
public relations and advertising campaign. In particular, the Company's recent
Break Away(SM) campaign, designed to showcase the achievements of disabled
athletes, has received favorable reviews in the market.
GUARANTEED INVESTMENT CONTRACTS
GENERAL
The Guaranteed Investment Contracts segment consists of GRC supported by
either the Company's general account or a guaranteed separate account.
Historically, a significant majority of these contracts was sold as general
account contracts with fixed rates and fixed maturities. The Company decided in
1995, after a thorough review of the guaranteed investment contract market, to
significantly de-emphasize general account GRC, choosing instead to focus its
distribution efforts on products sold by its other segments and selling general
account GRC primarily as an accommodation to customers. As a result, the Company
substantially withdrew from the general account GRC business in 1995 and, since
1994, sales of these products have declined dramatically. From 1992 to 1994, the
Company sold over $5 billion of GRC. In contrast, the Company sold only $169
million of GRC in 1996, $108 million of which was general account GRC. In the
first quarter of 1997, the Company wrote $13 million of general account GRC
(most of which were renewals to existing customers).
The Company internally segregates its Guaranteed Investment Contracts
segment into two distinct blocks of business which are separately managed. The
Company's GRC business sold prior to December 31, 1994 (including amounts sold
prior to this date where the cash was not received by the Company, and thus
recorded as a sale, until early in 1995) is referred to as Closed Book GRC.
Closed Book GRC contains a segregated portfolio of assets monitored and managed
on a liquidating basis; however, such designation as a "segregated" portfolio is
only for internal management purposes and has no legal or regulatory effect.
Management expects that the net income or loss from Closed Book GRC in the years
subsequent to 1996 will be immaterial. For a
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further discussion of Closed Book GRC, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Results of Operations for
the Years Ended December 31, 1994, 1995 and 1996 -- Comparison of Guaranteed
Investment Contracts Segment Results -- Closed Book GRC".
The following table illustrates, for the five years ended December 31,
1996, new sales and account value for the Guaranteed Investment Contracts
segment.
NEW SALES AND ACCOUNT VALUE
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
1992 1993 1994 1995 1996
------ ------ ------ ------ ------
(IN MILLIONS)
Guaranteed investment contract sales................... $1,608 $1,730 $1,732 $ 893 $ 169
Account value
General account................................... 5,673 6,216 7,257 5,722 4,124
Guaranteed separate account....................... 182 193 124 346 408
------ ------ ------ ------ ------
Total account value.......................... $5,855 $6,409 $7,381 $6,068 $4,532
====== ====== ====== ====== ======
PRODUCTS
GENERAL ACCOUNT PRODUCTS. General account GRC provides a guaranteed rate
of return on investment (generally for a fixed period of time) on funds
deposited with the Company. Deposits can be made in a lump sum or in periodic
payments. The customer may choose between a fixed rate of interest or a floating
rate of interest tied to an index.
SEPARATE ACCOUNT PRODUCTS. Separate account GRC either provides a limited
guarantee of a certain rate of return on investment, with further upside
potential if performance of the assets supporting the contract dictates, or a
guaranteed rate of return tied to an index such as LIBOR. The assets supporting
these products are held in a guaranteed separate account.
MARKETING AND DISTRIBUTION
Sales of GRC products are generated by an internal sales force of the
Company. Historically, these individuals primarily sold GRC. Given that the
Company has substantially withdrawn from the general account GRC business, these
individuals now focus on other products sold by the Company and generally sell
general account GRC primarily as an accommodation to customers.
INFORMATION SYSTEMS; CUSTOMER SERVICE; RESEARCH AND DEVELOPMENT
The Company has significantly enhanced its systems capabilities in recent
years. Over the last three years, the Company has spent over $20 million for
systems technology and is projected to spend approximately $30 million over the
next two years. The Company currently maintains a decentralized network of
systems designed to meet the specific business needs of each of its units and is
in the process of fully integrating this system throughout the Company.
Management believes that such technology will improve workflow and document
management, develop processing economies of scale and facilitate communications
with customers. The Company also is on-line with many of its bank and
broker-dealer distributors to facilitate the marketing, sales and servicing
process.
The Company focuses on the maintenance and expansion of its distribution
system and customer base through quality customer service and efficient policy
administration. In that regard, management continuously focuses attention on
productivity improvements and process reassessments. As part of these efforts,
the Company creates quality service standards based upon industry studies which
are used to evaluate the Company's overall performance. Management believes its
service performance compares favorably with other life insurance companies. The
Company received one of the five Quality Tested Service Seals awarded in 1996 in
the variable annuity industry by DALBAR, which recognized the Company's
achievement of the highest tier of service in
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that industry. The Company's implementation of a new state-of-the-art
administration and customer service system has further improved its ability to
process new business applications, apply policyholder funds, pay commissions,
respond to customer inquiries and provide valuable management information.
The Company's product development process is largely market and customer
driven, with each of the Company's units attempting to respond to and anticipate
the needs of its customers. Employees from the Company's sales, actuarial,
underwriting, accounting and administration operations are included in this
process at an early stage to ensure that pricing and underwriting are
coordinated and that administrative support is efficient and developed on a
cost-effective basis. After the initiation of a product, the Company monitors
sales and pricing assumptions to identify any adjustments necessary to maintain
sufficient profitability. Also, the Company maintains close contact with the
distributors to ensure that its new and established products and/or services
satisfy the targeted customer needs.
UNDERWRITING AND PRICING
The Company follows detailed and uniform underwriting practices and
procedures for its Individual Life Insurance segment designed to properly assess
and quantify risks before issuing coverage to qualified applicants. The Company
has underwriters who evaluate policy applications on the basis of the
information provided by the applicant and others. If the policy amount exceeds
certain prescribed dollar limits, a prospective policyholder must submit to a
variety of underwriting tests, such as medical examinations, electrocardiograms,
blood tests, urine tests, treadmill tests, chest X-rays and inspection reports.
Underwriting requirement limits are scrutinized against industry standards to
prevent anti-selection and to stay abreast of industry trends. Acquired Immune
Deficiency Syndrome ("AIDS") is expected to continue to adversely affect
mortality for the life insurance industry. Where permitted by law, the Company
has responded by considering AIDS information in underwriting and pricing
decisions. At the present time, comprehensive blood test screening, including
tests for the AIDS antibody, is performed on approximately 90% of all business
written.
The Company employs prudent underwriting standards to protect the quality
of its group life and group disability insurance business. The Company has
developed standard rating systems for each product line based on its past
disability experience and relevant industry experience. The Company updates its
manual rates on an ongoing basis and periodically reviews the quality of its
group life and group disability underwriting. Company underwriters evaluate the
risk characteristics of each prospective insured group. The premium rate quoted
to a prospective insured group is based on a standard rate and, for larger
groups, the group's past claims experience rate. Of the Company's group life and
group disability insurance business, over 80% is renewal business from which the
Company seeks annual rate increases where appropriate. The Company maintains a
persistency rate of approximately 85% to 90% with respect to its group life and
group disability insurance business.
The Company is not obligated to accept any policy or group of policies from
any distributor. Policies are underwritten on their merits and are not issued
without having been examined and underwritten individually. In addition, the
Company's policies generally afford it the flexibility to adjust dividend scales
and to increase rates charged to its policyholders (subject to specified maximum
charges) in order to provide for increased mortality and/or morbidity
experience. Management believes that its underwriting standards produce
mortality and morbidity results consistent with the assumptions used in product
pricing, while also allowing competitive risk selection.
Management believes that a competitive strength of the Company is its
ability to coordinate underwriting and product pricing. Product pricing on group
and individual insurance products is based on the expected pay-out of benefits
calculated through the use of assumptions for mortality,
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morbidity, expenses, persistency and investment returns, as well as certain
macroeconomic factors such as inflation. Investment-oriented products are priced
based on various factors, including investment return, expenses and persistency,
depending on the specific product features. Product specifications are designed
to prevent greater than expected mortality and the Company periodically monitors
mortality and morbidity assumptions. Ongoing internal underwriting audits,
conducted at multiple levels, also monitor consistency of underwriting
requirements and philosophy. The Company's underwriters have extensive
experience in the field and the Company is committed to periodic retraining in
order to keep its underwriters familiar with the latest industry trends.
RESERVES
In accordance with applicable insurance regulations, the Company
establishes and carries as liabilities actuarially determined reserves which are
calculated to meet the Company's future obligations. The reserves are based on
actuarially recognized methods using prescribed morbidity and mortality tables
in general use in the United States, which are modified to reflect the Company's
actual experience when appropriate. These reserves are computed at amounts that,
with additions from premiums to be received and with interest on such reserves
compounded annually at certain assumed rates, are expected to be sufficient to
meet the Company's policy obligations at their maturities or in the event of an
insured's death. Reserves include unearned premiums, premium deposits, claims
reported but not yet paid, claims incurred but not reported and claims in the
process of settlement. The Company's reserves for assumed reinsurance are
computed on bases essentially comparable to direct insurance reserves.
For the Company's individual life policies, universal life and
interest-sensitive whole life reserves are set according to premiums collected,
plus interest credited, less charges. Other fixed death benefit 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 stability of the Company's annuity and other interest-sensitive life
insurance reserves is enhanced by policy restrictions on withdrawal of funds.
Withdrawals in excess of allowable penalty-free amounts are assessed a surrender
charge during a penalty period of approximately 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. In addition, the Company's fixed MVA annuities
discourage surrender by policyholders. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources -- Operating Subsidiaries". The Company's reserves comply in all
material respects with state insurance department statutory accounting
practices; however, in the Company's consolidated financial statements, life
insurance reserves are determined in accordance with GAAP, which may vary from
statutory accounting practices.
REINSURANCE
The Company follows the standard industry practice of reinsuring ("CEDING")
portions of its insurance risks with other insurance companies under traditional
indemnity reinsurance agreements. This practice permits the Company to write
policies in amounts larger than the risk it is willing to retain. Each of the
Company's lines of business enters into reinsurance arrangements with different
insurance carriers as it deems appropriate. In general, the Company has entered
into yearly renewable term insurance contracts. The Company's method for
allocating reinsurance obligations among such reinsurers varies by product line.
As of December 31, 1994, 1995 and 1996, the amount of premiums ceded to
third-party reinsurers totaled $184 million, $313 million and $413 million,
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respectively. The Company's principal unaffiliated reinsurers of individual life
insurance policies at December 31, 1996 (and their corresponding A.M. Best
rating as of June 30, 1996) were: Lincoln National Life Insurance Company
("A+"), Manulife Reassurance Corporation("A++"), Sun Life Assurance Company of
Canada ("A++") and TMG Life Insurance Company ("A++"). As of December 31, 1996,
the life insurance in force ceded to each of these reinsurers was $1.7 billion,
$3.6 billion, $2.0 billion and $1.7 billion, respectively, which, in the
aggregate, constituted approximately 21% of the Company's total ceded life
insurance in force, other than amounts ceded in respect of COLI. As of December
31, 1996, the Company also ceded approximately $24 billion of individual and
group life insurance in force to companies affiliated with The Hartford and
assumed approximately $122 million of premiums relating to stop loss and
short-term disability insurance sold by the Company but written by a number of
The Hartford's property-casualty subsidiaries.
Reinsurance does not discharge the Company's obligations to pay policy
claims on the reinsured business. The Company remains responsible for policy
claims to the extent the reinsurer fails to pay such claims. The Company
therefore seeks to enter into reinsurance treaties with highly rated reinsurers
that have passed an internal due diligence review. At December 31, 1996,
excluding any reinsurance with its affiliates, of the $347 billion of gross
insurance in force, the Company had ceded to reinsurers approximately $89
billion of insurance in force.
The Company uses reinsurance to manage the net exposure in its individual
life and group life insurance lines of business. The risks that are reinsured
vary by product line. The Company does not currently reinsure any of the risks
associated with group short-term disability insurance. As of January 1, 1997,
the Company increased the level at which it retains the risk on any one
individual life insurance policy to $2.5 million from $1.25 million. The Company
reinsures mortality risk in excess of $1,000,000 on any single life covered by a
group life insurance policy and retains no more than $8,000 of monthly benefits
per insured life on group long-term disability policies. In addition, the
Company reinsures its accidental death and dismemberment and group travel
businesses for coverage exposure in excess of $250,000 per life and maintains
catastrophic coverage of up to $200 million for exposure in excess of $500,000
where more than two policyholders are involved in a catastrophe. The Company's
COLI business, which was acquired from Mutual Benefit, is 84% reinsured,
primarily through Mutual Benefit and its successor, MBL Life Assurance
Corporation, and assets have been placed in a security trust to support the
reinsurance recoverable asset which was $3.5 billion in 1992 and $3.8 billion as
of December 31, 1996.
INVESTMENT OPERATIONS
GENERAL
The Company's investment operations are managed by its investment strategy
group which reports directly to senior management of the Company and consists of
a risk management unit and portfolio management unit. The risk management unit
is responsible for monitoring and managing the Company's asset/liability profile
and establishing investment objectives and guidelines. 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 investment staff of The Hartford executes the
strategic investment decisions of the portfolio management unit, including the
identification and purchase of securities that fulfill the objectives of the
investment strategy group.
The primary investment objective of the Company for its general account and
guaranteed separate accounts is to maximize after-tax returns consistent with
acceptable risk parameters (including the management of the interest rate
sensitivity of invested assets to that of policyholder obligations). The Company
is exposed to two primary sources of investment risk: credit risk, relating to
the uncertainty associated with the continued ability of a given obligor to make
timely payments of principal and interest, and interest rate risk, relating to
the market price and/or cash
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flow variability associated with changes in market YIELD CURVES. The Company
manages credit risk through industry and issuer diversification and asset
allocation. The Company manages interest rate risk as part of its
asset/liability management strategies, including the use of certain hedging
techniques (which may include the use of certain financial derivatives), product
design, such as the use of MVA features and surrender charges, and proactive
monitoring and management of certain non-guaranteed elements of the Company's
products (such as the resetting of credited interest rates for policies that
permit such adjustments). For a further discussion of hedging strategies,
including derivatives utilization, see "-- Asset/Liability Management
Strategies", as well as notes to consolidated financial statements incorporated
herein by reference to the Company's Form 10.
The Company's separate accounts reflect two categories of risk assumption:
non-guaranteed separate accounts totaling $39.4 billion as of December 31, 1996,
wherein the policyholder assumes substantially all of the risk and reward, and
guaranteed separate accounts totaling $10.4 billion as of December 31, 1996,
wherein the Company contractually guarantees either a minimum return or account
value to the policyholder. The investment strategy followed varies by fund
choice, as outlined in the applicable fund prospectus or separate account plan
of operations. Non-guaranteed products include variable annuities and variable
life insurance contracts. The funds underlying such contracts are managed by the
investment staff of The Hartford and a variety of independent money managers,
including Wellington, Putnam and Dean Witter. Guaranteed separate account
products primarily consist of modified guaranteed individual annuities and
modified guaranteed life insurance, and generally include MVA features to
mitigate the disintermediation risk in the event of surrenders. Virtually all
the assets in the guaranteed separate accounts are fixed maturity securities
and, as of December 31, 1996, $10.2 billion, or approximately 99%, of the fixed
maturity securities portfolio within the guaranteed separate accounts was
investment grade or better. See "-- Asset/Liability Management Strategies".
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 investment strategy group works closely with the
business lines to develop 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 such
product line's individual risk and return objectives. For example, fixed
maturities are managed according to duration and return guidelines based
generally on the duration, cash payment and other characteristics of the
underlying liabilities. Fixed maturities in the Company's general account are
identified as available for sale and are carried at fair value with the net
unrealized investment gains and losses reflected as a component of stockholder's
equity. Equity securities are stated at fair value.
EFFECTS OF INTEREST RATES ON INVESTMENT OPERATIONS
Changes in interest rates can have significant effects on the Company's
profitability. Under certain circumstances of interest rate volatility, the
Company is exposed to disintermediation risk and reduction in net interest
spread or profit margins. The Company's investment portfolio primarily consists
of investment-grade, fixed maturity securities, including MBSs and CMOs. The
fair value of these and the Company's other invested assets fluctuates depending
on market and other general economic conditions as well as the interest rate
environment. During periods of declining interest rates, MBSs and CMOs prepay
faster as the underlying mortgages are prepaid and refinanced at lower interest
rates. 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 slows.
From June 1991 to September 1993, interest rates fell more than 300 basis
points. This dramatic decline in rates, combined with an unprecedented push by
financial intermediaries to
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refinance mortgages, resulted in prepayment levels substantially above the
expectations and historical experience for the entire investment community,
including the Company.
In particular, the duration of the Company's CMO holdings in the Closed
Book GRC investment portfolio significantly shortened. Hedging performed to
mitigate prepayment acceleration in this portfolio was insufficient to cover
actual prepayment experience. As interest rates rose in 1994, prepayment
activity declined as fast as it had accelerated during the falling interest rate
environment, causing the duration of the CMO holdings in the Closed Book GRC
investment portfolio to extend relative to expectations. Thus, the effect of
actions taken by the Company to increase asset duration (to offset fast
prepayments) in the Closed Book GRC investment portfolio in 1992 and 1993 was
intensified by extension of the mortgage collateral for such portfolio in 1994.
This produced a portfolio with assets having a longer duration than the related
GRC liabilities. As a result, the Company's net income fell to $150 million in
1995 and $24 million in 1996.
In response to the corresponding losses associated with the Closed Book GRC
investment portfolio, the Company instituted an improved risk management process
during 1995 and 1996, including the division of the Company's investment
strategy group into two independently managed units -- a risk management unit
and a portfolio management unit. The Company also reduced its exposure to MBSs
and CMOs and recently enhanced its computerized analytical systems to allow for
more effective management of its portfolio positions and potential exposures to
identify potential asset/liability mismatches earlier. As a result, all material
portfolios, including Closed Book GRC, are now reviewed on a monthly basis to
determine if the net economic sensitivity of the assets and the related
liabilities to interest changes is within a pre-determined range. The Company
believes that the establishment of a separate risk management unit and more
frequent review of all its material portfolios adds an important oversight
mechanism to the Company's investment management operation.
The assets and liabilities of the Company's material portfolios also are
now stressed against parallel and non-parallel interest rate shifts of up to
plus or minus 300 basis points along the yield curve. Based on recent interest
rate volatility, a 300 basis point shift represents a shift of approximately
three standard deviations occurring over the course of a full year and
implicitly assumes that the affected portfolio is not managed. Since such a
shift generally will occur over more than one day and the Company's portfolios
are modeled and managed at least monthly, management believes that its
monitoring process will minimize the effects of a dramatic interest rate shift.
In the event of an interest rate shift of 100 basis points or more, the Company
would immediately test all material portfolios for any potential asset/liability
mismatches and would adjust any of its portfolios that failed to comply with its
written guidelines. Thus, management believes that the quantification of the
impact of interest rate shifts of greater than plus or minus 300 basis points is
of limited value.
The Company's analysis of non-parallel interest rate shifts is based upon a
comparison of the "key rate" or "partial" durations of its assets and
liabilities. At a minimum, the assets and liabilities are tested at the one,
two, five, seven, ten and twenty-year points on the yield curve. When coupled
with its analysis of parallel interest rate shifts, the Company is able to
assess the risk of various interest rate shifts within 300 basis points,
including parallel shifts along the yield curve as well as a flattening,
steepening and other such non-parallel shifts on the yield curve. The results of
such analyses demonstrate a very close matching of the Company's assets and
liabilities, consistent with written portfolio guidelines maintained by the
Company. By testing monthly, the Company believes that it can detect
asset/liability mismatches earlier and take action to reduce the potential
impact of interest rate fluctuations on the portfolio.
In addition, the Company annually performs asset adequacy analysis for all
of its life insurance subsidiaries. This includes cash flow testing for all
material product lines. These analyses are accomplished by projecting, under a
number of possible future interest rate scenarios, the anticipated cash flows
from such business and the assets required to support such business. The
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first seven of these scenarios are required by state insurance laws. Projections
also are made using several additional scenarios which involve more extreme
fluctuations in future interest rates. The results of these tests demonstrate
that the projected cash flows for the assets are sufficient to provide the cash
flows needed for the liabilities under the scenarios tested.
DESCRIPTION OF INVESTMENT ASSETS IN GENERAL ACCOUNT
The following table sets forth by category the invested assets in the
Company's general account as of December 31, 1996.
INVESTED ASSETS BY CATEGORY
AS OF DECEMBER 31, 1996
--------------------------------
PERCENT OF
TOTAL
INVESTED AND
SEPARATE
ACCOUNT ASSETS
AMOUNT --------------
-------------
(IN MILLIONS)
Fixed maturity securities, available-for-sale, at fair value.... $15,711 22.6%
Equity securities, available-for-sale, at fair value............ 119 0.2
Policy loans, at outstanding balance(1)......................... 3,839 5.5
Other investments at cost(2).................................... 161 0.2
------- -----
Total general account invested assets...................... 19,830 28.5
Total separate account assets.............................. 49,770 71.5
------- -----
Total invested assets.................................... $69,600 100.0%
======= =====
- ---------------
(1) Policy loans, which have a current weighted average interest rate of 11.9%,
are secured by the cash value of the related life insurance policy. These
loans do not mature in the conventional sense but expire in conjunction with
the related policy liabilities.
(2) The Company has approximately $2 million in commercial mortgages in its
general account.
The following table sets forth by category the fixed maturity securities,
including CMOs, MBSs and other asset-backed securities ("ABSS"), held in the
Company's general account as of December 31, 1996.
FIXED MATURITY SECURITIES BY CATEGORY
AS OF DECEMBER 31, 1996
-----------------------------------------
WEIGHTED
AVERAGE
AMOUNT YIELD(1) PERCENTAGE
------------- -------- ----------
(IN MILLIONS)
Fixed maturity securities:
Corporates............................................ $ 7,587 6.80% 48.3%
CMOs.................................................. 2,150 6.58 13.7
Gov't/gov't agencies -- U.S. (including municipals)... 621 5.85 3.9
MBSs-Agency........................................... 402 7.36 2.6
ABSs.................................................. 2,693 6.31 17.1
Gov't/gov't agencies -- Foreign....................... 395 7.24 2.5
Commercial mortgage-backed securities................. 1,098 7.68 7.0
Short-terms........................................... 765 5.97 4.9
------- ---- -----
Total............................................ $15,711 6.69% 100.0%
======= ==== =====
- ---------------
(1) For the year ended December 31, 1996, the calculated yield on average fixed
maturities excluding derivatives was 6.69%, while the calculated yield
including derivative hedge income was 6.48%. The calculated yield represents
earnings on fixed maturities, excluding net realized capital gains and
losses (and excluding or including derivative hedge income, as applicable),
divided by average fixed maturities.
As of December 31, 1996, the Company had approximately 16.3% of its fixed
maturity securities portfolio invested in MBSs and CMOs. MBSs and CMOs are
subject to significant prepayment and
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payment extension risk, since underlying mortgages may be repaid more or less
rapidly than scheduled. As a result, holders of MBSs and CMOs may receive
prepayments which cannot be reinvested at yields comparable to the rates on such
securities or may be forced to liquidate securities at a loss to meet liquidity
obligations. The Company measures and manages prepayment and payment extension
risk through option-adjusted modeling of the market price sensitivity (duration
and convexity) of all of its assets, including MBSs and CMOs. For most MBSs and
CMOs, prepayment risk causes "negative convexity". Convexity can be increased
for a portfolio by adding securities or derivatives that have significant
"positive convexity". In particular, the Company uses interest rate caps and
floors to increase portfolio convexity and reduce the market price sensitivity
of its MBSs and CMOs. At December 31, 1996, the net weighted average coupon and
weighted average life for the Company's MBS portfolio was 7.74% and 5.2 years,
respectively. At December 31, 1996, the net weighted average coupon of the
mortgage collateral supporting the Company's CMO portfolio was 6.75%, and the
weighted average life of the CMO portfolio was 4.6 years. The Company has
reduced its exposure to CMOs and MBSs, from 24% of the total fixed maturity
securities as of December 31, 1995 to 16.3% as of December 31, 1996.
The following table sets forth, by category, the CMOs in the Company's
general account as of December 31, 1996.
COLLATERALIZED MORTGAGE OBLIGATIONS(1)
AS OF DECEMBER 31, 1996
--------------------------
PERCENTAGE
CARRYING OF
VALUE INVESTED
(AT MARKET) CMO ASSETS
----------- ----------
(IN
MILLIONS)
PAC........................................................ $ 786 36.6%
INVERSE FLOATERS........................................... 323 15.0
PRINCIPAL-ONLY SECURITIES.................................. 167 7.8
INTEREST-ONLY SECURITIES................................... 126 5.9
ACCRUAL SECURITIES......................................... 321 14.9
SEQUENTIAL-PAY SECURITIES.................................. 89 4.1
FLOATERS................................................... 252 11.7
Other...................................................... 86 4.0
------ -----
Total................................................. $ 2,150 100.0%
====== =====
- ---------------
(1) As of December 31, 1996, approximately 56% of CMO holdings had implicit or
explicit protection against prepayment.
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As of December 31, 1996, $15.66 billion or approximately 99.7% of the fixed
maturity securities portfolio was investment-grade securities or better, and
only $49 million or .3% of the fixed maturity securities portfolio was invested
in below investment-grade securities (less than "BBB"). The following table sets
forth the ratings of the fixed maturity securities in the Company's general
account as of December 31, 1996.
QUALITY DISTRIBUTION OF FIXED MATURITY SECURITIES(1)
AS OF DECEMBER 31, 1996
----------------------------------------
PERCENTAGE OF TOTAL
AMOUNT GENERAL ACCOUNT ASSETS
------------- ----------------------
(IN MILLIONS)
U.S. Government/agency............................ $ 353 2.2%
Short-term........................................ 765 4.9
AAA............................................... 4,695 29.9
AA................................................ 1,902 12.1
A................................................. 5,366 34.2
BBB............................................... 2,581 16.4
BB and below...................................... 49 0.3
------- -----
Total fixed maturity securities.............. $15,711 100.0%
======= =====
- ---------------
(1) The ratings referenced in this section are based on the S&P system or the
equivalent rating of another nationally recognized rating organization or,
if not rated, are internal ratings assigned by the Company based on the
Company's internal analysis of such securities. The Company holds
approximately 3.6% of non-rated securities.
Although almost all fixed maturity securities held by the Company in its
portfolio are investment grade and the Company believes that it maintains
prudent issuer diversification, no assurance can be given that, under certain
unanticipated economic circumstances, issuer defaults would not have a material
adverse effect on the business, financial condition and results of operations of
the Company.
At December 31, 1996, approximately 10.3% of the Company's fixed maturity
portfolio was invested in private placement securities (including Rule 144A
offerings). These securities are not registered with the Commission and
generally only can be purchased by certain institutional investors. Private
placement securities are thus generally less liquid than public securities.
However, covenants for private placements are generally 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. If such securities are not so rated, the Company assigns ratings
for internal monitoring purposes based on the Company's general understanding of
methodologies employed by the nationally recognized rating organizations.
The estimated maturities of the Company's fixed and variable rate
investments in its general account, along with their respective yields at
December 31, 1996, are reflected in the table below. ABSs, MBSs and CMOs are
distributed to maturity year based on the Company's estimate of the rate of
future prepayments of principal over the remaining life of the securities. These
estimates are developed using prepayment speeds reported in broker consensus
data. Such estimates are derived from prepayment speeds experienced at the
interest rate levels projected for the applicable underlying mortgages and can
be expected to vary from actual experience. Expected maturities differ from
contractual maturities due to call or prepayment provisions.
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FIXED MATURITY INVESTMENTS MATURITY SCHEDULE
ESTIMATED MATURITY
-----------------------------------------------------------------------
1997 1998 1999 2000 2001 THEREAFTER TOTAL
------ ------ ------ ------ ------ ---------- -------
(IN MILLIONS)
ABSS, MBSS AND CMOS(1)
Variable rate(2)
Amortized cost....... $ 185 $ 111 $ 80 $ 233 $ 157 $ 891 $ 1,657
Market value......... 183 131 171 226 148 851 1,710
Pre-tax yield(3)..... 5.97% 6.87% 6.60% 6.51% 6.63% 7.21% 7.09%
Fixed rate
Amortized cost....... $ 879 $ 630 $ 782 $ 709 $ 473 $1,188 $ 4,661
Market value......... 880 626 773 706 468 1,180 4,633
Pre-tax yield(3)..... 6.38% 6.76% 6.49% 6.74% 6.76% 6.96% 6.69%
BONDS AND NOTES
Variable rate(2)
Amortized cost....... $ 183 $ 72 $ 113 $ 90 $ 16 $ 248 $ 722
Market value......... 181 76 90 94 17 248 706
Pre-tax yield(3)..... 4.91% 5.74% 3.03% 5.97% 5.99% 6.72% 5.54%
Fixed rate
Amortized cost....... $1,673 $ 692 $ 919 $ 817 $ 752 $3,766 $ 8,619
Market value......... 1,692 689 918 821 751 3,791 8,662
Pre-tax yield(3)..... 6.35% 6.47% 6.43% 6.72% 6.84% 7.16% 6.80%
TOTAL FIXED MATURITIES
Amortized cost.......... $2,920 $1,505 $1,894 $1,849 $1,398 $6,093 $15,659
Market value............ 2,936 1,522 1,952 1,847 1,384 6,070 15,711
Pre-tax yield(3)........ 6.25% 6.59% 6.26% 6.66% 6.78% 7.11% 6.74%
- ---------------
(1) With respect to the ABS, MBS and CMO portfolio of the Company, a 100 basis
point increase in interest rates would be expected to decrease the duration
of such portfolio from approximately 3.6 to 3.4 years; a 100 basis point
decrease in interest rates would be expected to increase the duration of
such portfolio from approximately 3.6 to 3.7 years. The maturities noted in
this table would be significantly impacted if interest rates were to
decrease by 100 basis points or increase by 300 basis points from December
31, 1996 levels.
(2) Variable rate securities are instruments for which the coupon rates move
directly with or based upon an index rate. These securities include
interest-only securities and inverse floaters, which represent less than 1%
and 2.48%, respectively, of the Company's invested assets. Interest-only
securities, for which cost approximates market, have an average life of 5.1
years and earn an average yield of 14.7%. Inverse floaters, for which cost
approximates market, have an average life of 4.8 years and earn an average
yield of 6.42%. Average yields are based upon estimated cash flows using
prepayment speeds reported in broker consensus data.
(3) Pre-tax yields do not reflect yields on derivative instruments though
derivative adjustments are included in fixed maturity amortized cost and
market value.
ASSET/LIABILITY MANAGEMENT STRATEGIES
Derivatives play an important role in facilitating the management of
interest rate risk, creating opportunities to efficiently fund obligations to
policyholders and contractholders, 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. As an end user of derivatives, the
Company employs a variety of derivative financial instruments, including swaps,
caps, floors, forwards and exchange-traded financial futures and options, in
order to hedge exposure to price, foreign currency and/or interest rate risk on
anticipated investment purchases or existing assets and liabilities. The
notional amounts of derivatives contracts represent the basis upon which pay and
receive amounts are calculated and are not reflective of credit risk for
derivatives contracts. Credit risk for derivatives contracts is limited to the
amounts calculated to be due to the Company on such contracts. The Company
believes it maintains prudent policies regarding the financial stability and
credit standing of its major counterparties and typically requires credit
enhancement provisions to further limit its credit risk. Many of these
derivatives contracts are bilateral agreements that are not assignable without
the consent of the relevant counterparty. Notional amounts pertaining to
derivative financial instruments of the Company totaled $10.9 billion at
December 31, 1996 ($8.3 billion of which related
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to life insurance investments and $2.6 billion of which related to life
insurance liabilities). Management believes that the use of derivatives allows
the Company to sell more innovative products, capitalize on market opportunities
and execute a more flexible investment strategy for its general account
portfolio. The strategies described below are used by the Company to manage the
aforementioned risks associated with its obligations.
ANTICIPATORY HEDGING. For certain liabilities, the Company commits to the
price of the product prior to receipt of the associated premium or deposit. The
Company routinely executes anticipatory hedges to offset the impact of any
changes in asset prices arising from interest rate changes pending the receipt
of the premium or deposit payment and the resulting purchase of the assets.
These hedges involve taking a long position in an interest rate futures position
or entering into an interest rate swap with duration characteristics equivalent
to the associated liabilities or anticipated investments. The notional amount of
derivatives used for anticipatory hedges totaled $392 million and $718 million
at December 31, 1996 and 1995, respectively.
LIABILITY HEDGING. Several products obligate the Company to credit a
return to the contractholder which is indexed to a market rate. In order to
hedge risks associated with these products, the Company typically enters into
interest rate swaps to convert the contract rate into a rate that trades in a
more liquid and efficient market. This hedging strategy enables the Company to
customize contract terms and conditions to customer objectives and satisfies the
Company's asset/liability matching policy. Additionally, interest rate swaps are
used to convert certain fixed contract rates into floating rates, thereby
allowing them to be appropriately matched against floating rate assets. The
notional amount of derivatives used for liability hedging totaled $2.6 billion
and $1.7 billion at December 31, 1996 and 1995, respectively.
ASSET HEDGING. To meet the various policyholder obligations and to provide
investment risk diversification, the Company may combine two or more derivative
financial instruments to achieve the investment characteristics that match the
associated liability. The use of derivatives in this regard effectively
transfers unwanted investment risks or attributes to others. The selection of
the appropriate derivatives depends on the investment risk, the liquidity and
efficiency of the market and the asset and liability characteristics. The
notional amount of asset hedges totaled $2.4 billion and $3.0 billion at
December 31, 1996 and 1995, respectively.
PORTFOLIO HEDGING. The Company periodically compares the duration and
convexity of its portfolios of assets to their corresponding liabilities and
enters into portfolio hedges to reduce certain differences to acceptable levels.
Portfolio hedges reduce the mismatch between assets and liabilities and offset
the potential cash flow impact caused by interest rate changes. The notional
amount of portfolio hedges totaled $5.5 billion and $4.2 billion at December 31,
1996 and 1995, respectively.
The Company is committed to maintaining effective risk management
discipline. Derivatives used by the Company must support at least one of the
following objectives: to manage the risk arising from price, interest rate and
foreign currency volatility, to manage liquidity or to control transaction
costs. The Company has established credit limits, diversification standards and
review procedures for all credit risk, whether borrower, issuer or counterparty.
Each of the Company's segments utilizes the aforementioned derivatives
strategies. In particular, the Annuity and Employee Benefits segments use
anticipatory hedges to protect against adverse investment results from new
business sales due to interim interest rate movements and the Annuity segment
also uses a number of liability hedges in order to convert certain fixed rate
liabilities into floating rate liabilities. In contrast, the Individual Life
Insurance segment uses derivatives infrequently, other than utilizing certain
liability hedges (such as the purchase of interest rate floors) to hedge against
a dramatic decline in interest rates for products with long-term minimum
credited rate guarantees. In June 1996, FASB issued an exposure draft of an
accounting standard which, if adopted in the form in which it was issued, would
require companies to report derivatives on the balance sheet at fair value with
changes in fair value recorded in income or equity.
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Under SFAS No. 115, derivatives linked to assets are currently reflected in the
fair value of such assets reported on the Company's balance sheet. This exposure
draft also would change the accounting for derivatives used in hedging
strategies from traditional deferral accounting to a current recognition
approach which could impact a company's income statement and balance sheet and
expand the definition of a derivative instrument to include certain structured
securities currently accounted for as fixed maturities. This exposure draft has
drawn widespread criticism primarily because the required accounting treatment
would not match the perceived economic effect of such hedging strategies. As a
result of, among other things, the concerns and criticisms in comment letters
and at public hearings held on this exposure draft, FASB continued to deliberate
with regard to this exposure draft during the first quarter of 1997 and has
emphasized that a final decision has not been reached. FASB has stated that it
expects to conclude its review of this matter in the second quarter of 1997. The
Company is unable to predict the form that the final accounting standard, if
adopted, may take and believes it would be inappropriate to speculate on the
effects of any such adoption at this time. However, the Company believes the
adoption of a new accounting standard similar to this exposure draft could cause
substantial volatility in the Company's reported net income if certain of the
Company's current derivatives and hedging strategies were continued after the
adoption of such accounting standard. Were the Company to continue to employ its
current derivatives strategies, the Company's reported net income as a general
matter would, in the short-term, be adversely affected as interest rates rise
and positively affected as interest rates decline. In addition, if adopted in
its present form, the Company would be required to make a cumulative effect
adjustment to its net income and/or stockholder's equity, which adjustment would
vary based on its then current holdings of derivatives and the economic and
market circumstances present at the time such adjustment was implemented.
For a discussion of (i) the investments of the Company segregated by major
category, (ii) the types of derivatives related to the type of investment and
their respective notional amounts and the accounting policies utilized by the
Company for derivative financial instruments, see notes to consolidated
financial statements incorporated herein by reference to the Company's Form 10.
INSURANCE LIABILITY CHARACTERISTICS
Insurance liabilities, other than non-guaranteed separate accounts, which
were backed by $40.6 billion in total assets (including investments of $30.2
billion), totaled $30.8 billion (net of ceded reinsurance) at December 31, 1996.
These insurance liabilities consisted of future policy benefits of $4 billion,
other policyholder funds of $22.2 billion, guaranteed separate accounts of $10.4
billion and reinsurance recoverables of $(5.8) 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, 1996.
ESTIMATED DURATION YEARS(1)
BALANCE AT LESS
DECEMBER 31, THAN 1-5 6-10 OVER 10
DESCRIPTION 1996 1 YEAR YEARS YEARS YEARS
- ------------------------------------------- ------------ ------ ----- ----- -------
(IN BILLIONS)
Fixed rate asset accumulation vehicles..... $ 13.8 $1.9 $ 8.2 $3.7 $ --
Indexed asset accumulation vehicles........ 0.2 0.2 -- -- --
Interest credited asset accumulation
vehicles................................. 13.6 4.2 5.1 3.7 0.6
Long-term payout liabilities............... 2.7 0.1 0.6 0.8 1.2
Short-term payout liabilities.............. 0.5 0.5 -- -- --
----- ---- ----- ---- ----
Total................................. $ 30.8 $6.9 $13.9 $8.2 $ 1.8
===== ==== ===== ==== ====
- ---------------
(1) The duration of liabilities reflects management's assessment of the market
price sensitivity of the liabilities to changes in market interest rates,
and is not necessarily reflective of the projected liabilities' cash flows
under any specific scenario.
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FIXED RATE ASSET ACCUMULATION VEHICLES. Products in this category require
the Company to pay a fixed rate of interest for a specified period of time. The
cash flows are not interest rate sensitive because the products include an MVA
feature and the liabilities have protection against the early withdrawal of
funds through surrender charges. The primary risk associated with these products
is that the spread between investment return and credited rate is not sufficient
to earn the Company's targeted return. Product examples include fixed rate
annuities with an MVA feature and fixed rate GRC. Contract duration is reflected
above and is dependent on the policyholder's choice of guarantee period. The
weighted average credited policyholder rate for these policyholder liabilities
was 6.71% at December 31, 1996.
INDEXED ASSET ACCUMULATION VEHICLES. Products in this category are similar
to the fixed rate asset accumulation vehicles, but require the Company to pay a
rate that is determined by an external index. The amount and/or timing of cash
flows will therefore vary based on the level of the particular index. The
primary risks inherent in these products are similar to the fixed rate asset
accumulation vehicles, with an additional risk of changes in the index adversely
affecting profitability. Product examples include indexed GRC with an estimated
duration of up to two years. The weighted average credited rate was 5.78% at
December 31, 1996.
INTEREST CREDITED ASSET ACCUMULATION VEHICLES. Products in this category
credit interest to policyholders, subject to market conditions and minimum
guarantees. Policyholders may surrender at book value but are subject to
surrender charges for an initial period. The primary risks vary depending on the
degree of insurance element contained in the product. Product examples include
universal life insurance contracts and the general account portion of the
Company's variable annuity products. Liability duration is short- to
intermediate-term and is reflected in the table above. The average credited rate
for these liabilities was 5.52% at December 31, 1996, excluding policy loans.
LONG-TERM PAYOUT LIABILITIES. Products in this category are long-term in
nature and may contain significant actuarial (including mortality and morbidity)
pricing risks. The cash flows are not interest sensitive, but do vary based on
the timing and amount of benefit payments. The primary risks associated with
these products are that the benefits will exceed expected actuarial pricing
and/or the investment return will be lower than assumed in pricing. Product
examples include structured settlement contracts, on-benefit annuities (i.e.,
the annuitant is currently receiving benefits thereon) and long-term disability
contracts. Contract duration is generally six to ten years but, at times,
exceeds 30 years. Policy liabilities under these contracts are not
interest-sensitive.
SHORT-TERM PAYOUT LIABILITIES. These liabilities are short-term in nature
with a duration of less than one year. The primary risks associated with these
products are determined by the non-investment contingencies such as mortality or
morbidity. Liquidity is of greater concern than for the long-term payout
liabilities. Products include individual and group-term life insurance contracts
and short-term disability contracts.
COMPETITION
The Company competes with the over 2,000 life insurance companies in the
United States, as well as certain banks, securities brokerage firms, investment
advisors and other financial intermediaries marketing insurance products,
annuities, mutual funds and other retirement-oriented investments. Some of these
companies have greater financial resources and currently have higher financial
strength and claims-paying ability ratings from major rating agencies than the
Company. National banks, in particular, may become more significant competitors
in the future for insurers who sell annuities, including the Company, as a
result of recent court decisions and regulatory actions discussed under
"-- Insurance Regulation -- Regulation at Federal Level". Although the effect of
these recent developments on the Company and its competitors is uncertain, both
the persistency of the Company's existing products and the Company's ability to
sell products could be materially impacted in the future. Also, several
proposals to repeal or modify the Glass-Steagall Act of 1933, as amended (the
"Glass-Steagall Act"), and the Bank Holding Company Act of 1956, as amended (the
"Bank Holding Company Act"), have been made by members of Congress and the
Executive Branch. Certain of these proposals would repeal or modify the current
restrictions that
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prevent banks from being affiliated with insurance companies. None of these
proposals has yet been enacted, and it is not possible to predict whether any of
these proposals will be enacted or, if enacted, their potential effect on the
Company or its competitors.
The fundamental competitive factors affecting the sale of the Company's
products are price, the levels of commissions, charges and other expenses,
financial strength and claims-paying ability ratings, distribution capabilities,
reputation, quality of service, visibility in the marketplace and range of
products. For variable life insurance and annuity products, additional
competitive factors include mutual fund options, product design and investment
performance ratings. The Company's ability to compete is affected in part by its
ability to provide competitive products and quality service to the consumer,
wholesalers, general agents, licensed insurance agents and broker-dealers.
Management believes that its alternative and competing distribution systems
provide the Company with a competitive advantage in penetrating and
communicating with its growing target markets.
The Company also competes for distributors of its products such as banks,
broker-dealers and wholesalers. Management believes the principal bases upon
which insurance and financial services companies compete for distribution
channels are the services provided to, and the relationships developed with,
broker-dealers, wholesalers and other distributors, as well as compensation and
the variety and quality of products. Since the Company does not have a career
agency force, it must compete with other insurers and financial services
providers to attract and maintain productive independent distributors to sell
its products. Moreover, the Company does not have exclusive agency agreements
with many of its distributors and believes that certain of them sell products
similar to those marketed by the Company for other insurance companies.
In addition, the investment performance of investment managers chosen by
the Company to manage the assets related to its products may vary and
non-competitive investment performance could adversely affect the Company's
ability to market its products.
RATINGS
Ratings are an important factor in establishing the competitive position of
insurance companies. Insurers compete with other insurance companies, financial
intermediaries and other financial institutions on the basis of a number of
factors, including the ratings assigned by nationally recognized statistical
rating organizations. The Company's principal insurance subsidiaries currently
are rated "A+ (superior)" by A.M. Best and have claims-paying ability ratings of
"AA" from S&P and "AA+" from Duff & Phelps, and one such insurance subsidiary,
Hartford Life, has an insurance financial strength rating of "Aa3" from Moody's.
In September 1996, S&P announced that it reduced the claims-paying ability
ratings of The Hartford group of companies from "AA+" to "AA" and, in January
1997, Moody's announced that it downgraded various ratings of The Hartford and
its subsidiaries, including the insurance financial strength ratings of The
Hartford's insurance subsidiaries, from Aa2 to Aa3. Taken together, S&P and
Moody's expressed concern with, among other things, the overall strength of The
Hartford's consolidated capital, the recent charges it had taken relating to the
environmental and asbestos reserves of The Hartford's property-casualty
insurance operations (which are not part of the Company's operations) and Closed
Book GRC and the competitive nature of the business in which The Hartford and
its subsidiaries operate. Further ratings downgrades (or the potential for such
downgrades) of the Company could, among other things, materially increase
surrender levels, adversely affect relationships with broker-dealers, banks,
agents, wholesalers and other distributors of the Company's products and
services, negatively impact persistency, adversely affect the Company's ability
to compete and thereby materially and adversely affect the Company's business,
financial condition and results of operations.
A.M. Best's financial condition ratings for insurance companies currently
range from "A++ (superior)" to "F (in liquidation)". These ratings reflect A.M.
Best's opinion of an insurance company's financial strength, operating
performance and ability to meet its obligations to policyholders. Moody's
insurance financial strength ratings currently range from "Aaa (exceptional)" to
"C (lowest rated)". Such ratings are an opinion of the ability of an insurance
company to repay
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senior policyholder claims and obligations. S&P's insurance claims-paying
ability ratings currently range from "AAA (superior)" to "CCC (extremely
vulnerable)". Such a rating is an opinion of an operating insurance company's
financial capacity to meet the obligations of its insurance policies in
accordance with their terms. Duff & Phelps' claims-paying ability ratings
currently range from "AAA (negligible risk factors)" to "DD (liquidation)". Such
a claims-paying ability rating relates to the likelihood of timely payment of
policyholder and contractholder obligations.
Moreover, for so long as The Hartford maintains a controlling interest in
the Company, a deterioration in the financial condition or significant insured
losses from a catastrophic event or other unforeseen occurrence that materially
affects the financial results of The Hartford and results in a downgrade of The
Hartford's ratings could adversely impact the ratings of the Company.
Claims-paying ability or insurance financial strength ratings reflect a
rating agency's opinion of the Company's principal life insurance subsidiaries'
financial strength, operating performance and ability to meet their respective
obligations to policyholders and are not evaluations directed toward the
protection of investors.
INSURANCE REGULATION
GENERAL REGULATION AT STATE LEVEL
The insurance business of the Company is subject to comprehensive state and
federal regulation and supervision throughout the United States. The purpose of
such regulation is primarily to provide safeguards for policyholders rather than
to protect the interests of stockholders. The laws of the various jurisdictions
establish supervisory agencies with broad administrative powers with respect to,
among other things, licensing to transact business, licensing agents, admittance
of assets, regulating premium rates, approving policy forms, regulating unfair
trade and claims practices, establishing reserve requirements and solvency
standards, fixing maximum interest rates on life insurance policy loans and
minimum rates for accumulation of surrender values, restricting certain
transactions between affiliates and regulating the type, amounts and valuations
of investments permitted. State insurance regulators and the National
Association of Insurance Commissioners (the "NAIC") continually re-examine
existing laws and regulations. It is impossible to predict the future impact of
potential regulations on the Company's operations and there can be no assurance
that future insurance related laws and regulations, or the interpretation
thereof, will not have an adverse effect on the operations of the Company's
business.
Several states, including the State of Connecticut, regulate affiliated
groups of insurers, such as the Company, under insurance holding company
legislation. As a holding company with no significant business operations of its
own, the Company relies on dividends from its subsidiaries, which are primarily
domiciled in the State of Connecticut, as the principal source of cash to meet
its obligations, including the payment of principal and interest on debt
obligations of the Company and the payment of dividends to holders of its
capital stock. The payment of dividends by Connecticut-domiciled life insurers
is limited under the insurance holding company laws of Connecticut which require
notice to and approval by the Connecticut Insurance Commissioner for the
declaration or payment of any dividend that, together with the 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 gain from operations for the twelve-month period ending on
December 31 last preceding, in each case determined under statutory insurance
accounting practices. In addition, if any dividend of a Connecticut-domiciled
insurer exceeds the insurer's earned surplus, it requires the approval of the
Connecticut Insurance Commissioner. Based on these limitations and statutory
results as of December 31, 1996, the Company would have been able to receive
$132 million in dividends in 1997 from Hartford Life and Accident, the Company's
direct subsidiary, without obtaining the approval of the Connecticut Insurance
Commissioner.
Life insurance companies are required to establish an AVR consisting of two
components: (i) a "default component" which provides for future credit-related
losses on fixed maturity investments and (ii) an "equity component" which
provides for losses on all types of equity investments,
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including real estate. Insurers also are required to establish an IMR for fixed
maturity net realized capital gains and losses, net of tax, related to changes
in interest rates. The IMR is required to be amortized into statutory earnings
on a basis reflecting the remaining period to maturity of the fixed maturity
securities sold. These reserves are required by state insurance regulatory
authorities to be established as a liability on a life insurer's statutory
financial statements, but do not affect financial statements of the Company
prepared in accordance with GAAP. Although future additions to AVR will reduce
the future statutory surplus of the Company's insurance subsidiaries, the
Company does not believe that the impact under current regulations of such
reserve requirements will materially affect the ability of its insurance
subsidiaries to grow its statutory surplus and pay dividends to the Company in
the future.
In addition, the Company is a holding company which owns directly or
indirectly all the outstanding shares of capital stock of certain insurance
company subsidiaries domiciled in Connecticut and New Jersey. Insurance laws of
such states applicable to the Company generally provide that no person may
acquire control of the Company, and thus indirect control of these insurance
company subsidiaries, without the prior approval of the appropriate insurance
regulators. In general, any person who acquires beneficial ownership of 10% or
more of the voting securities of the Company would be presumed to have acquired
such control, although the appropriate insurance regulators, upon application,
may determine otherwise. See "Description of Capital Stock -- Restrictions on
Ownership Under Insurance Laws" in the accompanying Prospectus.
Each insurance company is required to file detailed annual reports with
supervisory departments in each of the jurisdictions in which it does business
and its operations and accounts are subject to examination by such departments
at regular intervals. Each of the Company's life insurance subsidiaries prepare
statutory financial statements in accordance with accounting practices
prescribed or permitted by the insurance departments of their respective states
of domicile. Prescribed statutory accounting practices include publications of
the NAIC, as well as state laws, regulations and general administrative rules.
In addition, as part of their routine regulatory oversight process, state
insurance departments conduct detailed examinations periodically (generally once
every three to five years) of the books, records, accounts and market conduct of
insurance companies domiciled in their states. Such examinations are generally
conducted in cooperation with the departments of two or three other states under
guidelines promulgated by the NAIC. In 1996, a State of Connecticut association
examination report of the Company's operations for the four years ended December
31, 1993 found no material discrepancies. The Company anticipates that its next
examination will occur in 1998. In addition, in 1995, a State of New York
Insurance Department examination of the Company's market conduct for the three
years ended December 31, 1994 found no material deficiencies. The Company is
currently undergoing separate periodic market conduct examinations conducted by
the State of Connecticut (covering the period from July 1, 1995 through June 30,
1996), the State of Maryland (covering the period from January 1, 1992 through
December 31, 1995) and the State of California (covering the period from January
1, 1995 through June 30, 1996). Management does not expect any finding from any
of these examinations that would have a material adverse effect on the Company.
REGULATORY INITIATIVES
State insurance regulators and the NAIC are continually re-examining
existing laws and regulations, specifically focusing on insurance company
investments and solvency issues, risk-adjusted capital guidelines,
interpretations of existing laws, the development of new laws, the
implementation of non-statutory guidelines and the circumstances under which
dividends may be paid. These initiatives may be adopted by the various states in
which the Company's insurance subsidiaries are licensed, but the ultimate
content and timing of any statutes and regulations adopted by the states cannot
be determined at this time. It is impossible to predict the future impact of
changing state and federal regulations on the Company's operations, and there
can be no assurance that existing or future insurance-related laws and
regulations will not become more restrictive.
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In the 1970s, the NAIC developed a set of financial relationships or
"tests" known as the Insurance Regulatory Information System ("IRIS") that was
designed for early identification of companies that may require special
attention by insurance regulatory authorities. Insurance companies submit data
annually to the NAIC, which in turn analyzes the data using ratios covering
twelve categories of financial data with defined "usual ranges" for each such
category. An insurance company may fall out of the usual range for one or more
ratios because of specific transactions or events that are in and of themselves
immaterial or eliminated at the consolidated level. Generally, an insurance
company will become subject to regulatory scrutiny if it falls outside the usual
ranges of four or more of the ratios, and regulators may then act, if such
company has insufficient capital, to constrain the company's underwriting
capacity. The Company has determined that, for 1996, one IRIS ratio for Hartford
Life and two IRIS ratios for Hartford Life and Accident fall outside the usual
range due to normal business operations such as the ownership by Hartford Life
and Accident of Hartford Life.
The NAIC also has approved risk-based capital ("RBC") standards, which are
used to determine the amount of total adjusted capital (STATUTORY CAPITAL AND
SURPLUS plus AVR and other adjustments) that a life insurance company must have,
taking into account the risk characteristics of such company's investments and
liabilities. The formula establishes a standard of capital adequacy that is
related to risk. The RBC formula establishes capital requirements for four
categories of risk: asset risk, insurance risk, interest rate risk and business
risk. For each category, the capital requirements are determined by applying
specified factors to various asset, premium, reserve and other items, with the
factor being higher for items with greater underlying risk and lower for items
with less risk. The formula is used by insurance regulators as an early warning
tool to identify deteriorating or weakly capitalized companies for the purpose
of initiating regulatory action.
The NAIC's RBC requirements provide for four levels of regulatory attention
depending on the ratio of a company's total adjusted capital to its RBC. If a
company's total adjusted capital is less than 100% but greater than or equal to
75% of its RBC, or if a negative trend has occurred (as defined in the
regulations) and total adjusted capital is less than 125% of its RBC, the
company must submit a comprehensive plan to the regulatory authority which
discusses proposed corrective actions to improve its capital position. If a
company's total adjusted capital is less than 75% but greater than or equal to
50% of its RBC, the regulatory authority will perform a special examination of
the company and issue an order specifying corrective actions that must be
followed. If a company's total adjusted capital is less than 50% but greater
than or equal to 35% of its RBC, the regulatory authority may take any action it
deems necessary, including placing the company under its control. If a company's
total adjusted capital is less than 35% of its RBC, the regulatory authority is
mandated to place the company under its control. The RBC ratios for each of
Hartford Life, Hartford Life and Accident and ITT Hartford Life and Annuity
Insurance Company have been in excess of 200% of their respective RBC from 1993
through 1996.
From time to time, the NAIC and various state insurance regulators have
considered, and may in the future consider, proposals to further restrict
dividend payments that may be made by an insurance company without regulatory
approval. No assurance can be given that there will not be any further
regulatory action restricting the ability of the Company's insurance
subsidiaries to pay dividends. Inability to pay dividends to the Company in an
amount sufficient to enable the Company to meet its debt service and other cash
requirements (including dividend payments on the Common Stock) could have a
material adverse effect on the Company's business, financial condition and
results of operations.
In addition, state regulatory authorities, industry groups and rating
agencies have developed several initiatives regarding market conduct. For
example, the NAIC has adopted the NAIC Model Illustration Regulation, which
applies to group and individual life insurance policies and certificates, and
the Market Conduct Handbook. State regulators have imposed significant fines on
various insurers for improper market conduct. The American Council on Life
Insurance established the Insurance Market Place Standards Association, a
self-regulatory organization, to implement its Principles and Code of Ethical
Life Insurance Market Conduct, which includes a third-party assessment
procedure. Market
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conduct also has become one of the criteria used to establish the ratings of an
insurance company. For example, A.M. Best's ratings analysis now includes a
review of the insurer's compliance program. Management does not believe that
these market conduct initiatives will have a material adverse effect on its
business, financial condition or results of operations.
In addition, the NAIC has adopted a model regulation called "Valuation of
Life Insurance Policies Model Regulation", which would establish new minimum
STATUTORY RESERVE requirements for individual life insurance policies written in
the future. Before the new reserve standards can become effective, individual
states must enact the model regulation. If these reserve standards were adopted
in their current form, companies selling certain individual life insurance
products such as term life insurance products with guaranteed premium periods
and universal life insurance products with no-lapse guarantees would be required
to adjust reserves to be consistent with the new minimum standards. It is
impossible at this time to predict if the model regulation will be enacted and,
if enacted, when it will become applicable. However, the Company anticipates no
material impact as a result of the enactment of this legislation.
ASSESSMENTS AGAINST INSURERS
Under the INSURANCE GUARANTY FUND laws existing in each state, the District
of Columbia and Puerto Rico, insurers licensed to do business can be assessed by
state insurance guaranty associations for certain obligations of insolvent
insurance companies to policyholders and claimants. Recent regulatory actions
against certain large life insurers encountering financial difficulty have
prompted various state insurance guaranty associations to begin assessing life
insurance companies for the deemed losses. Most of these laws do provide,
however, that an assessment may be excused or deferred if it would threaten an
insurer's solvency and further provide for 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's insurance subsidiaries were
assessed $11 million, $13 million and $12 million in 1994, 1995 and 1996,
respectively. Since such assessments are typically not made for several years
after an insurer fails and depend upon the final outcome of liquidation or
rehabilitation proceedings, the Company cannot accurately determine the amount
or timing of any future assessment on the Company's insurance subsidiaries.
However, based on the best information presently available, management believes
the Company's total future assessments will not be material to its operating
results or financial position.
REGULATION AT FEDERAL LEVEL
Although the federal government does not directly regulate the business of
insurance, federal legislation and administrative policies in several areas,
including pension regulation, financial services regulation and federal
taxation, can significantly and adversely affect the insurance industry and thus
the Company. For example, Congress has from time to time considered legislation
relating to the deferral of taxation on the accretion of value within certain
annuities and life insurance products, the removal of barriers preventing banks
from engaging in the insurance business, changes in regulations for the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), the alteration of
the federal income tax structure and the availability of Section 401(k) or
individual retirement accounts. In particular, Congress has reviewed various
proposals to repeal or modify the McCarran-Ferguson Act (which exempts the
insurance industry from certain federal laws), the Glass-Steagall Act (which
restricts banks from engaging in a securities-related business) and the Bank
Holding Company Act (which prohibits banks from being affiliated with insurance
companies). In addition, Congress is currently considering enacting legislation
that would reduce the tax rate applicable to long-term capital gains. This may
result in alternative financial products becoming less tax disadvantaged versus
variable annuities. It is not possible to predict whether future legislation or
regulation adversely affecting the insurance industry may be enacted or, if
enacted, the extent to which such legislation or regulation would have an effect
on the Company and its competitors.
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Moreover, the United States Supreme Court held on January 18, 1995 in
NationsBank of North Carolina v. Variable Annuity Life Insurance Company that
annuities are not insurance for purposes of the National Bank Act. In addition,
the Supreme Court also held on March 26, 1996 in Barnett Bank of Marion City v.
Nelson that state laws prohibiting national banks from selling insurance in
small-town locations are preempted by federal law. The Office of the Comptroller
of the Currency also adopted a ruling in November 1996 that permits national
banks, under certain circumstances, to expand into other financial services,
thereby increasing competition for the Company. At present, the extent to which
banks can sell insurance and annuities without regulation by state insurance
departments is being litigated in various courts in the United States. Although
the effect of these recent developments on the Company and its competitors is
uncertain, both the persistency of the Company's existing products and the
Company's ability to sell products may be materially impacted in the future.
In addition, the HIPA Act of 1996 phases out the deductibility of interest
on policy loans under COLI by 1998, thus eliminating all future sales of
leveraged COLI. The Company's leveraged COLI product has been an important
contributor to its profitability in recent years and will continue to contribute
to the profitability of the Company (although such contribution will be reduced
in the future due to the effects of this legislation). As a result, net income
contributed by COLI may be lower in the future (particularly during 1999 and
later years) as a result of the elimination of leveraged COLI sales.
SECURITIES LAWS
Certain of the Company's subsidiaries, and certain policies and contracts
offered by them, are subject to regulation under the federal securities laws
administered by the Commission and certain state securities laws. Certain
separate accounts of the Company's insurance subsidiaries are registered as
investment companies under the Investment Company Act of 1940, as amended (the
"Investment Company Act"). Separate accounts through which certain variable
annuity contracts and variable insurance policies issued by the Company's
insurance subsidiaries are made available are also registered under the
Securities Act. Certain other subsidiaries of the Company are registered as
broker-dealers under the Exchange Act and are members of, and subject to
regulation by, the National Association of Securities Dealers, Inc.
Certain of the Company's subsidiaries are investment advisors registered
under the Investment Advisers Act of 1940, as amended. The investment companies
managed by such subsidiaries are registered with the Commission under the
Investment Company Act and the shares of certain of these entities are qualified
for sale in certain states in the United States and the District of Columbia.
Certain subsidiaries of the Company are also subject to the Commission's net
capital rules.
In October 1996, the National Securities Markets Improvements Act of 1996
was enacted into law. Of particular interest to the variable products industry
are the provisions establishing a new "reasonableness standard" for all fees and
charges in variable annuity and variable life insurance policies. Because
insurers no longer will have to explain each and every component of their fees
and charges to the Commission, and instead will be subject to an overall
reasonableness standard for aggregate fees and charges, the Company believes the
legislative changes will provide the industry with greater flexibility in
product design. However, given the significant barriers to market entry, such as
entering into relationships with broker-dealers and systems constraints, the
Company believes that the legislation overall will have a minimal competitive
impact.
All aspects of the Company's investment advisory activities are subject to
various federal and state laws and regulations. These laws and regulations are
primarily intended to benefit investment advisory clients and investment company
stockholders and generally grant supervisory agencies broad administrative
powers, including the power to limit or restrict the carrying on of business for
failure to comply with such laws and regulations. In such event, the possible
sanctions which may be imposed include the suspension of individual employees,
limitations on the activities in which the investment advisor may engage,
suspension or revocation of the investment advisor's registration as an advisor,
censure and fines.
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ERISA CONSIDERATIONS
Enacted into law on August 20, 1996, the Small Business Protection Act (the
"SBPA") offered insurers protection from potential litigation exposure prompted
by the 1993 U.S. Supreme Court decision in John Hancock Mutual Life Insurance
Company v. Harris Trust & Savings Bank (the "Harris Trust Decision") in which
the Court held that, with respect to a portion of the funds held under certain
general account group annuity contracts, an insurer is subject to the fiduciary
requirements of ERISA. The pertinent SBPA provisions provide that insurers are
protected from lawsuits claiming breaches of fiduciary duties under ERISA for
past actions. However, insurers remain subject to federal criminal law and
liable for actions brought by the U.S. Secretary of Labor alleging breaches of
fiduciary duties that also constitute a violation of federal or state criminal
law. The SBPA also provides that contracts issued from an insurer's general
account on or before December 31, 1998, that are not guaranteed benefit
policies, will be permanently grandfathered if they meet the requirements of
regulations the United States Department of Labor is required to issue by
December 31, 1997. The SBPA further provides that contracts issued from an
insurer's general account after December 31, 1998, that are not guaranteed
benefit policies, will be subject to ERISA. Although the Company does not
believe that the Harris Trust Decision had a material adverse effect on its
business, financial condition or results of operations, the Company supported
and welcomed the enactment of the aforementioned provisions of the SBPA as a
means to remove an area of potential exposure for the insurance industry
generally.
With respect to employee welfare benefit plans subject to ERISA, the United
States Congress periodically has considered amendments to the law's federal
preemption provision, which would expose the Company, and the insurance industry
generally, to state law causes of action, and accompanying extra-contractual
(e.g., punitive) damages in lawsuits involving, for example, group life and
group disability claims. To date, all such amendments to ERISA have been
defeated.
PROPERTIES
The Company's headquarters, located in Simsbury, Connecticut, is currently
leased from a third party by Hartford Fire pursuant to a sale-leaseback
arrangement. The Company has subleased from Hartford Fire the right to use the
headquarters building. For a further discussion of this sublease arrangement,
see "Certain Relationships and Transactions--Intercompany Arrangements--Simsbury
Sublease". The remainder of the material facilities of the Company are either
leased or subleased from The Hartford or its subsidiaries or leased from third
parties. The Company believes its existing properties are adequate for its
present operations.
LEGAL PROCEEDINGS
The Company is a defendant in various lawsuits arising in the ordinary
course of business. In the opinion of management, the resolution of these
matters is not expected to have a material adverse effect on the Company's
business, financial condition or results of operations. In addition, companies
in the life insurance industry historically have been subject to substantial
litigation resulting from claims disputes and other matters. Most recently, such
companies have faced extensive claims, including class-action lawsuits, alleging
improper sales practices relating to sales of certain life insurance products.
Negotiated settlements of such class-action lawsuits have had a material adverse
effect on the business, financial condition and results of operations of certain
of these companies. The Company is not and has not been a defendant in any such
class-action lawsuit alleging improper sales practices. No assurance can be
given that such class-action lawsuits or other litigation would not materially
and adversely affect the Company's business, financial condition or results of
operations.
EMPLOYEES
As of May 13, 1997, the Company had 3,782 direct employees, 2,209 of whom
are employed at the home office in Simsbury, Connecticut, and 1,573 of whom are
employed at various branch offices throughout the United States, Canada and
elsewhere. Management believes that its employee relations are good. None of the
Company's employees is subject to a collective bargaining agreement and the
Company is not aware of any current efforts to implement such an agreement.
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CERTAIN RELATIONSHIPS AND TRANSACTIONS
GENERAL
The Hartford is the controlling stockholder of the Company and beneficially
owns 100% of the outstanding Class B Common Stock, which represents
approximately 95.6% of the combined voting power of all the outstanding Common
Stock and approximately 81.4% of the economic interest in the Company. For so
long as The Hartford continues to beneficially own shares of Common Stock
representing more than 50% of the combined voting power of the outstanding
Common Stock, it generally will be able to approve any matter submitted to a
vote of the stockholders, including, among other things, the election of the
entire Board of Directors or the amendment of the Restated Certificate of
Incorporation (the "Certificate of Incorporation") and By-laws, without the
consent of the other stockholders of the Company. In addition, through its
controlling beneficial ownership of the Company (as well as certain provisions
of the Master Intercompany Agreement discussed under "-- Intercompany
Arrangements -- Master Intercompany Agreement"), The Hartford will be able to
exercise a controlling influence over the business and affairs of the Company,
including determinations with respect to mergers or other business combinations
involving the Company, the acquisition or disposition of assets by the Company,
the Company's access to the capital markets, the payment of dividends and any
change of control of the Company. In the foregoing situations or otherwise,
various conflicts of interest between the Company and The Hartford could arise.
Furthermore, ownership interests of directors or officers of the Company in
common stock of The Hartford or service as a director or officer of both the
Company and The Hartford could create, or appear to create, potential conflicts
of interest when directors and officers are faced with decisions that could have
different implications for the Company and The Hartford.
COMPETITION
The Hartford historically has conducted the operations of its Annuity,
Individual Life Insurance and Employee Benefits segments (each as described in
this Prospectus Supplement) in the United States and Canada solely through the
Company and its subsidiaries. The Hartford has informed the Company that it
currently intends to continue this strategy with respect to those products and
services currently being offered by the Company through those business segments.
Separately, The Hartford has informed the Company that The Hartford intends to
engage in efforts to provide investment management services to large businesses,
some of which may be customers of the Company. The Company currently does not
plan to enter those lines of business in the United States and Canada in which
The Hartford or any of its subsidiaries (other than the Company or any of its
subsidiaries) currently operates. The Hartford currently provides commercial
property-casualty insurance, property-casualty reinsurance and personal lines
(including homeowners and auto) coverages.
The Hartford historically has conducted its international life insurance
and annuity operations both through the Company, and its subsidiaries, and
through other subsidiaries of The Hartford. Currently, The Hartford holds life
insurance and annuity operations internationally through direct or indirect
wholly owned subsidiaries in The Netherlands, Spain and the United Kingdom,
while the Company operates lines of business in Brazil and Argentina. There is
no current intention on the part of the Company or The Hartford to enter such
lines of business in countries in which The Hartford or the Company,
respectively, currently operates.
The Certificate of Incorporation of the Company provides that, subject to
any contractual agreements of the Company to the contrary, and subject to
applicable law, The Hartford or any subsidiary thereof (other than the Company
or any of its subsidiaries) will have the right to compete with the Company or
any of its subsidiaries. For a further discussion of the Company's Certificate
of Incorporation, see "Certain Provisions of the Certificate of Incorporation
and By-Laws of the Company" in the accompanying Prospectus. It is possible that
areas of competition and conflicts of interest may arise between the two
companies or their respective subsidiaries in the future. No assurance can be
given that such areas of competition or conflicts of interest will not arise or
will be resolved in a manner favorable to the Company.
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The Hartford has advised the Company that its current intent is to continue
to hold all the Class B Common Stock it beneficially owns. However, The Hartford
generally has no contractual obligation to retain its shares of Class B Common
Stock. In addition, the Company has agreed that it will, upon the request of The
Hartford, use its best efforts to effect the registration under applicable
federal and state securities laws of any shares of Common Stock held by The
Hartford or any of its affiliates. See "-- Intercompany Arrangements -- Master
Intercompany Agreement". The address of The Hartford is Hartford Plaza,
Hartford, Connecticut 06115.
BOARD OF DIRECTORS
Following the completion of the Debt Offering, The Hartford and the Company
expect to elect two additional directors of the Company who will be persons not
currently or formerly associated with The Hartford or the Company. The Board of
Directors will then consist of ten members, including eight who are directors
and/or officers of The Hartford. Members of the Board of Directors will be
divided into three classes and serve staggered three-year terms. The Hartford
will have the ability to change the size and composition of the Company's Board
of Directors.
INTERCOMPANY ARRANGEMENTS
The Company's relationship with The Hartford is governed by, among other
things, certain agreements entered into in connection with the Equity Offerings
and possibly in the future, including the Master Intercompany Agreement, the
Investment Management Agreements, the Tax Sharing Agreement and the Simsbury
Sublease, the material terms of which are summarized below. The agreements
entered into in connection with the Equity Offerings generally maintain the
relationship between the Company and The Hartford in a manner consistent in all
material respects with past practice. Under applicable insurance holding company
laws, agreements between the Company's insurance subsidiaries and The Hartford
or its affiliates must be fair and reasonable and may be subject to the approval
of applicable state insurance commissioners. However, none of these agreements
have resulted, nor any agreements entered into in the future between the Company
and The Hartford or their respective subsidiaries (for so long as The Hartford
maintains controlling beneficial ownership in the Company) will result, from
arm's-length negotiations and, as a result, the terms of certain of such
agreements may be less favorable to the Company than could be obtained from an
independent third party.
The descriptions set forth below are intended to be summaries and, while
material terms of the agreements are set forth herein, the descriptions are
qualified in their entirety by reference to the relevant agreement or form
thereof filed with the Registration Statement of which this Prospectus
Supplement and the accompanying Prospectus form a part.
MASTER INTERCOMPANY AGREEMENT
SERVICES. The Company and The Hartford have entered into the Master
Intercompany Agreement which identifies those services that The Hartford has
agreed to provide to the Company and that the Company has agreed to provide to
The Hartford, with the costs of such services allocated according to established
methodologies determined on an annual basis by The Hartford, in its sole
discretion, after consultation with the Company, which evidence each such
party's fair and reasonable share of such costs. Such allocation of costs for
such services provided in prior years is reflected in the Company's consolidated
financial statements. In particular, The Hartford continues to allow eligible
employees of the Company to continue to participate in The Hartford's employee
benefit plans.
The general purpose of the Master Intercompany Agreement is to ensure that
The Hartford continues to provide to the Company the range of services provided
by it prior to the Equity Offerings. These services include, among others,
certain corporate relations, executive, government
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affairs, human resources, legal, investment, finance, real estate, information
management, internal audit, cash management, tax and treasury services.
In addition, the Company has the exclusive right under the Master
Intercompany Agreement to distribute certain of its products through The
Hartford. The Hartford will not solicit or encourage any of its independent
agents to (x) sell or endorse any products of another company similar in type
and nature to such products of the Company or (y) transfer any of such
independent agents' in force business with the Company relating to such products
to another company.
APPROVAL OF CORPORATE ACTIVITIES. The Master Intercompany Agreement also
requires that, prior to the date on which The Hartford ceases to beneficially
own 50% or more of the combined voting power of the Voting Stock then
outstanding, neither the Company nor any of its subsidiaries may undertake or
agree to undertake any of the following without the prior written consent of The
Hartford:
(i) any merger or consolidation (or equivalent transaction) of the
Company or any of its subsidiaries with or into any corporation,
partnership, joint venture or any other person, or division thereof, which
merger or consolidation (or equivalent transaction) is material to the
Company and its subsidiaries taken as a whole;
(ii) the acquisition by the Company or any of its subsidiaries of a
majority of the issued and outstanding shares of capital stock or all or
substantially all the assets of any corporation, partnership, joint venture
or any other person involving consideration or value in excess of $5
million;
(iii) any sale, assignment, lease, transfer or other disposition, or
the pledge, mortgage or encumbrance, of assets of the Company or any of its
subsidiaries other than (w) any transaction in the ordinary course of
business and consistent with past practice, (x) any acquisition,
disposition or transfer of securities pursuant to investment portfolio
decisions in the ordinary course of business and consistent with past
practice, (y) any transaction between or among any of the Company and its
subsidiaries or (z) any transaction, or series of related transactions,
which does not involve aggregate consideration or value in excess of $5
million;
(iv) any transaction, or series of related transactions, not
specifically enumerated in subparagraphs (i) through (iii) above, involving
aggregate consideration, value or liabilities in excess of $10 million or
that is or are otherwise material to the Company and its subsidiaries taken
as a whole;
(v) any transaction, or series of related transactions, that could
have a material effect on The Hartford;
(vi) any increase or decrease in, or the reclassification of, the
authorized capital stock of the Company or the creation of any class or
series of capital stock of the Company;
(vii) the dissolution, liquidation or winding up of the Company;
(viii) any redemption, acquisition or issuance by the Company of any
shares of its capital stock or any options, warrants or rights to acquire
such capital stock or securities convertible into or exchangeable for
capital stock, other than issuances in respect of and pursuant to the
requirements of the 1997 Restricted Stock Plan, the 1997 Stock Plan, the
1997 Bonus Swap Plan and the 1997 Stock Purchase Plan or such other
employee and director stock option, profit sharing or other benefit plans
of the Company in effect from time to time;
(ix) the declaration or payment of dividends on or in respect of any
class or series of capital stock of the Company or any other distribution
to the stockholders of the Company, other than dividends on or in respect
of the Common Stock consistent with the Company's dividend policy then in
effect; and
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(x) any direct or indirect act that would result, either alone or
taking into account the business, operations, properties, activities and
legal and regulatory status of The Hartford and the Company, in (i) The
Hartford or any of its subsidiaries (other than the Company and any of its
subsidiaries) being required to file any notice, report or other document
or make any registration with, or obtain any approval, consent or
authorization of, any governmental or regulatory agency, other than in the
ordinary course of business and consistent with past practice, or otherwise
becoming subject to any applicable law or regulation or (ii) any director
of The Hartford being ineligible to serve or prohibited from so serving as
a director of The Hartford under or pursuant to any applicable law or
regulation.
REGISTRATION RIGHTS. The Master Intercompany Agreement further provides
that, upon the request of The Hartford or any other Rights Holder, the Company
will use its best efforts to effect the registration under the applicable
federal and state securities laws of any of the shares of Common Stock (and any
other securities issued in respect of or in exchange therefor) beneficially
owned by The Hartford or any such other Rights Holder, as applicable, for sale
in accordance with its intended method of disposition thereof, and will take
such other actions as may be necessary to permit the sale thereof in other
jurisdictions, subject to certain limitations specified in the Master
Intercompany Agreement. The Hartford and any other Rights Holder also will each
have the right, subject to certain limitations, to include at any time and from
time to time the shares of Common Stock (and any other securities issued in
respect of or in exchange therefor) beneficially owned by it in certain other
registrations of such securities initiated by the Company on its own behalf or
on behalf of its other stockholders. The Company generally has agreed, subject
to the provisions of the Master Intercompany Agreement, to pay all out-of-pocket
costs and expenses in connection with each such registration that The Hartford
or any other Rights Holder requests or in which The Hartford or any other Rights
Holder participates. Subject to certain limitations specified in the Master
Intercompany Agreement, such registration rights are assignable by The Hartford
or any other Rights Holder and their assigns. The Master Intercompany Agreement
contains customary terms and provisions with respect to, among other things,
registration procedures and certain rights to indemnification and contribution
granted by the parties thereunder in connection with such a registration.
INDEMNIFICATION. The Master Intercompany Agreement provides for the
assumption of liabilities and cross-indemnities allocating liability in respect
of the Company's businesses to the Company and in respect of The Hartford's
businesses (other than the businesses of the Company and its subsidiaries) to
The Hartford. In addition, for those liabilities not specifically arising out of
or allocable to either of their respective former or present businesses, the
parties have agreed to share such liabilities, allocating 30% of the cost of
such liabilities to the Company and 70% of the cost of such liabilities to The
Hartford. In addition, pursuant to the terms of the Master Intercompany
Agreement, the Company is responsible for 30% of certain shared liabilities not
specifically arising out of or allocable to any of the present or former
businesses of ITT, New ITT or The Hartford under the distribution agreement
executed in connection with the ITT Spin-Off (the "Spin-Off Distribution
Agreement") and for which The Hartford has responsibility thereunder. See
"-- ITT Spin-Off".
Under the tax allocation agreement entered into in connection with the ITT
Spin-Off (the "Spin-Off Tax Agreement"), The Hartford also is responsible for a
one-third share of certain federal, state or foreign tax liabilities with
respect to the ITT Spin-Off and certain business activities of ITT prior to the
date of such ITT Spin-Off. See "-- ITT Spin-Off". Pursuant to the Master
Intercompany Agreement, the Company is responsible for 30% of any such
liabilities and The Hartford is responsible for 70% of any such liabilities. In
addition, the Company and The Hartford have agreed that, pursuant to the Master
Intercompany Agreement, any sales or use tax arising from or imposed upon the
transfer of property or services by either of them or their respective
subsidiaries following the completion of the Equity Offerings will be the
liability of the party receiving such property or services. The Master
Intercompany Agreement also provides that the Company and its subsidiaries are
liable for any payroll tax attributable to 1997 that arises from the employment
by the Company
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after the completion of the Equity Offerings of individuals who perform services
for the Company or any of its subsidiaries during 1997. Further, the Master
Intercompany Agreement provides that the Company and its subsidiaries or The
Hartford and its subsidiaries (other than the Company and its subsidiaries)
(each group, an "Indemnifiable Group"), as applicable, will each indemnify the
other Indemnifiable Group for any taxes, including interest and penalties
thereon (regardless of which Indemnifiable Group member taxes are imposed upon),
attributable to, or otherwise arising as a result of, the exercise by the
Internal Revenue Service, or any other governmental revenue authority, of the
authority granted under Section 482 of the Internal Revenue Code or any similar
statutory provision, to distribute, apportion or allocate gross income,
deductions, credits or allowances between or among The Hartford or any of its
subsidiaries (other than the Company and its subsidiaries) and the Company and
its subsidiaries, as applicable.
LICENSE AND SUBLICENSE. Hartford Fire, the principal subsidiary of The
Hartford, has granted to the Company a non-exclusive right and license (the
"Hartford License") (and the right to grant sublicenses (the "Hartford
Sublicenses") to certain qualified subsidiaries) to use the "Hartford" name,
various versions of the Stag Logo and certain other trademarks and service marks
in connection with the products and services sold through the Company's Annuity,
Individual Life Insurance and Employee Benefits segments on a worldwide basis,
and any property-casualty products offered outside the United States and Canada
by the Company in the future, subject to customary usage restrictions. The
Hartford License and any Hartford Sublicenses are or will be perpetual, except
that, in the event that The Hartford reduces its beneficial ownership below 50%
of the combined voting power of the outstanding Voting Stock, Hartford Fire may
revoke the Hartford License and/or any Hartford Sublicenses upon the later of
May 28, 2002 or one year after receipt by the Company of written notice of
Hartford Fire's intention to revoke the Hartford License and/or any Hartford
Sublicenses. In addition, the Hartford License and/or any Hartford Sublicenses
may be revoked immediately in certain other limited, customary circumstances.
Subject to the terms of the Master Intercompany Agreement, upon the revocation
of any such licenses, the Company and any of its subsidiaries affected thereby
will change their name to exclude "Hartford" and will discontinue the use of the
Stag Logo and the other licensed trademarks and service marks. The revocation of
the Hartford License and/or any Hartford Sublicenses, in whole or in part, could
have a material adverse effect on the Company's ability to conduct its business.
Hartford Fire also has granted to the Company and/or certain of its
subsidiaries a personal, non-transferable sublicense to use the "ITT" name and
marks, including the logo, owned by ITT Sheraton Corporation (each, an "ITT
Sublicense") which was previously licensed to Hartford Fire under the ITT Trade
Name and Service Mark License Agreement (the "ITT License Agreement") entered
into in connection with the ITT Spin-Off, each such license subject to customary
usage restrictions. The rights that have been or will be granted under an ITT
Sublicense may be restricted or terminated pursuant to the terms of the ITT
License Agreement, including a provision that allows for termination by The
Hartford of its license thereunder upon six months' prior written notice.
Moreover, the ITT License Agreement provides that ITT may, under certain limited
circumstances, terminate the ITT License Agreement and thereby the ITT
Sublicenses. For a description of the circumstances under which ITT may
terminate the ITT License Agreement, see "-- ITT Spin-Off".
Subject to the foregoing limitations, each of the Hartford License, any
Hartford Sublicenses and any ITT Sublicenses are or will be perpetual, except
that, in the event that The Hartford reduces its beneficial ownership below 50%
of the combined voting power of the outstanding Voting Stock, Hartford Fire may
revoke the Hartford License and/or any Hartford Sublicenses upon the later of
May 28, 2002 or one year after receipt by the Company of written notice of
Hartford Fire's intention to revoke the Hartford License and/or any Hartford
Sublicenses. However, only with respect to any future international
property-casualty operations conducted by the Company, the Hartford License
and/or any Hartford Sublicenses may be revoked by Hartford Fire upon six months'
written notice in the event that The Hartford reduces its beneficial ownership
below 50% of the combined voting power of the outstanding Voting Stock. Each ITT
Sublicense will terminate on the earlier of (i) the
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earliest termination date specified in the ITT License Agreement or (ii) the
date that The Hartford reduces its beneficial ownership below 50% of the
combined voting power of the outstanding Voting Stock; provided, however, that
if the Company provides an indemnity to The Hartford to cover any resulting
liabilities, the Company may elect to have each ITT Sublicense terminate only
upon the earliest termination date specified in the ITT License Agreement. In
addition, in each case the Hartford License, any Hartford Sublicenses and the
ITT Sublicenses may be revoked immediately in certain other limited, customary
circumstances, such as material breach of any such licenses, insolvency and any
non-permitted transfers of such licenses and sublicenses. Each of the Company
and The Hartford has agreed to indemnify the other and any of its subsidiaries,
and their respective employees, officers, directors and agents, from and against
any claims, demands, suits, actions, damages and judgments brought or obtained
by a third party arising out of any (i) use of the "Hartford" name and/or any of
the various trademarks and service marks licensed pursuant to the Hartford
License and any Hartford Sublicenses by the Company or certain of its
subsidiaries or The Hartford or any of its subsidiaries, as applicable, or (ii)
breach by the Company or certain of its subsidiaries or The Hartford and any of
its subsidiaries, as applicable, of the terms and conditions of the Hartford
License and any Hartford Sublicenses, as applicable. In addition, Hartford Fire
has agreed to indemnify the Company and any of its subsidiaries, and their
respective employees, officers, directors and agents, from and against any
claims, demands, suits, actions, damages and judgments brought or obtained by a
third party arising out of an assertion that the use of such "Hartford" name,
trademarks or service marks infringes the trade names, trademarks and service
marks of a third party. The Company may assign its rights in the Hartford
License to a third party upon the prior written approval of Hartford Fire.
TERM. The Master Intercompany Agreement contains various termination
provisions. In the case of the provision of services, the relevant provisions of
the Master Intercompany Agreement are subject to termination by the Company or
The Hartford, upon six months' prior written notice, on and after the date on
which The Hartford ceases to own 50% or more of the combined voting power of the
Voting Stock then outstanding and as otherwise specified therein. As noted
above, the provisions in respect of approval of certain corporate activities by
The Hartford are only effective so long as The Hartford beneficially owns 50% or
more of the combined voting power of the outstanding Voting Stock. The Master
Intercompany Agreement does not provide for termination of the provisions in
respect of registration rights and indemnification discussed above. For a
discussion of the termination provisions in respect of the Hartford License, any
Hartford Sublicenses and the ITT Sublicenses, see "-- License and Sublicense".
TAX SHARING AGREEMENT AND TAX CONSOLIDATION
Pursuant to the Tax Sharing Agreement, the Company, its subsidiaries and
The Hartford 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 to file
separate federal, state and local income tax returns (including, except as
provided below, any amounts determined to be due as a result of a
redetermination of the tax liability of The Hartford arising from an audit or
otherwise). With respect to certain tax items, however, such as foreign tax
credits, alternative minimum tax credits, net operating losses and net capital
losses, the Company's right to reimbursement will be determined based on the
usage of such credits or losses by the consolidated group.
The Hartford continues to have all the rights of a parent of a consolidated
group (and similar rights provided for by applicable state and local law with
respect to a parent of a combined, consolidated or unitary group), is the sole
and exclusive agent for the Company in any and all matters relating to the tax
liabilities of the Company, has sole and exclusive responsibility for the
preparation and filing of all tax returns (or amended returns) and has the
power, in its sole discretion, to contest or compromise any asserted tax
adjustment or deficiency and to file, litigate or compromise any claim for
refund on behalf of the Company.
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The Hartford controls all the tax decisions of the Company by virtue of its
controlling beneficial ownership of the Company and the terms of the Tax Sharing
Agreement. Under the Tax Sharing Agreement, The Hartford has sole authority to
respond to and conduct all tax proceedings (including tax audits) relating to
the Company, file all returns on behalf of the Company and determine the amount
of the Company's liability to (or entitlement to payment from) The Hartford
under the Tax Sharing Agreement. This arrangement may result in conflicts of
interest between the Company and The Hartford. For example, under the Tax
Sharing Agreement, The Hartford is able to choose to contest, compromise or
settle any adjustment or deficiency proposed by the relevant taxing authority in
a manner that may be beneficial to The Hartford and detrimental to the Company.
Provided that The Hartford continues to beneficially own, directly or
indirectly, at least 80% of the combined voting power and the value of the
outstanding capital stock of the Company, the Company will be included for
federal income tax purposes in the consolidated group of which The Hartford is
the common parent. It is the present intention of The Hartford and its
subsidiaries to continue to file a single consolidated federal income tax
return. In certain circumstances, certain of the Company's subsidiaries also
will be included with certain subsidiaries of The Hartford (other than Company
subsidiaries) in combined, consolidated or unitary income tax groups for state
and local tax purposes. Each member of a consolidated group for federal income
tax purposes is jointly and severally liable for the federal income tax
liability of each other member of the consolidated group. Similar principles
apply with respect to members of a combined group for state law tax purposes.
Accordingly, although the Tax Sharing Agreement allocates tax liabilities
between the Company and The Hartford during the period in which the Company is
included in The Hartford's consolidated group, the Company could be liable for
the federal income tax liability of any other member of The Hartford
consolidated group in the event any such liability is incurred, and not
discharged, by such other member.
In addition, provided that The Hartford continues to beneficially own at
least 80% of the combined voting power or the value of the outstanding capital
stock of the Company, the Company will be included for federal income tax
purposes in the controlled group of which The Hartford is the common parent.
Each member of a controlled group is jointly and severally liable for pension
funding and pension termination liabilities of each other member of the
controlled group, as well as certain benefit plan taxes. Accordingly, the
Company could be liable for pension funding, pension termination liabilities and
certain other pension-related excise taxes as well as other taxes of another
member of The Hartford-controlled group in the event any such liability is
incurred, and not discharged, by such other member.
INVESTMENT MANAGEMENT AGREEMENTS
Management of the Company's general accounts and certain of its separate
accounts has been, prior to the completion of the Equity Offerings, and will
continue to be conducted by the Company. The Company's investment strategy group
is responsible for determining investment allocations for its general account
and guaranteed separate account investment portfolios. The Investment Management
Agreements provide that the investment staff of The Hartford will implement
(e.g., selection, purchase and sale of securities) the investment strategies
determined by the investment strategy group of the Company and act as advisor to
certain of the Company's non-guaranteed separate accounts and mutual funds. The
Investment Management Agreements also provide that the Company will pay a fee
designed to reflect the actual costs of providing such services. In addition,
the Investment Management Agreements generally provide that, prior to April 1,
2000, The Hartford may not terminate such Agreements, and the Company may only
terminate such Agreements, upon six months' written notice, based on The
Hartford's failure to satisfy performance benchmarks agreed to by the parties.
Further, the Investment Management Agreements generally provide that from and
after April 1, 2000, the Investment Management Agreements will continue unless
180 days' prior written notice of termination is provided on or after
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October 1, 1999 by one party to the other. The Investment Management Agreements
for the Company's mutual funds are terminable by any of the mutual funds' board
of directors at any time.
SIMSBURY SUBLEASE
The Company's headquarters, located in Simsbury, Connecticut, is currently
leased from a third party by Hartford Fire pursuant to a sale-leaseback
arrangement. The Company has subleased from Hartford Fire the right to use the
headquarters building pursuant to the Simsbury Sublease. The right to purchase
the facility and the renewal option in respect of the sale-leaseback arrangement
have been retained by Hartford Fire. In addition, a subsidiary of The Hartford
owns the land underlying and surrounding the headquarters building. The Hartford
Fire sublease expires on January 1, 2010. Rental payments are fixed (but not
level) over the term of the lease. The Company expects to pay rent of $12
million in each of 1997, 1998 and 1999, respectively, $21 million in each of
2000 and 2001, respectively, and $175 million thereafter in the aggregate over
the remaining term of the sublease.
ITT SPIN-OFF
The agreements entered into in connection with the ITT Spin-Off were not
affected by the Equity Offerings and, in material part, to the extent still in
force and effect, are the obligations of The Hartford. However, certain matters
addressed in the agreements relating to the ITT Spin-Off are also addressed in
the agreements entered into in connection with the Equity Offerings. The
Spin-Off Distribution Agreement provides for, among other things, the assumption
of liabilities and cross-indemnities designed generally to allocate among ITT,
New ITT and The Hartford, effective as of the effective date of the ITT Spin-Off
(the "Distribution Date"), financial responsibility for the liabilities arising
out of or in connection with their respective businesses, including liabilities
in respect of The Hartford's business, and for certain shared liabilities not
specifically arising out of or allocable to any of their respective former or
present businesses. The Hartford is responsible for one-third of the costs of
such shared liabilities under the Spin-Off Distribution Agreement. The
intellectual property agreements entered into in connection with the ITT
Spin-Off provide for the licensing to and among such entities of rights under
patents, copyrights, software, technology, trade secrets and certain other
intellectual property owned by them and their respective subsidiaries as of the
Distribution Date, including a grant of rights and licenses to The Hartford
(with rights to sublicense to its subsidiaries) to continue to use the "ITT"
name and marks in the operation of its business following the Distribution Date,
subject to certain conditions. For a description of the allocation of the above-
described shared liabilities between the Company and The Hartford, see
"-- Master Intercompany Agreement -- Indemnification".
However, under the terms of the ITT License Agreement, ITT may, in its
discretion, terminate such agreement in the event of a change of control of The
Hartford, which is defined therein to include (i) the sale of 20% or more of the
outstanding common stock of The Hartford to any person, (ii) a tender or
exchange offer for 15% or more of the outstanding common stock of The Hartford,
(iii) a consolidation or merger in which The Hartford is not the surviving
corporation and (iv) a change in the majority of the members of the board of
directors of The Hartford during any twelve-month period. Pursuant to the Master
Intercompany Agreement, Hartford Fire has granted the ITT Sublicenses to the
Company and certain of its subsidiaries subject to the foregoing terms and
conditions and certain other terms and conditions included in the ITT License
Agreement. See "-- Master Intercompany Agreement -- License and Sublicense".
The Spin-Off Tax Agreement provides that New ITT and The Hartford will pay
their respective shares of ITT's consolidated tax liability for the tax years
that they were included in ITT's consolidated federal income tax return, as well
as their respective shares of any state, local and foreign taxes attributable to
periods prior to the Distribution Date. The Hartford is responsible for a
one-third share of certain federal, state or foreign tax liabilities with
respect to the ITT Spin-Off and certain business activities of ITT prior to the
date of such ITT Spin-Off. While there can be no
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ultimate assurance, management does not believe that its share of any such tax
liabilities under the Spin-Off Tax Agreement will have a material adverse effect
on the results of operations, financial condition or businesses of the Company.
For a description of the allocation of such liabilities between the Company and
The Hartford, see "-- Master Intercompany Agreement -- Indemnification".
HARTFORD FIRE GUARANTEE
Pursuant to a guarantee agreement between Hartford Fire, Hartford Life and
Accident and Hartford Life, Hartford Fire has provided to Hartford Life and
Accident and Hartford Life an unconditional guarantee since 1990, on behalf of
and for the benefit of such subsidiaries and the owners of the life, disability
and other insurance and annuity contracts issued by either such subsidiary, in
respect of any contractual claims made under such contracts by the beneficiaries
thereof. On May 28, 1997, Hartford Fire terminated such guarantee; however, the
guarantee will remain in full force and effect with respect to any outstanding
contracts at the time of such termination. Although management does not believe
the termination of the guarantee will have an adverse impact on sales, it is
possible that future sales of some of the Company's products could be adversely
impacted as a result of the absence of the marketing benefit associated with
such guarantee.
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DESCRIPTION OF THE SECURITIES
The following description of the particular terms of the series of %
Notes, % Notes and % Debentures offered hereby (referred to in the
accompanying Prospectus as the "Debt Securities") supplements and, to the extent
inconsistent therewith, replaces the descriptions of the general terms and
provisions of Debt Securities set forth in the accompanying Prospectus in
"Description of Debt Securities", to which description reference is hereby made.
The Offered Debt Securities will be "Senior Debt Securities" as that term is
used in the accompanying Prospectus. Capitalized terms not otherwise defined
herein have the meanings given to them in the accompanying Prospectus.
GENERAL
The Securities will be issued in three separate series of Debt Securities
described in the accompanying Prospectus and will be limited to $200,000,000
aggregate principal amount of % Notes, $200,000,000 aggregate principal
amount of % Notes and $250,000,000 aggregate principal amount of %
Debentures. The Securities will be in fully registered form only in
denominations of $1,000 and any integral multiple thereof. The % Notes will
mature on , 2004, the % Notes will mature on
, 2007 and the % Debentures will mature on ,
2027.
The Securities will bear interest at the rates per annum shown on the cover
page of this Prospectus Supplement, in each case from , 1997, or
from the most recent Interest Payment Date to which interest has been paid or
duly provided for, as the case may be. Interest on each of the % Notes, the
% Notes and the % Debentures will be payable semiannually on
and of each year, commencing ,
1997, to the persons in whose names such Notes or Debentures, as applicable, are
registered at the close of business of the and of
each year, as the case may be, next preceding such and
.
The Securities may be transferred or exchanged without any service charge
at the corporate trust office of the Trustee in the City of New York, or at any
other office or agency maintained by the Company for such purpose.
REDEMPTION
The Company may, at its option, redeem the Securities of any series on any
Interest Payment Date with respect thereto in whole at any time or in part from
time to time. Securities in denominations larger than $1,000 may be redeemed in
part but only in integral multiples of $1,000. The redemption price for any
Security so redeemed shall equal any accrued and unpaid interest thereon to the
redemption date, plus the greater of (a) the principal amount thereof and (b) an
amount equal to the Discounted Remaining Fixed Amount Payments. For purposes of
this redemption provision, the following terms have the meanings set forth
below:
"Discounted Remaining Fixed Amounts Payments" means, in respect of a
Security of any series, an amount equal to the sum of the Current Values of the
amounts of interest and principal that would have been payable by the Company
pursuant to the terms of such Security on each Interest Payment Date after the
redemption date and at Stated Maturity of the final payment of principal thereof
assuming that the Company had not redeemed such Security prior to such Stated
Maturity).
"Current Value" means, in respect of any amount, the present value of that
amount on the redemption date after discounting that amount on a semiannual
basis from the originally scheduled date for payment on the basis of the
Treasury Rate.
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"Treasury Rate" means a per annum rate (expressed as a decimal and, in the
case of United States Treasury bills, converted to a per annum yield) determined
on the redemption date to be the per annum rate equal to the semiannual bond
equivalent yield to maturity for United States Treasury securities maturing at
the Stated Maturity of the final payment of principal of any series of
Securities redeemed pursuant to the provisions described above, as determined by
reference to the weekly average yield to maturity for United States Treasury
securities maturing on such Stated Maturity if reported in the most recent
Statistical Release H.15(519) of the Board of Governors of the Federal Reserve
(or any successor release), or, if no such securities weekly average yield is so
reported, by interpolation between the most recent weekly average yields to
maturity for two series of United States Treasury securities, (i) one maturing
as close as possible to, but earlier than, such Stated Maturity and (ii) the
other maturing as close as possible to, but later than, such Stated Maturity, in
each case as published in the most recent Statistical Release H.15(519) of the
Board of Governors of the Federal Reserve (or any successor release).
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the redemption date to each Holder of Securities to be redeemed
at such Holder's registered address. Unless the Company defaults in payment of
the redemption price, on and after the redemption date interest shall cease to
accrue on such Securities or portions thereof called for redemption.
SINKING FUND
The Securities will not be entitled to the benefit of any sinking fund.
DEFEASANCE
The provisions of Article IV of the Senior Indenture relating to
defeasance, which are described in "Description of Debt
Securities -- Defeasance" in the accompanying Prospectus, will apply to the
Securities.
BOOK-ENTRY SECURITIES
The Securities will be issued in the form of global securities. The Global
Securities will be deposited with, or on behalf of DTC (the "Depositary"), and
registered in the name of the Depositary or a nominee thereof.
The Depositary has advised the Company as follows: the Depositary is a
limited purpose trust company organized under the New York Banking Law, a
"banking organization" within the meaning of the New York Banking Law, a member
of the Federal Reserve System, a "clearing corporation" within the meaning of
the New York Uniform Commercial Code and a "clearing agency" registered pursuant
to the provisions of Section 17A of the Exchange Act. The Depositary was created
to hold securities of its participants and to facilitate the clearance and
settlement of securities transactions among its participants in such securities
through electronic book-entry changes in participants' accounts thereby
eliminating the need for physical movement of securities certificates. The
Depositary's participants include securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations, some of whom
(and/or their representatives) own the Depositary. Access to the Depositary's
book-entry system also is available to others, such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship with
a participant, either directly or indirectly. The rules applicable to the
Depositary are on file with the Commission.
VALIDITY OF SECURITIES
Certain legal matters in connection with the offering to which this
Prospectus Supplement and the accompanying Prospectus relate will be passed upon
for the Company by Lynda Godkin, General Counsel of the Company. Ms. Godkin has
an interest in the Class A Common Stock of the Company. The validity of each
series of Securities offered hereby will be passed upon for the Underwriters (as
defined in "Underwriting") by Sullivan & Cromwell, New York, New York. This
statement supercedes the "Legal Opinions" section in the accompanying
Prospectus.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
OVERVIEW
The following general discussion summarizes certain of the material U.S.
federal income and estate tax aspects of the purchase, ownership and disposition
of the Securities. This discussion is a summary for general information only and
does not consider all aspects of U.S. federal income tax that may be relevant to
the purchase, ownership and disposition of the Securities by a prospective
investor in light of such investor's personal circumstances. This discussion
also does not address the U.S. federal income tax consequences of ownership of
Securities not held as capital assets within the meaning of Section 1221 of the
Internal Revenue Code, or the U.S. federal income tax consequences to investors
subject to special treatment under the U.S. federal income tax laws, such as
dealers in securities or foreign currency, tax-exempt entities, banks, thrifts,
insurance companies, persons that hold the Securities as part of a "straddle", a
"hedge" against currency risk or a "conversion transaction", persons that have a
"functional currency" other than the U.S. dollar and investors in pass-through
entities. In addition, this discussion is limited to the U.S. federal income tax
consequences to initial holders that purchase the Securities for cash at their
issue price (as defined below). It does not describe any tax consequences
arising out of the tax laws of any state, local or foreign jurisdiction.
This discussion is based upon the Internal Revenue Code, existing and
proposed regulations thereunder, Internal Revenue Service rulings and
pronouncements and judicial decisions now in effect, all of which are subject to
change (possibly on a retroactive basis). The Company has not and will not seek
any rulings or opinions from the Internal Revenue Service or counsel with
respect to the matters discussed below. There can be no assurance that the
Internal Revenue Service will not take positions concerning the tax consequences
of the purchase, ownership or disposition of the Securities which are different
from those discussed herein.
PERSONS CONSIDERING THE PURCHASE OF SECURITIES SHOULD CONSULT THEIR OWN
ADVISORS CONCERNING THE APPLICATION OF U.S. FEDERAL INCOME TAX LAWS, AS WELL AS
THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING JURISDICTION, TO THEIR PARTICULAR
SITUATIONS.
U.S. HOLDERS
The following discussion is limited to the U.S. federal income tax
consequences relevant to a holder of a Security that is (i) a citizen or
resident (as defined in Section 7701(b)(1) of the Internal Revenue Code) of the
United States, (ii) a corporation created or organized under the laws of the
United States or any political subdivision thereof or therein, (iii) an estate
or trust described in Section 7701(a)(30) of the Internal Revenue Code or (iv) a
person whose worldwide income or gain is otherwise subject to U.S. federal
income taxation on a net income basis (a "U.S. Holder"). Certain U.S. federal
income tax consequences relevant to a holder other than a U.S. Holder are
discussed separately below.
STATED INTEREST
In general, stated interest on a Security will be taxable to a U.S. Holder
as ordinary interest income at the time it accrues or is received, in accordance
with such holder's regular method of tax accounting.
INTEREST AND ORIGINAL ISSUE DISCOUNT
The Securities may be issued with original issue discount ("OID"). OID is
the excess of (i) the stated redemption price at maturity of a Security over
(ii) its issue price.
The "stated redemption price at maturity" of a Security is the sum of all
payments provided by the instrument other than payments of qualified stated
interest. "Qualified stated interest" generally means stated interest that is
unconditionally payable in cash or property (other than debt
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instruments of the issuer) at least annually at a single fixed rate that
appropriately takes into account the length of the interval between stated
interest payments. Payments attributable to qualified stated interest will
generally be taxable to a U.S. Holder as ordinary income at the time such
payments accrue or are received in accordance with each such U.S. Holder's
method of tax accounting. The stated interest on the Securities will constitute
qualified stated interest.
The "issue price" of a Security is the first price at which a substantial
amount of the Securities is sold to the public for cash (excluding sales to bond
houses, brokers or similar persons or organizations acting in the capacity as
underwriters, placement agents or wholesalers).
A U.S. Holder is required to include OID in income as ordinary interest as
it accrues under a constant yield method in advance of receipt of the cash
payments attributable to such income, regardless of such U.S. Holder's regular
method of accounting. In general, the amount of OID included in income by a U.S.
Holder of a Security is the sum of the daily portions of OID for each day during
the taxable year (or portion of the taxable year) on which such Holder held such
Security. The "daily portion" is determined by allocating the OID for an accrual
period equally to each day in that accrual period. The "accrual period" for a
Security may be of any length and may vary in length over the term of a
Security, provided that each accrual period is no longer than one year and each
scheduled payment of principal or interest occurs either on the first or final
day of an accrual period.
The amount of OID for an accrual period is generally equal to the excess of
(i) the product of the Security's adjusted issue price at the beginning of such
accrual period and its yield to maturity over (ii) the amount of any qualified
stated interest payments allocable to such accrual period. The "adjusted issue
price" of a Security at the beginning of any accrual period is the sum of the
issue price of the Security plus the amount of OID allocable to all prior
accrual periods minus the amount of any prior payments on the Security that were
not qualified stated interest payments. Under these rules, a U.S. Holder
generally will have to include in income increasingly greater amounts of OID in
successive accrual periods.
In determining the yield and maturity of the Securities, the Company will
be deemed to exercise the call option in a manner that minimizes the yield on
the Securities. If the Securities are not in fact called on a presumed exercise
date, then, for purposes of the accrual of OID, the yield and maturity of the
Securities are redetermined by treating the Securities as retired and reissued
on that date for an amount equal to their adjusted issue price on that date.
SALE, EXCHANGE OR REDEMPTION OF THE SECURITIES
Upon the sale, exchange, retirement or other disposition of a Security, a
U.S. Holder will generally recognize taxable gain or loss equal to the
difference between (i) the amount realized on the disposition (other than
amounts attributable to accrued and unpaid interest) and (ii) the U.S. Holder's
adjusted tax basis in the Security. A U.S. Holder's adjusted tax basis in a
Security generally will equal the cost of the Security (net of accrued interest)
to the U.S. Holder increased by any OID included in income through the date of
disposition. Such gain or loss will generally constitute capital gain or loss
and will be long-term capital gain or loss if the U.S. Holder has held such
Security for longer than one year. In addition, a U.S. Holder will be required
to recognize ordinary income equal to the amount of accrued interest on the
Security that such U.S. Holder has not previously included in income under such
U.S. Holder's method of accounting.
NON-U.S. HOLDERS
The following discussion is limited to the U.S. federal income tax
consequences relevant to a holder of a Security that is not a U.S. Holder (a
"Non-U.S. Holder").
Subject to the discussion of backup withholding below, payments of interest
(including OID) on a Security to any Non-U.S. Holder will generally not be
subject to U.S. federal income or withholding tax, provided that (1) the holder
is not (i) a direct or indirect owner of 10% or more of the total
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voting power of all voting stock of the Company, (ii) a controlled foreign
corporation related to the Company through stock ownership or (iii) a foreign
tax-exempt organization or a foreign private foundation for U.S. federal income
tax purposes, (2) such interest payments are not effectively connected with the
conduct by the Non-U.S. Holder of a trade or business within the United States
and (3) the Company or its paying agent receives (i) from the Non-U.S. Holder, a
properly completed Form W-8 (or substitute Form W-8) signed under penalties of
perjury which provides the Non-U.S. Holder's name and address and certifies that
the Non-U.S. Holder of the Security is a Non-U.S. Holder or (ii) from a security
clearing organization, bank or other financial institution that holds the
Securities in the ordinary course of its trade or business (a "financial
institution") on behalf of the Non-U.S. Holder, certification under penalties of
perjury that such a Form W-8 (or substitute Form W-8) has been received by it,
or by another such financial institution, from the Non-U.S. Holder, and a copy
of the Form W-8 (or substitute Form W-8) is furnished to the payor. Recently
proposed Treasury Regulations would provide alternative methods for satisfying
this certification requirement and are proposed to be effective for payments
made after December 31, 1997. The proposed regulations also would require, in
the case of Securities held by a foreign partnership, that (x) the certification
described in clause (3) above be provided by the partners rather than by the
foreign partnership and (y) the partnership provide certain information,
including a United States taxpayer identification number. A look-through rule
would apply in the case of tiered partnerships. The proposed regulations are
proposed to be effective for payments made after December 31, 1997.
A Non-U.S. Holder that does not qualify for exemption from withholding
under the preceding paragraph generally will be subject to withholding of U.S.
federal income tax at the rate of 30% (or lower applicable treaty rate) on
payments of interest (including OID) on the Securities.
If the payments of interest (including OID) on a Security are effectively
connected with the conduct by a Non-U.S. Holder of a trade or business in the
United States, such payments will be subject to U.S. federal income tax on a net
basis at the rates applicable to United States persons generally (and, with
respect to corporate holders, may also be subject to a 30% branch profits tax).
If payments are subject to U.S. federal income tax on a net basis in accordance
with the rules described in the preceding sentence, such payments will not be
subject to United States withholding tax so long as the holder provides the
Company or its paying agent with a properly executed Form 4224. See the
discussion above with regard to the rules under recently proposed Treasury
Regulations.
Non-U.S. Holders should consult any applicable income tax treaties, which
may provide for a lower rate of withholding tax, exemption from or reduction of
branch profits tax, or other rules different from those described above.
SALE, EXCHANGE OR REDEMPTION OF SECURITIES
Except as described below and subject to the discussion concerning backup
withholding, any gain realized by a Non-U.S. Holder on the sale, exchange,
retirement or other disposition of a Security generally will not be subject to
U.S. federal income tax, unless (i) such gain is effectively connected with the
conduct by such Non-U.S. Holder of a trade or business within the United States,
(ii) the Non-U.S. Holder is an individual who holds the Security as a capital
asset and is present in the United States for 183 days or more in the taxable
year of the disposition and certain other conditions are satisfied or (iii) the
Non-U.S. Holder is subject to tax pursuant to the provisions of U.S. tax law
applicable to certain U.S. expatriates.
FEDERAL ESTATE TAX
Securities held (or treated as held) by an individual who is a Non-U.S.
Holder at the time of his or her death will not be subject to U.S. federal
estate tax provided that (i) the individual does not
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actually or constructively own 10% or more of the total voting power of all
voting stock of the Company and (ii) income on the Securities was not
effectively connected with the conduct by such Non-U.S. Holder of a trade or
business within the United States.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company must report annually to the Internal Revenue Service and to
each Non-U.S. Holder any interest including OID that is subject to withholding
or that is exempt from U.S. withholding tax. Copies of those information returns
also may be made available, under the provisions of a specific treaty or
agreement, to the tax authorities of the country in which the Non-U.S. Holder
resides.
The regulations provide that backup withholding (which generally is a
withholding tax imposed at the rate of 31% on payments to persons that fail to
furnish certain required information) and information reporting will not apply
to payments made in respect of the Securities by the Company to a Non-U.S.
Holder if the holder certifies as to its non-U.S. status under penalties of
perjury or otherwise establishes an exemption (provided that neither the Company
nor its paying agent has actual knowledge that the holder is a U.S. person or
that the conditions of any other exemption are not, in fact, satisfied).
The payment of the proceeds from the disposition of Securities to or
through the United States office of any broker, U.S. or foreign, will be subject
to information reporting and possible backup withholding unless the owner
certifies as to its non-U.S. status under penalties of perjury or otherwise
establishes an exemption, provided that the broker does not have actual
knowledge that the holder is a U.S. person or that the conditions of any other
exemption are not, in fact, satisfied. The payment of the proceeds from the
disposition of a Security to or through a non-U.S. office of a non-U.S. broker
that is not a U.S. related person will not be subject to information reporting
or backup withholding. For this purpose, a "U.S. related person" is (i) a
"controlled foreign corporation" for U.S. federal income tax purposes or (ii) a
foreign person 50% or more of whose gross income from all sources for the
three-year period ending with the close of its taxable year preceding the
payment (or for such part of the period that the broker has been in existence)
is derived from activities that are effectively connected with the conduct of a
U.S. trade or business.
In the case of the payment of proceeds from the disposition of Securities
to or through a non-U.S. office of a broker that is a U.S. related person, the
regulations require information reporting on the payment unless the broker has
documentary evidence in its files that the owner is a Non-U.S. Holder and the
broker has no knowledge to the contrary. Backup withholding will not apply to
payments made through foreign offices of a broker that is a U.S. person or a
U.S. related person (absent actual knowledge that the payee is a U.S. person).
Any amounts withheld under the backup withholding rules from a payment to a
Non-U.S. Holder will be allowed as a refund or a credit against such Non-U.S.
Holder's U.S. federal income tax liability, provided that the requisite
procedures are followed.
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UNDERWRITING
Subject to the terms and conditions set forth in the Pricing Agreements,
the Company has agreed to sell to each of the Underwriters named below, and each
of such Underwriters has severally agreed to purchase, the principal amounts of
the Securities set forth opposite its name below:
PRINCIPAL
AMOUNT OF %
NOTES
DUE ,
UNDERWRITER 2004
----------------------------------------------------------------- --------------
Goldman, Sachs & Co. ............................................
A.G. Edwards & Sons, Inc. .......................................
NationsBanc Capital Markets, Inc. ...............................
PaineWebber Incorporated.........................................
Salomon Brothers Inc.............................................
------------
Total....................................................... $200,000,000
============
PRINCIPAL
AMOUNT OF %
NOTES
DUE ,
UNDERWRITER 2007
----------------------------------------------------------------- --------------
Goldman, Sachs & Co. ............................................
BancAmerica Securities, Inc. ....................................
Chase Securities Inc. ...........................................
First Chicago Capital Markets, Inc. .............................
------------
Total....................................................... $200,000,000
============
PRINCIPAL
AMOUNT OF %
DEBENTURES DUE
UNDERWRITER , 2027
----------------------------------------------------------------- --------------
Goldman, Sachs & Co. ............................................
Citicorp Securities, Inc. .......................................
Credit Suisse First Boston Corporation...........................
Lehman Brothers Inc. ............................................
J.P. Morgan Securities Inc. .....................................
------------
Total....................................................... $250,000,000
============
Under the terms and conditions of the Pricing Agreements, the underwriters
with respect to the % Notes (the " % Notes Underwriters") are committed
to take and pay for the % Notes if any of the % Notes are taken; the
underwriters with respect to the % Notes (the " % Notes Underwriters")
are committed to take and pay for the % Notes if any of the % Notes
are taken; and the underwriters with respect to the % Debentures (the
" % Debentures Underwriters" and, together with the % Notes
Underwriters and the % Notes Underwriters, the "Underwriters") are
committed to take and pay for the % Debentures if any of the %
Debentures are taken. The closing of the offerings of the % Notes, the
% Notes and the % Debentures are not conditioned on one another.
The % Notes Underwriters propose to offer and sell the % Notes in
part directly to the public at the initial public offering price set forth on
the cover page of this Prospectus Supplement and in part to certain securities
dealers at such price less a concession of % of the principal amount of the
% Notes. The % Notes Underwriters may allow, and such dealers may
reallow, a concession not to exceed % of the principal amount of the %
Notes to certain brokers and dealers. After the % Notes are released for
sale to the public, the offering price and other selling terms may from time to
time be varied by the % Notes Underwriters.
The % Notes Underwriters propose to offer and sell the % Notes in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus Supplement and in part to certain securities
dealers at such price less a concession of % of the principal amount of the
% Notes. The % Notes Underwriters may allow, and such dealers may reallow, a
concession not to exceed % of the principal amount of the % Notes to certain
brokers and dealers. After the % Notes are released for sale to the public,
the offering price and other selling terms may from time to time be varied by
the % Notes Underwriters.
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The % Debentures Underwriters propose to offer and sell the %
Debentures in part directly to the public at the initial public offering price
set forth on the cover page of this Prospectus Supplement and in part to certain
securities dealers at such price less a concession of % of the principal
amount of the % Debentures. The % Debentures Underwriters may allow, and
such dealers may reallow, a concession not to exceed % of the principal amount
of the % Debentures to certain brokers and dealers. After the % Debentures
are released for sale to the public, the offering price and other selling terms
may from time to time be varied by the % Debentures Underwriters.
The Securities are new issues with no established trading market. The
Company has been advised by each of the Underwriters that each such Underwriter
intends to make a market in the Securities but is not obligated to do so and may
discontinue market making at any time without notice. No assurance can be given
as to the liquidity of the trading market for the Securities. The Securities
will not be listed on any securities exchange.
In connection with the Debt Offering, the Underwriters may purchase and
sell the Securities in the open market. These transactions may include
over-allotment and stabilizing transactions and purchases to cover syndicate
short positions created by the Underwriters in connection with the Debt
Offering. Stabilizing transactions consist of certain bids or purchases for the
purpose of preventing or retarding a decline in the market price of the
Securities; and syndicate short positions created by the Underwriters involve
the sale by the Underwriters of a greater amount of the Securities than they are
required to purchase from the Company in the Debt Offering. The Underwriters
also may impose a penalty bid, whereby selling concessions allowed to syndicate
members or other broker-dealers in respect of the Securities sold in the Debt
Offering for their account may be reclaimed by the syndicate if such securities
are repurchased by the syndicate in stabilizing or covering transactions. These
activities may stabilize, maintain or otherwise affect the market price of the
Securities, which may be higher than the price that might otherwise prevail in
the open market; and these activities, if commenced, may be discontinued at any
time.
The Company maintains bank accounts, borrows money and has customary
banking relationships with affiliates of BancAmerica Securities, Inc., Chase
Securities Inc., Citicorp Securities, Inc., First Chicago Capital Markets, Inc.
and J.P. Morgan Securities Inc. in the ordinary course of business.
Certain of the Underwriters have provided from time to time, and expect to
provide in the future, investment or commercial banking services to The Hartford
and/or the Company and their respective affiliates, for which such Underwriters
have received and will receive customary fees and commissions.
The Company intends to use more than 10% of the net proceeds from the sale
of (i) the % Notes to repay indebtedness owed by it under the Line of Credit
to Bank of America Illinois, an affiliate of BancAmerica Securities, Inc., and
(ii) the % Debentures to repay indebtedness owed by it under the Line of
Credit to Citibank, N.A., an affiliate of Citicorp Securities, Inc., and Morgan
Guaranty Trust Company of New York, an affiliate of J.P. Morgan Securities Inc.
Accordingly, the offering of each of the % Notes and the % Debentures is
being made in compliance with the requirements of Rule 2710(c)(8) of the
National Association of Securities Dealers, Inc.
In addition, Citibank, N.A. is serving as trustee under the Company's
Senior Indenture dated as of May 19, 1997.
The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act.
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GLOSSARY OF SELECTED INSURANCE AND OTHER TERMS
The following Glossary includes definitions of certain insurance-related
terms as well as terms relating specifically to the Company and should be read
in conjunction with the terms defined elsewhere in this Prospectus Supplement.
ACCOUNT VALUE: The amount of money held in either a general account or
separate account of an insurance company to support policyholder liabilities.
ACCRUAL SECURITIES: A type of CMO the holder of which receives higher
principal amounts of bonds, in lieu of cash, for interest earned until all the
principal amounts of bonds preceding the accrual tranche have been fully repaid.
At such time, this security begins receiving both interest and principal in
cash.
ANNUITANT: A person who receives an income benefit from an annuity for
life or for a specified period.
ABS: Investment-grade securities representing undivided ownership
interests in a pool of financial assets, such as credit card receivables, auto
loans, equipment leases and bank loans.
AVR: Under statutory accounting practices, the asset valuation reserve is
a liability on a life insurance company's statutory financial statements
beginning with such company's statutory financial statements for 1992. AVR
establishes statutory reserves for debt securities, preferred stock, common
stock, mortgage loans, equity real estate and joint ventures and other invested
assets. AVR generally captures all net realized and unrealized capital gains and
losses on such assets, other than those resulting from changes in interest
rates. AVR has no effect on financial statements prepared in conformity with
GAAP.
BASIS POINT: The smallest measure used in quoting yields on bills, notes
and bonds. One basis point is .01%, or one one-hundredth of one percent of
yield. Thus, if a bond's yield increases from 8.00% to 8.50%, it would be said
to have risen 50 basis points.
CEDING: The reinsuring of all or a portion of an insurer's risk with
another insurer.
COLI: A fixed premium individual or group life insurance policy owned by a
company or a trust sponsored by a company. The proceeds from such a policy may
be used to help fund general corporate liabilities such as deferred compensation
plans or post-retirement obligations.
CMO: A mortgage-backed obligation secured by the cash flow of a pool of
mortgages. Regular principal and interest payments made by borrowers are
separated into different payment streams, creating several bonds that repay
invested capital at different rates.
CONVEXITY: A measure of the shape of the price/yield curve. Convexity
helps explain the difference between the prices estimated by standard duration
and the actual market prices of a security resulting from a change in
market-required yield.
COST OF INSURANCE: The mortality charges assessed against certain life
insurance policies such as universal life.
CREDITED RATES: Interest rates applied (i.e., credited) to life insurance
policies and annuity contracts, whether contractually guaranteed or currently
declared for a specified period, as outlined in the policy or contract.
DPAC: Deferred policy acquisition costs include commissions and certain
other underwriting, policy issuance and selling expenses which vary with and are
directly related to the production of business. These acquisition costs are
deferred and later amortized in proportion to either revenues or gross profits
when reported in financial statements prepared in conformity with GAAP.
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DISINTERMEDIATION: The risk to a financial institution of a loss due to
the movement of policyholder funds at book (i.e., without a market value
adjustment) when interest rates are higher than at contract inception.
DURATION: A measure expressed in years of the price sensitivity of a
financial instrument to changes in interest rates.
FIXED MVA ANNUITIES: Fixed rate annuity contracts that guarantee that a
specific sum of money will be paid in the future, either as a lump sum or as
monthly income, to an annuitant. In the event of surrender prior to the
specified period, the MVA feature adjusts the surrender value of the contract
thereby protecting the Company from losses due to higher interest rates at the
time of surrender provided that the Company has appropriately matched its
portfolio of assets and liabilities. The amount of such payments will not
fluctuate due to adverse changes in the Company's investment return, mortality
experience or expenses.
FLOATER: Debt instrument with a variable coupon, paying a rate indexed to
any of a variety of rates, typically short term.
GENERAL ACCOUNT: All assets of an insurer other than those allocated to a
separate account. An insurer's general account consists of the assets held in
the general account of the insurer. The insurer bears the investment risk on the
invested assets of the general account.
GUARANTEED SEPARATE ACCOUNT: Assets held in an insurer's separate account,
where the insurer provides some form of guarantee on the rate credited to the
policy. This guarantee is backed by the general account assets of the insurer.
Assets held in guaranteed separate accounts usually contain a market value
adjustment to protect the insurer against disintermediation risk.
GENERAL INSURANCE EXPENSES: Costs incurred by an insurance company other
than agent commissions, other premium-related expenses and taxes; mainly the
administrative expense of running the company.
IMR: The interest maintenance reserve was adopted by the NAIC in December
1991 to be established under statutory accounting practices as a liability or a
non-admitted asset on a life insurer's statutory financial statements beginning
with the insurer's statutory financial statements for 1992. IMR applies to all
types of fixed income investments (bonds, preferred stocks, MBSs and mortgage
loans). IMR captures the net gains or losses from changes in the overall level
of interest rates which are realized upon the sale of investments and amortizes
these net realized capital gains or losses into income over the remaining life
of each investment sold. IMR has no effect on financial statements prepared in
conformity with GAAP.
IN FORCE: Insurance policies in effect.
INSURANCE GUARANTY FUNDS: Funds created in all fifty states, the District
of Columbia and Puerto Rico by law to cover funding shortfalls in paying claims
of insolvent insurance companies. These funds are maintained by assessments of
insurance companies operating in a particular state in proportion to their
business written in that state.
INTEREST-ONLY SECURITIES: Securities representing only the interest
payments of CMOs or MBS based on an underlying pool of mortgages. The interest
payments are "stripped" from the principal repayment obligation and can
represent the interest from an entire pool of mortgages or can be tranches
within a CMO.
INVERSE FLOATER: Mortgage-backed bond, usually part of a CMO, bearing an
interest rate that moves inversely with a specified index.
LEVERAGED COLI: A fixed premium life insurance policy owned by a company
or a trust sponsored by a company. This general account policy provides cash
flow flexibility and optimizes certain tax advantages for a company or trust by
allowing it to borrow the policy cash value and receive certain interest
deductions on the policy loans.
MBS: An investment grade security backed by a pool of mortgages or trust
deeds.
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MODIFIED GUARANTEED LIFE INSURANCE: Certain blocks of life insurance
policies, which have provisions protecting the Company from disintermediation
risk, assumed by the Company in connection with the rehabilitation of certain
insurance companies.
MORBIDITY: The relative incidence of disability or sickness due to disease
or physical impairment.
MORTALITY: The relative incidence of death.
MVA: The market value adjustment feature in the Company's fixed annuity
products that adjusts the surrender value of a contract in the event of
surrender prior to the end of the contract period to protect the Company against
losses due to higher interest rates at the time of surrender.
NEW ANNUALIZED WEIGHTED PREMIUM: An internal measure the Company developed
to measure new sales on an equivalent basis period-to-period and
product-to-product. For example, the premium for a new single premium life
insurance policy sold is divided by ten.
NON-GUARANTEED SEPARATE ACCOUNT: Assets held in an insurer's separate
account as to which the insurer does not guarantee any minimum return to the
policyholder. Rather, any investment income and net realized capital gains and
losses with respect to these assets accrue directly to the policyholder.
PAC: A CMO security, also known as a planned amortization class security,
which amortizes with a predetermined sinking fund as long as prepayments on the
underlying collateral remain within a broad range of speeds, providing the
holder with an enhanced degree of cash flow certainty.
PERSISTENCY: The rate, expressed as a percentage of the number of policies
remaining in force over the previous year, at which insurance policies or
annuity contracts remain in force.
POLICY: A life or disability or other insurance policy or annuity contract
issued by the Company's insurance subsidiaries.
PREMIUMS: The amount that a policy owner is charged, reflecting the
expectation of profit, loss or risk. The insurance company assumes certain risks
of the insured (e.g., mortality, morbidity) in exchange for a premium payment.
Premiums are calculated utilizing actuarial models and assumptions.
PREMIUM EQUIVALENTS: Claims and administration fees on self-funded
disability business.
PRINCIPAL-ONLY SECURITIES: Securities representing only the principal
repayment obligations of CMOs or MBS based on an underlying pool of mortgages.
The principal repayment obligations are "stripped" from the interest payments
and can represent the principal from an entire pool of mortgages or can be
tranches within a CMO.
REINSURANCE: The practice whereby one party (the reinsurer or assuming
company), in consideration of a premium paid to such party, agrees to indemnify
another party, called the ceding company. Reinsurance provides a primary insurer
with three major benefits: it reduces net liability on individual risks; it
helps to protect against losses; and it provides a primary insurer with
additional underwriting capacity in that the primary insurer can accept larger
risks and can expand the volume of business it writes with lower amounts of
capital.
RESERVES: Liabilities established by insurers that generally represent the
estimated discounted present value of the net cost of claims, payments or
contract liabilities and the related expenses that the insurer will ultimately
be required to pay in respect of insurance or annuities it has written.
SEPARATE ACCOUNTS: Investment accounts maintained by an insurer to which
funds have been allocated for certain policies under provisions of relevant
state insurance law. The investments in each separate account are maintained
separately from those in other separate accounts and the general account.
SEQUENTIAL-PAY SECURITIES: Bonds, also known as sequentials, that start to
pay principal when the principal and interest of classes with an earlier
priority have been fully repaid.
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SINGLE PREMIUM VARIABLE LIFE INSURANCE: Investment-oriented life insurance
policy structured similarly to variable life insurance, except that a single
premium payment is made at the initiation of the policy rather than fixed
premiums throughout the term of the policy.
STATUTORY ACCOUNTING PRACTICES: Accounting practices prescribed or
permitted by an insurer's domiciliary state insurance regulatory authorities for
purposes of financial reporting to regulators. Statutory accounting practices
emphasize solvency rather than operating results that match revenues and
expenses during an accounting period.
STATUTORY ASSETS: Assets determined in accordance with statutory
accounting principles. This valuation methodology is generally considered very
conservative, but is deemed most appropriate by regulators in evaluating
solvency.
STATUTORY CAPITAL AND SURPLUS: The excess of statutory admitted assets
over statutory liabilities as shown on an insurer's statutory financial
statements.
STATUTORY RESERVE: Amounts established by state insurance law that an
insurer must have available to provide for future obligations with respect to
all policies. Statutory reserves are liabilities on the balance sheet of
financial statements prepared in conformity with statutory accounting practices.
STRUCTURED SETTLEMENT CONTRACTS: Contracts providing for periodic payments
to an injured person for a determinable number of years or for life, typically
in settlement of a claim under a property-casualty insurance policy.
SURRENDER CHARGE: The fee charged to a policy owner when a life insurance
policy or annuity is surrendered for its cash value prior to the end of the
surrender charge period. Such charge is intended to recover all or a portion of
policy acquisition costs and act as a deterrent to early surrender. Surrender
charges typically decrease over a set period of time as a percentage of the
account value in relation to the anticipated amortization of the deferred policy
acquisition costs.
TERM LIFE INSURANCE: Life insurance protection during a certain number of
years but expiring without policy cash value if the insured survives the stated
period.
THIRD-PARTY ADMINISTRATOR: An entity that processes insurance or
self-funded claims for, and/or provides administrative services to, companies or
associations that have purchased insurance coverage, including stop loss
insurance, for a fee.
UNDERWRITING: The process of examining, accepting or rejecting insurance
risks, and classifying those accepted, in order to charge an appropriate premium
for each accepted risk. The underwriter is expected to select business that will
produce an average risk of loss no greater than that anticipated for the class
of business. In the life insurance industry, underwriter may also mean an agent
or other field representative who is referred to as a "field underwriter".
UNIVERSAL LIFE INSURANCE: A form of life insurance where an insurance
account is maintained for each insurance policy. Premiums, net of specified
expenses, are credited to the account, as is interest, generally at a rate
determined from time to time by the insurer. Specific charges are made against
the account for the cost of insurance protection and for the insurer's expenses.
The universal life form allows considerable flexibility as to the amount and
timing of premium payments and for the level of death benefits provided.
VARIABLE ANNUITIES: Annuities in which premium payments are used to
purchase accumulation units. The value of a unit fluctuates in accordance with
the investment experience of a separate account; variable annuity contracts
typically include a general account guaranteed interest investment option. At
the time of the payment of benefits to the annuitant, the annuitant may
generally elect from a number of payment options that provide either fixed or
variable benefit payments.
VARIABLE COLI: A separate account COLI policy where the benefits payable
upon surrender of the policy or the death of certain of the policyholder's
employees vary to reflect the investment experience of the separate account
supporting such policy.
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VARIABLE LIFE INSURANCE: Investment-oriented life insurance policy that
offers fixed premiums and a minimum death benefit and provides a return linked
to an underlying portfolio of securities that may be either in the general or
separate account of the insurer. The portfolio typically is a group of mutual
funds established by the insurer as a separate account, with the policyholder
given investment discretion in choosing among the investment alternatives
provided. In general, the better the total return on the investment portfolio,
the higher the death benefit or account value of the variable life policy.
WHOLE LIFE INSURANCE: Permanent life insurance offering guaranteed death
benefits and guaranteed cash values.
YIELD CURVE: A spectrum of measures that compares the interest rate yields
on securities of the same credit quality but with varying maturities ranging
from the shortest to the longest available.
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PROSPECTUS
US $1,000,000,000
HARTFORD LIFE, INC.
DEBT SECURITIES
PREFERRED STOCK
DEPOSITARY SHARES
Hartford Life, Inc., a Delaware corporation (the "Company"), may from time
to time offer its (a) debt securities, in one or more series, which may be
either senior debt securities (the "Senior Debt Securities") or subordinated
debt securities (the "Subordinated Debt Securities" and, together with the
Senior Debt Securities, the "Debt Securities") and (b) shares of its preferred
stock, par value $.01 per share ("Preferred Stock"), which may be issued in the
form of Depositary Shares (as defined herein) evidenced by Depositary Receipts
(as defined herein), in each case in amounts, at prices and on terms to be
determined at the time or times of offering. The Debt Securities and Preferred
Stock are referred to herein collectively as the "Offered Securities." The
aggregate initial offering price of the Offered Securities in respect of which
this Prospectus is being delivered will not exceed U.S. $1,000,000,000 or its
equivalent (based on the applicable exchange rate at the time of issue), if
Offered Securities are offered for consideration denominated in one or more
foreign currencies or currency units as shall be designated by the Company.
Specific terms of the particular Offered Securities in respect of which this
Prospectus is being delivered will be set forth in an accompanying Prospectus
Supplement (the "Prospectus Supplement"), which will describe, without
limitation and where applicable, the following: (a) in the case of Debt
Securities, the specific designation, aggregate principal amount, whether such
Debt Securities are Senior Debt Securities or Subordinated Debt Securities,
denominations, maturity, premium, if any, interest rate (which may be fixed or
variable) or method of calculating interest, if any, place or places where
principal, premium, if any, and interest, if any, will be payable, currency in
which principal, premium, if any, and interest, if any, will be payable, any
terms of redemption, any terms of subordination, any sinking fund provisions,
initial public offering or purchase price, any listing on a securities exchange,
methods of distribution and other special terms, (b) in the case of Preferred
Stock, the specific designation, stated value and liquidation preference per
share and number of shares offered, dividend rate (which may be fixed or
variable) or method of calculating dividends, place or places where dividends
will be payable, any terms of redemption, any voting rights, any sinking fund
provisions, initial public offering or purchase price, any listing on a
securities exchange, methods of distribution and other special terms, and (c) in
the case of Depositary Shares, the fractional share of Preferred Stock
represented by each such Depositary Share.
The Prospectus Supplement also will contain information, as applicable,
about certain United States federal income tax considerations relating to the
Offered Securities, if applicable.
The Debt Securities will be unsecured and, because the Company is a
non-operating holding company, will be effectively subordinated to all
liabilities of the Company's subsidiaries, including liabilities under contracts
of insurance and annuities written by the Company's insurance subsidiaries.
Accordingly, holders of the Debt Securities should look only to the assets of
the Company for payments of interest and principal and premium, if any. Unless
otherwise specified in a Prospectus Supplement, the Senior Debt Securities will
rank equally with all other unsecured and unsubordinated indebtedness of the
Company. The Subordinated Debt Securities will be subordinated in right of
payment to all Senior Debt (as defined herein) of the Company to the extent
described herein and in the Prospectus Supplement relating thereto. The Debt
Securities may be denominated in United States dollars or, at the option of the
Company if so specified in the applicable Prospectus Supplement, in one or more
foreign currencies or currency units. The Debt Securities may only be issued in
registered form or in the form of one or more global debt securities unless
otherwise specified in the applicable Prospectus Supplement. If so specified in
the applicable Prospectus Supplement, Debt Securities of a series may be issued
in whole or in part in the form of one or more temporary or permanent global
debt securities.
The Offered Securities may be sold to or through underwriters, through
dealers, remarketing firms or agents or directly to purchasers. See "Plan of
Distribution". The names of any underwriters, dealers, remarketing firms or
agents involved in the sale of Offered Securities in respect of which this
Prospectus is being delivered and any applicable fee, commission or discount
arrangements with them will be set forth in a Prospectus Supplement. The
Prospectus Supplement will state whether the Offered Securities will be listed
on any national securities exchange. If the Offered Securities are not listed on
any national securities exchange, there can be no assurance that there will be a
secondary market for the Offered Securities.
This Prospectus may not be used to consummate sales of Offered Securities
unless accompanied by a Prospectus Supplement.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The date of this Prospectus is , 1997.
102
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND THE PROSPECTUS SUPPLEMENT AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR ANY AGENT, UNDERWRITER OR DEALER. THIS PROSPECTUS AND THE PROSPECTUS
SUPPLEMENT DO NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO
WHICH THEY RELATE, OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY
THOSE TO WHICH THEY RELATE IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. THE DELIVERY
OF THIS PROSPECTUS AND/OR THE PROSPECTUS SUPPLEMENT AT ANY TIME DOES NOT IMPLY
THAT THE INFORMATION HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
ITS DATE.
AVAILABLE INFORMATION
Hartford Life, Inc. (the "Company") is subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith, files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information can be inspected and copied at
the public reference facilities of the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549 and at the regional offices of
the Commission located at Seven World Trade Center, Suite 1300, New York, New
York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 or on the Internet at http://www.sec.gov. Copies of such material
may also be obtained at prescribed rates by writing to the Public Reference
Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. In addition, such reports, proxy statements and other
information concerning the Company can be inspected at the offices of the New
York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005.
The Company has filed with the Commission a Registration Statement on Form
S-3 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act of 1933 (the "Securities Act") with respect
to the securities offered hereby. This Prospectus does not contain all the
information set forth in the Registration Statement, certain portions of which
have been omitted as permitted by the rules and regulations of the Commission.
For further information with respect to the Company and the securities offered
hereby, reference is made to the Registration Statement and the exhibits and the
financial statements, notes and schedules filed as a part thereof or
incorporated by reference therein, which may be inspected at the public
reference facilities of the Commission, at the addresses set forth above.
Statements made in this Prospectus concerning the contents of any documents
referred to herein are not necessarily complete, and in each instance are
qualified in all respects by reference to the copy of such document filed as an
exhibit to the Registration Statement.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company hereby incorporates into this Prospectus by reference the
Company's Registration Statement on Form 10 (File No. 1-12749) filed with the
Commission on February 14, 1997, as amended by Amendment No. 1 thereto filed
with the Commission on May 16, 1997 and as may be further amended (as so
amended, the "Form 10"), filed with the Commission pursuant to Section 12(b) of
the Exchange Act, to which reference is hereby made.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering of the Offered Securities shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from the
date of the filing such documents.
Any statement contained herein or in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein,
or in any other subsequently filed document which also
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is or is deemed to be incorporated by reference herein, modifies or supersedes
such statement. Any such statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, upon the request of any such person, a copy of any
or all of the documents which are incorporated herein by reference, other than
exhibits to such documents (unless such exhibits are specifically incorporated
by reference into such documents). Requests should be directed to Hartford Life,
Inc., Attention: Investor Relations Department, 200 Hopmeadow Street, Simsbury,
Connecticut 06089, telephone number (860) 843-7716.
THE COMPANY
The Company is a leading insurance and financial services company with
operations that provide (i) annuity products such as individual variable
annuities and fixed 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. The Company is a holding company formed in December 1996, which
holds virtually all the annuity, individual life insurance and employee benefits
operations of The Hartford Financial Services Group, Inc. (formerly known as ITT
Hartford Group, Inc.) ("The Hartford"). The Company is a direct subsidiary of
Hartford Accident and Indemnity Company and an indirect subsidiary of The
Hartford. The Hartford is among the largest domestic and international providers
of commercial property-casualty insurance, property-casualty reinsurance and
personal lines (including homeowners and auto) coverages. On December 19, 1995,
ITT Industries, Inc. (formerly ITT Corporation) ("ITT") distributed all of 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.
As a holding company with no significant business operations of its own,
the Company relies on dividends from its subsidiaries, which are primarily
domiciled in the State of Connecticut, as the principal source of cash to meet
its obligations, including the payment of principal of and premium, if any, and
interest on debt obligations of the Company and the payment of dividends to
holders of its capital stock. The payment of dividends by Connecticut-domiciled
life insurers is limited under the insurance holding company laws of
Connecticut, which require notice to and approval by the Connecticut 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 gain from operations for the
twelve-month period ending on the December 31 last preceding, in each case
determined under statutory insurance accounting practices. In addition, if any
dividend of a Connecticut-domiciled insurer exceeds the insurer's earned
surplus, it requires the approval of the Connecticut Insurance Commissioner.
The Company's principal offices are located at 200 Hopmeadow Street,
Simsbury, Connecticut 06089. The Company's telephone number is (860) 843-7716.
USE OF PROCEEDS
Except as otherwise set forth in a Prospectus Supplement, the Company
intends to use the net proceeds from the sale of the Offered Securities for the
refinancing of debt, including outstanding commercial paper and other
third-party indebtedness, and the satisfaction of other obligations, for working
capital, capital expenditures, investments in or loans to subsidiaries and for
other general corporate purposes.
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RATIOS OF EARNINGS TO FIXED CHARGES
AND COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
The following table sets forth the Company's ratio of earnings to fixed
charges and ratio of earnings to combined fixed charges and Preferred Stock
dividends for the years indicated:
FOR THE THREE
MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------- -------------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ---- ----
Ratio of Earnings to Fixed
Charges........................ 5.5 7.2 7.0 6.2 1.5 5.5 6.5
Ratio of Earnings to Combined
Fixed Charges and Preferred
Stock Dividends................ 5.5 7.2 7.0 6.2 1.5 5.5 6.5
For purposes of computing the ratio of earnings to fixed charges, "earnings"
consist of income from continuing operations before federal income taxes and
fixed charges. "Fixed charges" consist of interest expense and an imputed
interest component for rental expense. There were no shares of Preferred Stock
outstanding during the periods included above.
DESCRIPTION OF DEBT SECURITIES
The Senior Debt Securities offered hereby are to be issued in one or more
series under the Senior Indenture, dated as of May 19, 1997, as supplemented
from time to time (as so supplemented, the "Senior Indenture"), between the
Company and Citibank, N.A., as trustee (the "Senior Indenture Trustee"). The
Subordinated Debt Securities offered hereby are to be issued in one or more
series under a Subordinated Indenture, as supplemented from time to time (as so
supplemented, the "Subordinated Indenture" and, together with the Senior
Indenture, the "Indentures"), between the Company and a trustee to be named in a
Prospectus Supplement relating to the offering of Subordinated Debt Securities
(the "Subordinated Indenture Trustee" and, together with the Senior Indenture
Trustee, the "Trustees"). A copy of the Senior Indenture has been filed as an
exhibit to the Registration Statement of which this Prospectus forms a part and
a copy of the form of Subordinated Indenture will be filed as an exhibit to a
Current Report on Form 8-K incorporated herein by reference prior to any
offering of Subordinated Debt Securities.
The statements herein relating to the Debt Securities and the following
summaries of certain provisions of the Indentures do not purport to be complete
and are subject to, and are qualified in their entirety by reference to, all the
provisions of the Indentures (as they may be amended or supplemented from time
to time) and the Trust Indenture Act of 1939, as amended (the "Trust Indenture
Act"). Whenever particular sections or defined terms of the Indentures (as they
may be amended or supplemented from time to time) are referred to herein or in a
Prospectus Supplement, such sections or defined terms are incorporated herein or
therein by reference.
GENERAL
The Debt Securities will be unsecured obligations of the Company. The
Senior Debt Securities will be unsecured and will rank on a parity with all
other unsecured and unsubordinated obligations of the Company. The Subordinated
Debt Securities will be subordinated and junior in right of payment to the
extent and in the manner set forth in the Subordinated Indenture to all Senior
Debt (as defined below) of the Company. See "-- Subordination under the
Subordinated Indenture". As a holding company with no significant business
operations of its own, most of the operating assets of the Company and its
consolidated subsidiaries are owned by such subsidiaries and the Company relies
on dividends from such subsidiaries to meet its obligations for payment of
principal of and premium, if any, and interest on its outstanding debt
obligations and corporate expenses. Accordingly, the Debt Securities will be
effectively subordinated to all existing and future liabilities of the Company's
subsidiaries, and holders of Debt Securities should look only to the assets of
the Company for payments on the Debt Securities. The payment of dividends by the
Company's
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insurance company subsidiaries, including Hartford Life and Accident, is limited
under the insurance holding company laws of the states in which such
subsidiaries are incorporated or commercially domiciled. The Indentures do not
limit the aggregate amount of Debt Securities that may be issued thereunder.
Except as otherwise provided in the applicable Prospectus Supplement, the
Indentures, as they apply to any series of Debt Securities, do not limit the
incurrence or issuance of secured or other unsecured debt of the Company,
whether under either of the Indentures, any other indenture that the Company may
enter into in the future or otherwise. See "-- Subordination under the
Subordinated Indenture" and the Prospectus Supplement relating to any offering
of Subordinated Debt Securities.
The Debt Securities will be issuable in one or more series pursuant to an
indenture supplemental to the Senior Indenture or the Subordinated Indenture, as
the case may be, or a resolution of the Company's Board of Directors or a
committee thereof and set forth in an Officer's Certificate.
The applicable Prospectus Supplement or Prospectus Supplements will
describe the following terms of the Debt Securities: (1) the title of the Debt
Securities; (2) any limit upon the aggregate principal amount of the Debt
Securities; (3) the date or dates on which the principal of the Debt Securities
is payable or the method of determination thereof; (4) the rate or rates, if
any, at which the Debt Securities shall bear interest, the Interest Payment
Dates on which any such interest shall be payable, the right, if any, of the
Company to defer or extend an Interest Payment Date, and the Regular Record Date
for any interest payable on any Interest Payment Date or the method by which any
of the foregoing shall be determined; (5) the place or places where, subject to
the terms of the Indenture as described below under "Payment and Paying Agents",
the principal of and premium, if any, and interest on the Debt Securities will
be payable and where, subject to the terms of the Indenture as described below
under "Denominations, Registration and Transfer", the Debt Securities may be
presented for registration of transfer or exchange and the place or places where
notices and demands to or upon the Company in respect of the Debt Securities and
the Indentures may be made ("Place of Payment"); (6) any period or periods
within or date or dates on which, the price or prices at which and the terms and
conditions upon which Debt Securities may be redeemed, in whole or in part, at
the option of the Company; (7) the obligation or the right, if any, of the
Company to redeem, purchase or repay the Debt Securities pursuant to any sinking
fund, amortization or analogous provisions or at the option of a Holder thereof
and the period or periods within which, the price or prices at which, the
currency or currencies (including currency unit or units) in which and the other
terms and conditions upon which the Debt Securities shall be redeemed, repaid or
purchased, in whole or in part, pursuant to such obligation; (8) the
denominations in which any Debt Securities shall be issuable if other than
denominations of $1,000 and any integral multiple thereof; (9) if other than in
U.S. Dollars, the currency or currencies (including currency unit or units) in
which the principal of and premium, if any, and interest, if any, on the Debt
Securities shall be payable, or in which the Debt Securities shall be
denominated; (10) any additions, modifications or deletions, in the Events of
Default or covenants of the Company specified in the Indenture with respect to
the Debt Securities; (11) if other than the principal amount thereof, the
portion of the principal amount of Debt Securities that shall be payable upon
declaration or acceleration of the Maturity thereof; (12) any additions or
changes to the Indenture with respect to a series of Debt Securities as shall be
necessary to permit or facilitate the issuance of such series in bearer form,
registrable or not as to principal, and with or without interest coupons; (13)
any index or indices used to determine the amount of payments of principal of
and premium, if any, and interest, if any, on the Debt Securities and the manner
in which such amounts will be determined; (14) the issuance of a temporary
Global Security representing all of the Debt Securities of such series and
exchange of such temporary Global Security for definitive Debt Securities of
such series; (15) subject to the terms described under "Global Debt Securities",
whether the Debt Securities of the Series shall be issued in whole or in part in
the form of one or more Global Securities and, in such case, the Depositary for
such Global Securities, which Depositary shall be a clearing agency registered
under the Exchange Act; (16) the appointment of any Paying Agent or Agents; (17)
in the case of the Subordinated Indenture, the relative degree, if any, to which
such Debt Securities of the series shall
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be senior to or be subordinated to other series of such Debt Securities in right
of payment, whether such other series of Debt Securities are outstanding or not;
and (18) any other terms of the Debt Securities not inconsistent with the
provisions of the Indentures. (Section 3.01.)
Debt Securities may be sold at a substantial discount below their stated
principal amount, bearing no interest or interest at a rate which at the time of
issuance is below market rates. Certain federal income tax consequences and
special considerations if applicable to any Debt Securities will be described in
the applicable Prospectus Supplement.
If the purchase price of any of the Debt Securities is payable in one or
more foreign currencies or currency units or if any Debt Securities are
denominated in one or more foreign currencies or currency units or if the
principal of, premium, if any, or interest, if any, on any Debt Securities is
payable in one or more foreign currencies or currency units, the restrictions,
elections, certain federal income tax considerations, specific terms and other
information with respect to such issue of Debt Securities and such foreign
currency or currency units will be set forth in the applicable Prospectus
Supplement.
If any index is used to determine the amount of payments of principal of,
premium, if any, or interest on any series of Debt Securities, special federal
income tax, accounting and other considerations applicable thereto will be
described in the applicable Prospectus Supplement.
DENOMINATIONS, REGISTRATION AND TRANSFER
Unless otherwise specified in the applicable Prospectus Supplement, the
Debt Securities will be issuable only in registered form without coupons in
denominations of $1,000 and any integral multiple thereof. Debt Securities of
any series will be exchangeable for other Debt Securities of the same issue and
series, of any authorized denominations, of a like aggregate principal amount,
of the same Original Issue Date and Stated Maturity and bearing the same
interest rate. (Section 3.05.)
Debt Securities may be presented for exchange as provided above, and may be
presented for registration of transfer (with the form of transfer endorsed
thereon, or a satisfactory written instrument of transfer, duly executed), at
the office of the Securities Registrar or at the office of any transfer agent
designated by the Company for such purpose with respect to any series of Debt
Securities and referred to in an applicable Prospectus Supplement, without
service charge and upon payment of any taxes and other governmental charges as
described in the Indenture. The Company will appoint the Trustees as Securities
Registrars under the Indentures. (Section 3.05.) If a Prospectus Supplement
refers to any transfer agents (in addition to the Securities Registrar)
initially designated by the Company with respect to any series of Debt
Securities, the Company may at any time rescind the designation of any such
transfer agent or approve a change in the location through which any such
transfer agent acts, provided that the Company maintains a transfer agent in
each Place of Payment for such series. The Company may at any time designate
additional transfer agents with respect to any series of Debt Securities.
(Section 10.02.)
In the event of any redemption, neither the Company nor the Trustee shall
be required to (i) issue, register the transfer of or exchange Debt Securities
of any series during a period beginning at the opening of business 15 days
before the day of selection for redemption of Debt Securities of that series and
ending at the close of business on the day of mailing of the relevant notice of
redemption or (ii) transfer or exchange any Debt Securities so selected for
redemption, except, in the case of any Debt Securities being redeemed in part,
any portion thereof not to be redeemed. (Section 3.05.)
GLOBAL DEBT SECURITIES
The Debt Securities of a series may be issued in whole or in part in the
form of one or more Global Debt Securities that will be deposited with, or on
behalf of, a depositary (the "Depositary") identified in the Prospectus
Supplement relating to such series. Global Debt Securities may be issued only in
fully registered form and in either temporary or permanent form. Unless and
until it is exchanged in whole or in part for the individual Debt Securities
represented thereby, a Global Debt
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Security may not be transferred except as a whole by the Depositary for such
Global Debt Security to a nominee of such Depositary or by the Depositary or any
nominee to a successor Depositary or any nominee of such successor.
The specific terms of the depositary arrangement with respect to a series
of Debt Securities will be described in the Prospectus Supplement relating to
such series. The Company anticipates the following provisions will generally
apply to depositary arrangements.
Upon the issuance of a Global Debt Security, and the deposit of such Global
Debt Security with or on behalf of the Depositary, the Depositary for such
Global Debt Security or its nominee will credit on its book-entry registration
and transfer system, the respective principal amounts of the individual Debt
Securities represented by such Global Debt Security to the accounts of persons
that have accounts with such Depositary ("Participants"). Such accounts shall be
designated by the dealers, underwriters or agents with respect to such Debt
Securities or by the Company if such Debt Securities are offered and sold
directly by the Company. Ownership of beneficial interests in a Global Debt
Security will be limited to Participants or persons that may hold interests
through Participants. Ownership of beneficial interests in such Global Debt
Security will be shown on, and the transfer of that ownership will be effected
only through, records maintained by the applicable Depositary or its nominee
(with respect to interests of Participants) and the records of Participants
(with respect to interests of persons who hold through Participants). The laws
of some states require that certain purchasers of securities take physical
delivery of such securities in definitive form. Such limits and such laws may
impair the ability to transfer beneficial interests in a Global Debt Security.
So long as the Depositary for a Global Debt Security, or its nominee, is
the registered owner of such Global Debt Security, such Depositary or such
nominee, as the case may be, will be considered the sole owner or holder of the
Debt Securities represented by such Global Debt Security for all purposes under
the Indenture governing such Debt Securities. Except as provided below, owners
of beneficial interests in a Global Debt Security will not be entitled to have
any of the individual Debt Securities of the series represented by such Global
Debt Security registered in their names, will not receive or be entitled to
receive physical delivery of any such Debt Securities of such series in
definitive form and will not be considered the owners or holders thereof under
the Indentures governing such Debt Securities.
Payments of principal of and premium, if any, and interest on individual
Debt Securities represented by a Global Debt Security registered in the name of
a Depositary or its nominee will be made to the Depositary or its nominee, as
the case may be, as the registered owner of the Global Debt Security
representing such Debt Securities. None of the Company, the Trustee for such
Debt Securities, any Paying Agent, or the Securities Registrar for such Debt
Securities will have any responsibility or liability for any aspect of the
records relating to, or payments made on account of, beneficial ownership
interest of the Global Debt Security for such Debt Securities or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests.
The Company expects that the Depositary for a series of Debt Securities or
its nominee, upon receipt of any payment of principal, premium or interest in
respect of a permanent Global Debt Security representing any of such Debt
Securities, immediately will credit Participants' accounts with payments in
amounts proportionate to their respective beneficial interest in the principal
amount of such Global Debt Security for such Debt Securities as shown on the
records of such Depositary or its nominee. The Company also expects that
payments by participants to owners of beneficial interests in such Global Debt
Security held through such Participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers in bearer form or registered in "street name".
Such payments will be the responsibility of such Participants.
Unless otherwise specified in the applicable Prospectus Supplement, if a
Depositary for a series of Debt Securities is at any time unwilling, unable or
ineligible to continue as depositary and a successor depositary is not appointed
by the Company within 90 days, the Company will issue
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individual Debt Securities of such series in exchange for the Global Debt
Security representing such series of Debt Securities. In addition, the Company
may at any time and in its sole discretion, subject to any limitations described
in the Prospectus Supplement relating to such Debt Securities, determine not to
have any Debt Securities of such series represented by one or more Global Debt
Securities and, in such event, will issue individual Debt Securities of such
series in exchange for the Global Debt Security or Securities representing such
series of Debt Securities. Further, if the Company so specifies with respect to
the Debt Securities of a series, an owner of a beneficial interest in a Global
Debt Security representing Debt Securities of such series may, on terms
acceptable to the Company, the Trustee and the Depositary for such Global Debt
Security, as described in the applicable Prospectus Supplement, receive
individual Debt Securities of such series in exchange for such beneficial
interest in a Global Debt Security. In any such instance, an owner of a
beneficial interest in a Global Debt Security will be entitled to physical
delivery of individual Debt Securities of the series represented by such Global
Debt Security equal in principal amount to such beneficial interest and to have
such Debt Securities registered in its name. Individual Debt Securities of such
series so issued will be issued in denominations, unless otherwise specified by
the Company, of $1,000 and integral multiples thereof.
PAYMENT AND PAYING AGENTS
Unless otherwise indicated in an applicable Prospectus Supplement, payment
of principal of and premium, if any, and any interest on Debt Securities will be
made at the office of the Trustee for such Debt Securities in the City of New
York or at the office of such Paying Agent or Paying Agents as the Company may
designate from time to time in an applicable Prospectus Supplement, except that,
at the option of the Company, payment of any interest may be made (i) by check
mailed to the address of the person entitled thereto as such address shall
appear in the Securities Register or (ii) by transfer to an account maintained
by the person entitled thereto as specified in the Securities Register, provided
that proper transfer instructions have been received by the Regular Record Date.
Unless otherwise indicated in an applicable Prospectus Supplement, payment of
any interest on Debt Securities will be made to the person in whose name such
Debt Security is registered at the close of business on the Regular Record Date
for such interest, except in the case of Defaulted Interest. The Company may at
any time designate additional Paying Agents or rescind the designation of any
Paying Agent; however, the Company will at all times be required to maintain a
Paying Agent in each Place of Payment for each series of Debt Securities.
(Sections 3.01, 3.07 and 10.02.)
Any moneys deposited with the Trustee or any Paying Agent, or then held by
the Company in trust, for the payment of the principal and premium, if any, or
interest on any Debt Security and remaining unclaimed for two years after such
principal and premium, if any, or interest has become due and payable shall, at
the request of the Company, be repaid to the Company and the Holder of such Debt
Security shall thereafter look, as a general unsecured creditor, only to the
Company for payment thereof. (Section 10.03.)
REDEMPTION
Unless otherwise indicated in an applicable Prospectus Supplement, Debt
Securities will not be subject to any sinking fund and will not be redeemable
prior to their Stated Maturity.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Senior and Subordinated Indentures provide that the Company shall not
consolidate with or merge into any other corporation or convey, transfer or
lease its properties and assets substantially as an entirety to any Person (as
defined), and no Person shall consolidate with or merge into the Company or
convey, transfer or lease its properties and assets substantially as an entirety
to the Company, unless (i) in case the Company consolidates with or merges into
another corporation or conveys, transfers or leases its properties and assets
substantially as an entirety to any Person, the successor corporation is
organized under the laws of the United States of America or any state or
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the District of Columbia, and such successor corporation expressly assumes the
Company's obligations on the Debt Securities issued under the related Indenture;
(ii) immediately after giving effect thereto, no Event of Default, and no event
which, after notice or lapse of time or both, would become an Event of Default,
shall have happened and be continuing; and (iii) certain other conditions as
prescribed in the Indenture are met. (Sections 8.01 and 8.02.)
LIMITATIONS UPON LIENS
The Senior and Subordinated Indentures provide that the Company will not,
nor will it permit any Restricted Subsidiary to, issue, assume or guarantee any
indebtedness for money borrowed if such indebtedness is secured by a Lien (as
defined) upon any Principal Property of the Company or any Restricted Subsidiary
or on any shares of stock of any Restricted Subsidiary (whether such Principal
Property or shares of stock are now owned or hereafter acquired) without in any
such case effectively providing that the Debt Securities of any series
Outstanding (as defined) which are entitled to the benefits of such provision of
the Indenture (together with, if the Company shall so determine, any other
indebtedness of or indebtedness guaranteed by the Company or such Restricted
Subsidiary entitled thereto, subject to applicable priority of payment) shall be
secured equally and ratably with or prior to such indebtedness, except that the
foregoing restriction shall not apply to (i) Liens on property or shares of
stock of any corporation existing at the time such corporation becomes a
Restricted Subsidiary; (ii) Liens on property existing at the time of
acquisition thereof, or Liens on property which secure the payment of the
purchase price of such property, or Liens on property which secure indebtedness
incurred or guaranteed for the purpose of financing the purchase price of such
property or the construction of such property (including improvements to
existing property), which indebtedness is incurred or guaranteed within 180 days
after the latest of such acquisition or completion of such construction or
commencement of operation of such property; (iii) Liens securing indebtedness
owing by any Restricted Subsidiary to the Company or a wholly owned Restricted
Subsidiary; (iv) Liens on property of a corporation existing at the time such
corporation is merged into or consolidated with the Company or a Restricted
Subsidiary or at the time of a purchase, lease or other acquisition of the
properties of a corporation or other Person as an entirety or substantially as
an entirety by the Company or a Restricted Subsidiary; (v) Liens on property of
the Company or a Restricted Subsidiary in favor of the United States of America
or any State thereof or any agency, instrumentality or political subdivision
thereof, or in favor of any other country, or any political subdivision thereof,
to secure any indebtedness incurred or guaranteed for the purpose of financing
all or any part of the purchase price or the cost of construction of the
property subject to such Liens within 180 days after the latest of the
acquisition, completion of construction or commencement of operation of such
property; and (vi) any extension, renewal or replacement (or successive
extensions, renewals or replacements), in whole or in part, of any Lien referred
to in the foregoing clauses (i) to (v), inclusive. Notwithstanding the above,
the Company and one or more Restricted Subsidiaries may, without securing the
Debt Securities, issue, assume or guarantee secured indebtedness which would
otherwise be subject to the foregoing restrictions, provided that after giving
effect thereto, the aggregate amount of such indebtedness issued pursuant to
such exception at such time does not exceed 10% of Consolidated Net Tangible
Assets. In computing the aggregate amount of indebtedness outstanding for
purposes of the foregoing sentence, there shall not be included in the
calculation an indebtedness issued, assumed or guaranteed pursuant to clauses
(i) through (vi) above. (Section 10.08.)
CERTAIN DEFINITIONS
"Consolidated Net Tangible Assets" means the total amount of assets (less
applicable reserves and other properly deductible items) after deducting
therefrom (i) all current liabilities (excluding any thereof which are by their
terms extendible or renewable at the option of the obligor thereon to a time
more than 12 months after the time as of which the amount thereof is being
computed) and (ii) all segregated goodwill, trade names, trademarks, patents,
unamortized debt discount and expense and other like intangibles, all as set
forth on the most recent balance sheet of
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the Company and its consolidated Subsidiaries ("Subsidiary" being defined as any
corporation where more than 50% of its voting stock is owned directly or
indirectly by the Company or by another Subsidiary) and prepared in accordance
with generally accepted accounting principles. (Section 1.01.)
"Principal Property" means all land, buildings, machinery and equipment,
and leasehold interests and improvements in respect of the foregoing, which
would be reflected on a consolidated balance sheet of the Company and its
Subsidiaries prepared in accordance with generally accepted accounting
principles, excluding all such tangible property located outside the United
States of America and excluding any such property which, in the opinion of the
Board of Directors set forth in a Board Resolution, is not material to the
Company and its consolidated Subsidiaries taken as a whole. (Section 1.01.)
"Restricted Subsidiary" is defined as any Subsidiary which is incorporated
under the laws of any state of the United States or of the District of Columbia,
and which is a regulated insurance company principally engaged in the life
insurance business; provided, however, that no Subsidiary shall be a Restricted
Subsidiary (i) if the total assets of such Subsidiary are less than 10% of the
total assets of the Company and its consolidated Subsidiaries (including such
Subsidiary) in each case as set forth on the most recent fiscal year-end balance
sheets of such Subsidiary and the Company and its consolidated Subsidiaries,
respectively, and computed in accordance with generally accepted accounting
principles, or (ii) if in the judgment of the Board of Directors, as evidenced
by a Board Resolution, such Subsidiary is not material to the financial
condition of the Company and its Subsidiaries taken as a whole. (Section 1.01.)
As of the date of this Prospectus, the Subsidiaries of the Company which meet
the definition of Restricted Subsidiaries are the following: Hartford Life
Insurance Company, Hartford Life and Accident Insurance Company and ITT Hartford
Life and Annuity Insurance Company.
MODIFICATION AND WAIVER
Modification and amendments of each Indenture may be made by the Company
and the Trustee with the consent of the holders of a majority in aggregate
principal amount of the Outstanding Debt Securities of each series affected
thereby; provided, however, that no such modification or amendment may, without
the consent of the Holder of each Outstanding Debt Security affected thereby,
(i) change the Stated Maturity of the principal of, or any installment of
interest on, any Outstanding Debt Security; (ii) reduce the principal amount of,
or the rate of interest on, or any premium payable upon the redemption of, or
the amount of principal of an Original Issue Discount Security that would be due
and payable upon a declaration of acceleration of the Maturity of, any
Outstanding Debt Security; (iii) change the Place of Payment, or the coin or
currency in which any Outstanding Debt Security or the interest thereon is
payable; (iv) impair the right to institute suit for the enforcement of any
payment on or with respect to any Outstanding Debt Security after the Stated
Maturity; or (v) change the provisions of such Indenture relating to amendments
of the Indenture requiring the consent of the affected Holders for waiver of
compliance with certain provisions of the Indenture or waiver of past defaults.
(Section 9.02.)
The Holders of a majority in principal amount of the Outstanding Debt
Securities of each series may on behalf of the Holders of all Debt Securities of
that series waive, insofar as the series is concerned, compliance by the Company
with certain restrictive covenants of the Indenture. (Section 10.09.) The
Holders of not less than a majority in principal amount of the Outstanding Debt
Securities of any series may on behalf of the Holders of all Debt Securities of
that series waive any past default under the Indenture with respect to that
series of Debt Securities, except a default in the payment of the principal of,
or any interest on, any Debt Security of that series or in respect of a
provision which under such Indenture cannot be modified or amended without the
consent of the Holder of each Outstanding Debt Security of that series affected.
(Section 5.13.)
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EVENTS OF DEFAULT
Each Indenture provides that the following shall constitute Events of
Default with respect to any series of Debt Securities: (i) default for 30 days
in the payment of any interest when due; (ii) default in the payment of
principal or premium, if any, at Maturity; (iii) default in the performance of
any other covenant in the Indenture for 60 days after written notice thereof;
(iv) certain events in bankruptcy, insolvency or reorganization; (v)
acceleration or default in the payment of indebtedness for borrowed money in
excess of $25,000,000, which acceleration or default shall not have been
rescinded or annulled within 30 days after notice; or (vi) any other Event of
Default provided in the applicable Board Resolution or supplemental indenture
under which such series of Debt Securities is issued. (Section 5.01.) The
Company is required to furnish the Trustee annually with a statement as to the
fulfillment by the Company of its obligations under the Indenture. (Section
10.06.) Each Indenture provides that the Trustee may withhold notice to the
Holders of the Debt Securities of any default (except in respect of the payment
of principal or interest on the Debt Securities) if it considers it in the
interest of the Holders to do so. (Section 6.02.)
If an Event of Default with respect to Outstanding Debt Securities of any
series occurs and is continuing, then and in every such case the Trustee or the
Holders of not less than 25% in principal amount of the Outstanding Debt
Securities of that series may declare the principal amount (or, if the Debt
Securities of that series are Original Issue Discount Securities, such portion
of the principal amount as may be specified in the terms of that series) of all
the Debt Securities of that series to be due and payable immediately, by a
notice in writing to the Company (and to the Trustee if given by Holders), and
upon any such declaration such principal shall become immediately due and
payable. However, at any time after a declaration or acceleration with respect
to Debt Securities of any series has been made, but before a judgment or decree
for payment of the money due has been obtained, the Holders of a majority in
principal amount of Outstanding Debt Securities of that series may, subject to
certain conditions, rescind and annul such declaration. (Section 5.02.)
Subject to the provisions of the applicable Indenture relating to the
duties of the Trustee, in case an Event of Default shall occur and be
continuing, the Trustee shall be under no obligation to exercise any of its
rights or powers under the Indenture at the request, order or direction of any
of the Holders, unless such Holders shall have offered to the Trustee reasonable
security or indemnity. (Section 6.03.) Subject to such provisions for the
security or indemnification of the Trustee, the Holders of a majority in
principal amount of the Outstanding Debt Securities of any series shall have the
right to direct the time, method and place of conducting any proceeding for, and
remedy available to, the Trustee, or exercising any trust or power conferred on
the Trustee with respect to the Debt Securities of that series. (Section 5.12.)
No Holder of any Debt Security of any series will have any right to
institute any proceeding with respect to the Indenture or for any remedy
thereunder, unless such Holder shall have previously given to the Trustee
written notice of a continuing Event of Default with respect to Debt Securities
of that series and unless the Holders of at least 25% in principal amount of the
Outstanding Debt Securities of that series shall have made written request, and
offered reasonable indemnity, to the Trustee to institute such proceeding as
Trustee, and, within 60 days following the receipt of such notice, the Trustee
shall not have received from the Holders of a majority in principal amount of
the Outstanding Debt Securities of that series a direction inconsistent with
such request, and the Trustee shall have failed to institute such proceeding.
(Section 5.07.) However, the Holder of any Debt Security will have an absolute
right to receive payment of the principal of, and premium, if any, and interest
on such Debt Security on or after the due dates expressed in such Debt Security
and to institute a suit for the enforcement of any such payment. (Section 5.08.)
SATISFACTION AND DISCHARGE OF THE INDENTURES
Each Indenture provides that when, among other things, all Debt Securities
not previously delivered to the Trustee for cancellation (i) have become due and
payable or (ii) will become due and payable at their Stated Maturity within one
year and the Company in either case deposits or
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causes to be deposited with the Trustee trust funds in trust for such purpose an
amount in the currency or currencies in which the Debt Securities are payable
sufficient to pay and discharge the entire indebtedness on the Debt Securities
not previously delivered to the Trustee for cancellation, for the principal and
premium, if any, and interest to the date of the deposit or to the Stated
Maturity, as the case may be, then the Indenture will cease to be of further
effect (except as to the Company's obligations to pay all other sums due
pursuant to the Indenture and to provide the Officers' Certificates and Opinions
of Counsel described therein), and the Company will be deemed to have satisfied
and discharged the Indenture. (Section 4.01.)
DEFEASANCE
Except as may otherwise be provided in the applicable Prospectus Supplement
with respect to the Debt Securities of any series, each Indenture provides that
the Company shall be deemed to have paid and discharged the entire indebtedness
on all the Debt Securities of a series at any time prior to the Stated Maturity
or redemption thereof when (i) the Company has irrevocably deposited or caused
to be deposited with the Trustee, in trust, either (a) sufficient funds to pay
and discharge the entire indebtedness on the Debt Securities of such series for
the principal and premium, if any, and interest to the Stated Maturity or any
redemption date or (b) such amount of Government Obligations (as defined) as
will, in the written opinion of independent public accountants delivered to the
Trustee, together with predetermined and certain income to accrue thereon,
without consideration of any reinvestment thereof, be sufficient to pay and
discharge when due the entire indebtedness on the Debt Securities of such series
for principal and premium, if any, and interest to the Stated Maturity or any
redemption date, (ii) the Company has paid or caused to be paid all other sums
payable with respect to the Debt Securities of such series, (iii) the Company
has delivered to the Trustee an officer's certificate and an opinion of counsel
to the effect that (a) the Company has received from, or there has been
published by, the Internal Revenue Service a ruling, or (b) since the date of
execution of the applicable Indenture, there has been a change in the applicable
Federal income tax law, in either case to the effect that, and based thereon
such opinion confirms that, the deposit and related defeasance would not cause
the holders of the Debt Securities of such series to recognize income, gain or
loss for Federal income tax purposes and such opinion is accompanied by a ruling
to such effect received from or published by the Internal Revenue Service, (iv)
the Company has delivered to the Trustee an opinion of counsel that neither the
Company nor the trust held by such Trustee will immediately after the deposit
just described be an "investment company" or a company "controlled" by an
"investment company" within the meaning of the Investment Company Act of 1940
and (v) the Company has delivered to the Trustee such other Officer's
Certificates and Opinions of Counsel as may be required by the Indenture, each
stating that all conditions precedent provided for therein relating to the
satisfaction and discharge of the entire indebtedness on all Debt Securities of
such series have been complied with. (Section 4.03.)
With respect to the Subordinated Indenture, in order to be discharged as
described above, no default in the payment of principal of, or premium, if any,
or interest on any Senior Debt shall have occurred and be continuing or no other
Event of Default with respect to the Senior Debt shall have occurred and be
continuing and shall have resulted in such Senior Debt becoming or being
declared due and payable prior to the date it would have become due and payable.
GOVERNING LAW
The Indentures and the Debt Securities will be governed by and construed in
accordance with the laws of the State of New York (without regard to principles
of conflicts of laws). (Section 1.12.)
SUBORDINATION UNDER THE SUBORDINATED INDENTURE
In the Subordinated Indenture, the Company will covenant and agree that any
Subordinated Debt Securities issued thereunder will be subordinate and junior in
right of payment to all Senior Debt to the extent provided in the Subordinated
Indenture. Upon any payment or distribution of assets to creditors upon any
liquidation, dissolution, winding up, reorganization, assignment for the
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benefit of creditors, marshalling of assets or any bankruptcy, insolvency, debt
restructuring or similar proceedings in connection with any insolvency or
bankruptcy proceeding of the Company, the holders of Senior Debt will first be
entitled to receive payment in full of principal of and premium, if any, and
interest, if any, on such Senior Debt before the holders of Subordinated Debt
Securities will be entitled to receive or retain any payment in respect of the
principal of and premium, if any, or interest, if any, on the Subordinated Debt
Securities.
In the event of the acceleration of the maturity of any Subordinated Debt
Securities, the holders of all Senior Debt outstanding at the time of such
acceleration will first be entitled to receive payment in full of all amounts
due thereon (including any amounts due upon acceleration) before the holders of
Subordinated Debt Securities will be entitled to receive any payment upon the
principal of or premium, if any, or interest, if any, on the Subordinated Debt
Securities.
No payments on account of principal or premium, if any, or interest, if
any, in respect of the Subordinated Debt Securities may be made if there shall
have occurred and be continuing a default in any payment with respect to Senior
Debt, or any event of default with respect to any Senior Debt resulting in the
acceleration of the maturity thereof, or if any judicial proceeding shall be
pending with respect to any such default.
"Debt" means, with respect to any Person, whether recourse is to all or a
portion of the assets of such Person and whether or not contingent, (i) every
obligation of such Person for money borrowed; (ii) every obligation of such
Person evidenced by bonds, debentures, notes or other similar instruments,
including obligations incurred in connection with the acquisition of property,
assets or businesses; (iii) every reimbursement obligation of such Person with
respect to letters of credit, bankers' acceptances or similar facilities issued
for the account of such Person; (iv) every obligation of such Person issued or
assumed as the deferred purchase price of property or services (but excluding
trade accounts payable or accrued liabilities arising in the ordinary course of
business); (v) every capital lease obligation of such Person; and (vi) every
obligation of the type referred to in clauses (i) through (vi) of another Person
and all dividends of another Person the payment of which, in either case, such
Person has guaranteed or is responsible or liable, directly or indirectly, as
obligor or otherwise.
"Senior Debt" means the principal of and premium, if any, and interest, if
any (including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to the Company whether or not such
claim for post-petition interest is allowed in such proceeding), on Debt,
whether incurred on or prior to the date of the Subordinated Indenture or
thereafter incurred, unless, in the instrument creating or evidencing the same
or pursuant to which the same is outstanding, it is provided that such
obligations are not superior in right of payment to the Subordinated Debt
Securities or to other Debt which is pari passu with, or subordinated to, the
Subordinated Debt Securities; provided, however, that Senior Debt shall not be
deemed to include (a) any Debt of the Company which when incurred and without
respect to any election under Section 1111(b) of the Bankruptcy Code, was
without recourse to the Company, (b) any Debt of the Company to any of its
subsidiaries, (c) any Debt to any employee of the Company, (d) any liability for
taxes and (e) any indebtedness or monetary obligations to trade creditors or
assumed by the Company or any of its subsidiaries in the ordinary course of
business in connection with the obtaining of materials or services.
The Company is a holding company with no significant business operations of
its own, and most of the assets of the Company are owned by its subsidiaries.
Accordingly, the Debt Securities will be effectively subordinated to all
existing and future liabilities of the Company's subsidiaries, including
liabilities under contracts of insurance and annuities written by the Company's
insurance subsidiaries. Holders of Debt Securities should look only to the
assets of the Company for payments of interest and principal and premium, if
any.
The Subordinated Indenture will place no limitation on the amount of
additional Senior Debt that may be incurred by the Company. The Company expects
from time to time to incur additional indebtedness constituting Senior Debt.
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The Subordinated Indenture will provide that the foregoing subordination
provisions, insofar as they relate to any particular issue of Subordinated Debt
Securities, may be changed prior to such issuance. Any such change would be
described in the Prospectus Supplement relating to such Subordinated Debt
Securities.
CONCERNING THE SENIOR INDENTURE TRUSTEE
The Trustee acts as depository for funds of, makes loans to, and performs
other services for, the Company and its subsidiaries in the normal course of
business.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 600,000,000 shares
of Class A Common Stock, par value $.01 per share ("Class A Common Stock"),
600,000,000 shares of Class B Common Stock, par value $.01 per share ("Class B
Common Stock" and, together with the Class A Common Stock, the "Common Stock"),
and 50,000,000 shares of Preferred Stock. 26,000,000 shares of Class A Common
Stock are outstanding and 114,000,000 shares are reserved for issuance upon
conversion of any of the Class B Common Stock into Class A Common Stock.
114,000,000 shares of Class B Common Stock are outstanding and held by The
Hartford or one of its directly or indirectly wholly owned subsidiaries. No
shares of Preferred Stock are outstanding. A description of various provisions
of the Company's Certificate of Incorporation and By-laws affecting the rights
of the Class A Common Stock, Class B Common Stock and Preferred Stock is set
forth below. This description is intended as a summary and is qualified in its
entirety by reference to the form of the Company's Restated Certificate of
Incorporation (the "Certificate of Incorporation") and By-laws filed as exhibits
to the Registration Statement of which this Prospectus is a part.
CLASS A COMMON STOCK AND CLASS B COMMON STOCK
DIVIDENDS
Holders of Class A Common Stock and Class B Common Stock are entitled to
receive ratably such dividends, if any, as may be declared by the Board of
Directors out of funds legally available therefor, subject to any preferential
dividend rights of any outstanding Preferred Stock. Cash dividends may be
declared and paid to the holders of Class A Common Stock only if at such time
cash dividends in the same amount per share are declared and paid to the holders
of Class B Common Stock, and vice versa. Dividends payable other than in cash or
Common Stock (or in rights, options, warrants or securities convertible into or
exchangeable for Common Stock) will be declared and paid to holders of Class A
Common Stock and Class B Common Stock on a pro rata per share basis. Dividends
consisting of shares of Common Stock, or of rights, options, warrants or other
securities convertible into or exchangeable for such shares, may be declared and
paid to holders of Class A Common Stock only if a like dividend is declared and
paid to holders of Class B Common Stock, and vice versa, and, to that end,
shares of Class A Common Stock, or any rights, options, warrants or securities
convertible into or exchangeable for Class A Common Stock, would be declared and
paid only to holders of shares of Class A Common Stock and shares of Class B
Common Stock, or any rights, options, warrants or securities convertible into or
exchangeable for Class B Common Stock, would be declared and paid only to
holders of Class B Common Stock. The Company may not reclassify, subdivide or
combine the shares of either class of Common Stock without at the same time
proportionately reclassifying, subdividing or combining the shares of the other
class.
VOTING RIGHTS
Holders of Class A Common Stock and Class B Common Stock generally have
identical voting rights and vote together (and 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
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votes per share and the shares of Class B Common Stock maintain certain
conversion rights and transfer restrictions as described below. Except as
required by law, all matters to be voted on by stockholders must be approved by
a majority (or, in the case of the election of directors, by a plurality) of the
votes entitled to be cast in person or by proxy by all shares of Class A Common
Stock and Class B Common Stock, voting together as a single class, subject to
any voting rights granted to holders of any outstanding Preferred Stock. Holders
of shares of Class A Common Stock and Class B Common Stock are not entitled to
cumulate their votes in the election of directors. Except as otherwise provided
by law, and subject to any voting rights granted to holders of any outstanding
Preferred Stock, amendments to the Certificate of Incorporation (including any
such amendment to increase or decrease the authorized shares of any class) must
be approved by a majority of the votes entitled to be cast in person or by proxy
by all outstanding shares of Class A Common Stock and Class B Common Stock,
voting together as a single class, except that certain provisions of the
Certificate of Incorporation may be amended only with the approval of the
holders of at least 80% of the combined voting power of the Common Stock then
outstanding. See "Certain Provisions of the Certificate of Incorporation and
By-Laws of the Corporation -- Corporate Opportunities". However, amendments to
the Certificate of Incorporation that would change the powers, preferences and
relative participating, optional or other special rights of the Class A Common
Stock or Class B Common Stock also must be approved by a majority of the
outstanding shares of such class voting as a separate class. The superior voting
rights of the Class B Common Stock may discourage unsolicited tender offers and
merger proposals.
CONVERSION
Each share of Class B Common Stock is convertible at any time by the holder
thereof at the option of such holder into one share of Class A Common Stock,
except as provided herein. Subject to the exceptions described in the following
sentence, upon the sale or other transfer (whether by merger, operation of law
or otherwise) by a stockholder of the Company of shares of Class B Common Stock
such that any person or persons, other than such stockholder or any of its
affiliates (within the meaning of the rules and regulations under the Exchange
Act), or a Class B Transferee (as defined below), will have beneficial ownership
thereof, such shares will automatically convert into an equal number of shares
of Class A Common Stock. However, if shares of Class B Common Stock representing
50% or more of all the then outstanding shares of Common Stock (calculated
without regard to the difference in voting rights between the classes of Common
Stock) are transferred by the holder thereof in a single transaction, or series
of related transactions, to any person or group of affiliated persons not
affiliated with such transferor (a "Class B Transferee"), such shares of Class B
Common Stock so transferred will not automatically convert into shares of Class
A Common Stock upon such transfer. Each share of Class B Common Stock retained
by such transferor following any such transfer will automatically convert into a
share of Class A Common Stock upon such transfer. In addition, each share of
Class B Common Stock will automatically convert into one share of Class A Common
Stock on the date on which the number of shares of Class B Common Stock then
outstanding is less than 50% of the then outstanding shares of Common Stock.
The provisions of the Company's Certificate of Incorporation described
above are generally designed so that, were The Hartford to reduce its ownership
of the Class B Common Stock to less than 50% of all the then outstanding shares
of Common Stock (calculated without regard to the difference in voting rights
between the classes of Common Stock), its shares of Class B Common Stock would
be automatically converted into Class A Common Stock, thereby resulting in all
holders of Common Stock having identical voting rights other than any Class B
Transferee. However, The Hartford (and any Class B Transferee) is permitted to
transfer shares of Class B Common Stock representing 50% or more of all the then
outstanding shares of Common Stock (calculated without regard to the difference
in voting rights between the classes of Common Stock), to a Class B Transferee
with the effect that such Class B Transferee will succeed to ownership of the
Class B Common Stock and thus control of the Company.
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OTHER
Upon the liquidation, dissolution or winding up of the Company, whether
voluntary or involuntary, and subject to the rights of the holders of the
Preferred Stock, the net assets of the Company available for distribution to
stockholders of the Company shall be distributed pro rata to the holders of the
Common Stock in accordance with their respective rights and interests and the
Class B Common Stock shall rank pari passu with the Class A Common Stock as to
such distribution.
No shares of either class of Common Stock are subject to redemption or have
preemptive rights to purchase additional shares of Common Stock.
The outstanding shares of Class A Common Stock and Class B Common Stock are
fully paid and non-assessable.
PREFERRED STOCK
The authorized Preferred Stock of the Company is available for issuance
from time to time at the discretion of the Board of Directors without
stockholder approval. The Board of Directors has the authority to prescribe, for
each series of the Preferred Stock it establishes, the number of shares in that
series, the number of votes (if any) to which such shares in that series are
entitled, the dividends payable on such shares in that series, any conversion
rights applicable thereto and the other powers, preferences and relative
participating, optional or other special rights, and any qualifications,
limitations or restrictions of the shares in that series. Depending upon the
rights of such Preferred Stock, the issuance thereof could have an adverse
effect on holders of the Common Stock by delaying or preventing a change of
control of the Company, making removal of the present management of the Company
more difficult or resulting in restrictions upon the payment of dividends and
other distributions to the holders of the Common Stock.
The particular terms of any series of Preferred Stock offered hereby will
be set forth in the Prospectus Supplement relating thereto. The rights,
preferences, privileges and restrictions, including dividend rights, voting
rights, terms of redemption and liquidation preferences, of the Preferred Stock
of each series will be fixed or designated pursuant to a certificate of
designation adopted by the Board of Directors or a duly authorized committee
thereof. The description of the terms of a particular series of Preferred Stock
that will be set forth in a Prospectus Supplement shall not purport to be
complete and shall be qualified in its entirety by reference to the certificate
of designation relating to such series.
DEPOSITARY SHARES
GENERAL
The Company may, at its option, elect to offer fractional interests
("Depositary Shares") in Preferred Stock, rather than full shares of Preferred
Stock. In such event, receipts ("Depositary Receipts") for Depositary Shares,
each of which will represent a fraction (to be set forth in the Prospectus
Supplement relating to a particular series of Preferred Stock) of a share of a
particular series of Preferred Stock, will be issued as described below.
The shares of any series of Preferred Stock represented by Depositary
Shares will be deposited under a Deposit Agreement (the "Deposit Agreement")
between the Company and a depositary to be named by the Company in a Prospectus
Supplement (the "Depositary"). Subject to the terms of the Deposit Agreement,
each owner of a Depositary Share will be entitled, in proportion to the
applicable fraction of a share of Preferred Stock represented by such Depositary
Share, to all the rights and preferences of the Preferred Stock represented
thereby (including dividend, voting, redemption, subscription and liquidation
rights). The following summary of certain provisions of the Deposit Agreement
does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, all the provisions of the Deposit Agreement, including
the definitions therein of certain terms. Whenever particular sections or
defined terms of the Deposit Agreement are referred to herein or in a Prospectus
Supplement, it is intended that such sections or defined terms shall be
incorporated herein or therein by reference. Copies of the forms of Deposit
Agreement and Depositary Receipt will be filed as exhibits to a Current Report
on Form 8-K incorporated herein by reference to be filed prior to any offering
of Depositary Shares.
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DIVIDENDS AND OTHER DISTRIBUTIONS
The Depositary will distribute all cash dividends or other cash
distributions received in respect of the Preferred Stock to the record holders
of Depositary Shares relating to such Preferred Stock in proportion to the
numbers of such Depositary Shares owned by such holders.
In the event of a distribution other than in cash, the Depositary will
distribute property received by it to the record holders of Depositary Shares in
an equitable manner, unless the Depositary determines that it is not feasible to
make such distribution, in which case the Depositary may sell such property and
distribute the net proceeds from such sale to such holders.
REDEMPTION OF DEPOSITARY SHARES
If a series of Preferred Stock represented by Depositary Shares is subject
to redemption, the Depositary Shares will be redeemed from the proceeds received
by the Depositary resulting from the redemption, in whole or in part, of such
series of Preferred Stock held by the Depositary. The redemption price per
Depositary Share will be equal to the applicable fraction of the redemption
price per share payable with respect to such series of Preferred Stock. Whenever
the Company redeems shares of Preferred Stock held by the Depositary, the
Depositary will redeem as of the same redemption date the number of Depositary
Shares representing shares of Preferred Stock so redeemed. If fewer than all the
Depositary Shares are to be redeemed, the Depositary Shares to be redeemed will
be selected by lot, pro rata or by any other equitable method as may be
determined by the Depositary.
VOTING THE PREFERRED STOCK
Upon receipt of notice of any meeting at which the holders of the Preferred
Stock are entitled to vote, the Depositary will mail the information contained
in such notice of meeting to the record holders of the Depositary Shares
relating to such Preferred Stock. Each record holder of such Depositary Shares
on the record date (which will be the same date as the record date for the
Preferred Stock) will be entitled to instruct the Depositary as to the exercise
of the voting rights pertaining to the amount of the Preferred Stock represented
by such holder's Depositary Shares. The Depositary will endeavor, insofar as
practicable, to vote the amount of the Preferred Stock represented by such
Depositary Shares in accordance with such instructions, and the Company will
agree to take all reasonable action which may be deemed necessary by the
Depositary in order to enable the Depositary to do so. The Depositary will
abstain from voting shares of the Preferred Stock to the extent it does not
receive specific instructions from the holder of Depositary Shares representing
such Preferred Stock.
AMENDMENT AND TERMINATION OF THE DEPOSIT AGREEMENT
The form of Depositary Receipt evidencing the Depositary Shares and any
provision of the Deposit Agreement may at any time be amended by agreement
between the Company and the Depositary. However, any amendment which materially
and adversely alters the rights of the holders of Depositary Shares will not be
effective unless such amendment has been approved by the holders of at least a
majority of the Depositary Shares then outstanding. The Deposit Agreement will
only terminate if (i) all outstanding Depositary Shares have been redeemed or
(ii) there has been a final distribution in respect of the Preferred Stock,
including in connection with any liquidation, dissolution or winding up of the
Company and such distribution has been distributed to the holders of Depositary
Receipts.
RESIGNATION AND REMOVAL OF DEPOSITARY
The Depositary may resign at any time by delivering to the Company notice
of its election to do so, and the Company may at any time remove the Depositary,
any such resignation or removal to take effect upon the appointment of a
successor Depositary and its acceptance of such appointments. Such successor
Depositary must be appointed within 60 days after delivery of the notice of
resignation or removal and must be a bank or trust company having its principal
office in the United States and having a combined capital and surplus of at
least $500,000,000.
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CHARGES OF DEPOSITARY
The Company will pay all transfer and other taxes and governmental charges
arising solely from the existence of the depositary arrangements. The Company
will pay charges of the Depositary in connection with the initial deposit of the
Preferred Stock and the issuance of Depositary Receipts, all withdrawals of
shares of Preferred Stock by owners of the Depositary Shares and any redemption
of the Preferred Stock. Holders of Depositary Receipts will pay other transfer
and other taxes and governmental charges and such other charges as the Deposit
Agreement expressly provides to be for their accounts.
MISCELLANEOUS
The Depositary will forward all reports and communications from the Company
which are delivered to the Depositary and which the Company is required or
otherwise determines to furnish to the holders of the Preferred Stock.
Neither the Depositary nor the Company will be liable under the Deposit
Agreement to holders of Depositary Receipts other than for its gross negligence,
willful misconduct or bad faith. Neither the Company nor the Depositary will be
obligated to prosecute or defend any legal proceeding in respect of any
Depositary Shares or Preferred Stock unless satisfactory indemnity is furnished.
The Company and the Depositary may rely upon written advice of counsel or
accountants, or upon information provided by persons presenting Preferred Stock
for deposit, holders of Depositary Receipts or other persons believed to be
competent and on documents believed to be genuine.
RESTRICTIONS ON OWNERSHIP UNDER INSURANCE LAWS
Although the Certificate of Incorporation and By-laws of the Company do not
contain any provision restricting ownership of the Common Stock, under
applicable state insurance laws and regulations, no person may acquire control
of any of the insurance subsidiaries of the Company or any corporation
controlling such subsidiaries unless such person has filed a statement
containing specified information with appropriate regulatory authorities and
approval for such acquisition is obtained from such authorities. For example,
under the laws of the State of Connecticut, any person acquiring, directly by
stock ownership or indirectly by revocable proxy or otherwise, 10% or more of
the voting securities of any other person is presumed to have acquired control
of such person, and, as a result, any person who beneficially acquires 10% or
more of the voting securities of the Company's insurance company subsidiaries or
the Company without obtaining the approval of the Connecticut Insurance
Commissioner would be in violation of Connecticut's insurance holding company
laws and may be subject to injunctive action requiring disposition or seizure of
such shares of voting securities and prohibiting the voting of such shares, as
well as other action determined by the applicable regulatory authority. The
application of such state insurance laws may be a deterrent to any person
proposing to acquire control of the Company, particularly in a hostile
transaction.
CERTAIN PROVISIONS OF THE
CERTIFICATE OF INCORPORATION AND
BY-LAWS OF THE COMPANY
TRANSACTIONS WITH INTERESTED PARTIES
The Company's Certificate of Incorporation includes certain provisions
addressing potential conflicts of interest between the Company and The Hartford
and regulating and defining the conduct of certain affairs of the Company as
they may involve The Hartford and its subsidiaries, directors and officers. The
Certificate of Incorporation provides that no contract, agreement, arrangement
or transaction (or amendment, modification or termination thereof) between the
Company and The Hartford or any of its subsidiaries (other than the Company and
its subsidiaries) or between the Company and any entity in which any of the
Company's directors has a financial interest (a "Related Entity"), or between
the Company and any director or officer of the Company, The Hartford or any
subsidiary of the Company or The Hartford or any Related Entity will be void or
voidable for the reason that The Hartford or any subsidiary thereof, Related
Entity or any director or officer of the
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Company, The Hartford or any subsidiary of the Company or The Hartford or any
Related Entity is a party thereto, or because any such director or officer is
present at, participates in or votes at a meeting of the Board of Directors or a
committee thereof which authorizes such contract, agreement, arrangement or
transaction (or amendment, modification or termination thereof), if:
(i) the material facts as to such contract, agreement, arrangement or
transaction (or amendment, modification or termination thereof) are
disclosed or are known to the Board of Directors or the committee thereof
that authorizes such contract, agreement, arrangement or transaction (or
amendment, modification or termination thereof) and the Board of Directors
or such committee in good faith authorizes, approves or ratifies such
contract, agreement, arrangement or transaction (or amendment, modification
or termination thereof) by the affirmative vote of a majority of the
Disinterested Directors (as defined below), even though the number of
Disinterested Directors voting may be less than a quorum;
(ii) the material facts as to such contract, agreement, arrangement or
transaction (or amendment, modification or termination thereof) are
disclosed or are known to the holders of Common Stock entitled to vote
thereon, and the contract, agreement, arrangement or transaction (or
amendment, modification or termination thereof) is specifically approved or
ratified in good faith by a majority of the votes entitled to be cast by
all then outstanding shares of Common Stock present in person or
represented by proxy and not owned by The Hartford or any subsidiary
thereof or a Related Entity, as the case may be; or
(iii) such contract, agreement, arrangement or transaction (or
amendment, modification or termination thereof) is fair to the Company at
the time it is authorized, approved or ratified by the Board of Directors,
a committee thereof or the stockholders of the Company.
For purposes hereof, "Disinterested Directors" means the directors of the
Company who are not (i) officers of either the Company or The Hartford or any of
their respective subsidiaries or (ii) directors of The Hartford or any
subsidiary thereof (other than the Company).
CORPORATE OPPORTUNITIES
The Certificate of Incorporation further provides that, subject to any
contract to which the Company is a party and subject to applicable law, The
Hartford or any subsidiary thereof (other than the Company and any subsidiary
thereof) will have the right to: (i) engage in the same or similar business
activities or lines of business as the Company or any subsidiary thereof; (ii)
do business with any client or customer of the Company or any subsidiary
thereof; and (iii) employ or otherwise engage any officer or employee of the
Company or any subsidiary thereof. In addition, in the event that The Hartford
or any of its subsidiaries (other than the Company and its subsidiaries) or the
Company or any of its subsidiaries acquires knowledge of a potential transaction
or matter that may be a corporate opportunity for both The Hartford and the
Company, such person shall have no duty, other than pursuant to the laws of the
State of Delaware, to communicate or present such corporate opportunity to the
Company or The Hartford, as applicable.
CERTAIN AMENDMENTS TO THE CERTIFICATE OF INCORPORATION
Until The Hartford ceases to beneficially own, directly or indirectly, more
than 20% of the number of outstanding shares of Common Stock, the Certificate of
Incorporation requires the affirmative vote of the holders of 80% or more of the
combined voting power of the Common Stock then outstanding, voting together as a
single class, to alter, amend or repeal, or adopt any provision of the
Certificate of Incorporation which is inconsistent with, any provision of the
Certificate of Incorporation (whether directly or indirectly through any merger
of the Company with any other entity) relating to transactions with interested
parties and corporate opportunities (each as described above), as well as the
provision requiring such an 80% vote to effect such an alteration, amendment,
repeal or adoption. Thereafter, under the General Corporation Law of the State
of Delaware (the "DGCL"), an affirmative vote of 50% or more of the combined
voting power of the Common Stock then outstanding would be required to effect
such an alteration, amendment, repeal or adoption. Accordingly, so long as The
Hartford beneficially owns more than 20% of the number of
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outstanding shares of Common Stock, it can prevent any such alteration,
amendment, repeal or adoption.
In addition, the Certificate of Incorporation requires the affirmative vote
of the holders of at least 80% of the combined voting power of all the then
outstanding shares of Common Stock, voting together as a single class, to alter,
amend or repeal, or adopt any provision of the Certificate of Incorporation
(whether directly or indirectly through any merger of the Company with any other
entity) which is inconsistent with, any provision of the Certificate of
Incorporation relating to the classification of the Board of Directors, the
filling of vacancies on the Board of Directors, the prohibition on the taking of
actions by stockholders by written consent in lieu of a meeting and the calling
of a special meeting of stockholders, as well as the provision requiring such an
80% vote to effect such an alteration, amendment, repeal or adoption.
POTENTIAL LIMITS ON CHANGE OF CONTROL
Certain provisions of the Certificate of Incorporation and By-laws may
delay, defer or prevent a tender offer, proxy contest or other takeover attempt
involving the Company. It is believed that such provisions will enable the
Company to develop its business in a manner that will foster its long-term
growth without disruption caused by the threat of a takeover not deemed by its
Board of Directors to be in the best interests of the Company and its
stockholders. In addition, these provisions also are intended to ensure that the
Board of Directors will have sufficient time to act in what the Board of
Directors believes to be in the best interests of the Company and its
stockholders. However, such provisions could have the effect of making it more
difficult for a third party to undertake, or discouraging a third party from
undertaking, an unsolicited takeover bid or otherwise attempting to obtain
control of the Company or the Board of Directors, although such proposals, if
made, might be considered desirable by a majority of the Company's stockholders.
Such provisions also may have the effect of making it more difficult for third
parties to cause the replacement of the current management of the Company
without the concurrence of the Board of Directors. These provisions include (i)
the availability of shares of Preferred Stock for issuance from time to time at
the discretion of the Board of Directors; (ii) prohibitions against stockholders
calling a special meeting of stockholders or acting by written consent in lieu
of a meeting; (iii) the classification of the Board of Directors into three
classes, each of which will serve for different three-year periods; (iv) a
requirement, pursuant to Section 141 of the DGCL, that, due to the
classification of the Board of Directors, directors of the Company may only be
removed for cause; (v) a requirement that certain provisions of the Certificate
of Incorporation may be amended only with the approval of the holders of at
least 80% of the combined voting power of the Common Stock then outstanding;
(vi) requirements for advance notice for raising business or making nominations
at stockholders' meetings; and (vii) the ability of the Board of Directors to
increase the size of the board and to appoint directors to fill newly created
directorships. The Hartford, as owner of more than 80% of the combined voting
power of all classes of voting stock, could sell or otherwise dispose of a
substantial portion of its holdings and still be able to block any tender offer,
proxy contest or other takeover attempt by any third party and certain other
material transactions and matters.
LIMITATION ON LIABILITY
To the fullest extent permitted by applicable law as then in effect, no
director of the Company shall be personally liable to the Company or any of its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
Company or its stockholders; (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law; (iii) under
Section 174 of the DGCL; or (iv) for any transaction from which the director
derived an improper personal benefit.
While the Certificate of Incorporation provides directors with protection
from awards for monetary damages for breaches of their duty of care, it does not
eliminate such duty. Accordingly, the Certificate of Incorporation should have
no effect on the availability of equitable remedies such as an injunction or
recission based on a director's breach of his or her duty of care and does not
eliminate or limit a director's liability arising in connection with causes of
action brought under the
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federal securities laws. This provision, however, may discourage or deter
stockholders or management from bringing a lawsuit against a director for a
breach of his or her fiduciary duty, though such an action, if successful, might
otherwise have benefited the Company and its stockholders.
The By-laws provide that the Company, to the fullest extent permitted by
applicable law as then in effect, will indemnify any person who was or is
involved in any manner or is threatened to be made so involved in any
threatened, pending or completed investigation, claim, action, suit or
proceeding, by reason of the fact that such person was or is a director,
officer, employee or agent of the Company or was or is serving at the request of
the Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against all expenses,
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such investigation, claim, action, suit or
proceeding. To receive such indemnification under the DGCL as currently in
effect, such a person must have been successful in such investigation, claim,
action, suit or proceeding or acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the
Company.
DELAWARE STATUTE
The Company is a Delaware corporation subject to Section 203 of the DGCL.
Section 203 provides that, subject to certain exceptions specified therein, a
corporation may not engage in any business combination, including mergers or
consolidations or acquisitions of assets or additional shares of the
corporation, with any "interested stockholder" for a period of three years
following the time that such stockholder became an interested stockholder unless
(i) prior to such time, the board of directors of the corporation approved
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder, (ii) upon consummation of the
transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the time the transaction commenced (excluding
certain shares) or (iii) on or subsequent to such time, the business combination
is approved by the board of directors of the corporation and authorized at an
annual or special meeting of stockholders, and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding voting stock which is
not owned by the interested stockholder. Except as otherwise specified in
Section 203 of the DGCL, an "interested stockholder" is defined to include (x)
any person that is the owner of 15% or more of the outstanding voting stock of
the corporation or is an affiliate or associate of the corporation and was the
owner of 15% or more of the outstanding voting stock of the corporation at any
time within the three-year period immediately prior to the relevant date and (y)
the affiliates and associates of any such person. Under certain circumstances,
Section 203 of the DGCL makes it more difficult for an interested stockholder to
effect various business combinations with a corporation for the above-referenced
three-year period, although the stockholders may elect to exclude a corporation
from the restrictions imposed thereunder. By virtue of its beneficial ownership
of the Class B Common Stock, The Hartford is in a position to elect to exclude
the Company from the restrictions under Section 203 of the DGCL, although it
currently has no intention to do so.
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PLAN OF DISTRIBUTION
The Company may sell any of the Offered Securities being offered hereby in
any one or more of the following ways from time to time: (i) through agents;
(ii) to or through underwriters; (iii) through dealers; and (iv) directly by the
Company to purchasers.
The distribution of the Offered Securities may be effected from time to
time in one or more transactions at a fixed price or prices, which may be
changed, at market prices prevailing at the time of sale, at prices related to
such prevailing market prices or at negotiated prices.
Offers to purchase Offered Securities may be solicited by agents designated
by the Company from time to time. Any such agent involved in the offer or sale
of the Offered Securities in respect of which this Prospectus is delivered will
be named, and any commissions payable by the Company to such agent will be set
forth, in the applicable Prospectus Supplement. Unless otherwise indicated in
such Prospectus Supplement, any such agent will be acting on a reasonable best
efforts basis for the period of its appointment. Any such agent may be deemed to
be an underwriter, as that term is defined in the Securities Act, of the Offered
Securities so offered and sold.
If Offered Securities are sold by means of an underwritten offering, the
Company will execute an underwriting or pricing agreement with an underwriter or
underwriters at the time an agreement for such sale is reached, and the names of
the specific managing underwriter or underwriters, as well as any other
underwriters, and the terms of the transaction, including commissions, discounts
and any other compensation of the underwriters and dealers, if any, will be set
forth in the Prospectus Supplement which will be used by the underwriters to
make resales of the Offered Securities in respect of which this Prospectus is
being delivered to the public. If underwriters are utilized in the sale of any
Offered Securities in respect of which this Prospectus is being delivered, such
Offered Securities will be acquired by the underwriters for their own account
and may be resold from time to time in one or more transactions, including
negotiated transactions, at fixed public offering prices or at varying prices
determined by the underwriters at the time of sale. Offered Securities may be
offered to the public either through underwriting syndicates represented by
managing underwriters or directly by the managing underwriters. If any
underwriter or underwriters are utilized in the sale of the Offered Securities,
unless otherwise indicated in the Prospectus Supplement, the underwriting or
pricing agreement will provide that the obligations of the underwriters are
subject to certain conditions precedent and that the underwriters with respect
to a sale of Offered Securities will be obligated to purchase all such Offered
Securities if any are purchased.
If a dealer is utilized in the sale of the Offered Securities in respect of
which this Prospectus is delivered, the Company will sell such Offered
Securities to the dealer as principal. The dealer may then resell such Offered
Securities to the public at varying prices to be determined by such dealer at
the time of resale. Any such dealer may be deemed to be an underwriter, as such
term is defined in the Securities Act, of the Offered Securities so offered and
sold. The name of the dealer and the terms of the transaction will be set forth
in the Prospectus Supplement relating thereto.
Offers to purchase Offered Securities may be solicited directly by the
Company and the sale thereof may be made by the Company directly to
institutional investors or others, who may be deemed to be underwriters within
the meaning of the Securities Act with respect to any resale thereof. The terms
of any such sale will be described in the Prospectus Supplement relating
thereto.
Offered Securities may also be offered and sold, if so indicated in the
applicable Prospectus Supplement, in connection with the remarketing upon their
purchase, in accordance with a redemption or repayment pursuant to their terms,
or otherwise, by one or more firms ("remarketing firms"), acting as principals
for their own accounts or as agents for the Company. Any remarketing firm will
be identified and the terms of its agreement, if any, with the Company and its
compensation will be described in the applicable Prospectus Supplement.
Remarketing firms may be deemed to be underwriters, as that term is defined in
the Securities Act, in connection with the Offered Securities remarketed
thereby.
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If so indicated in the applicable Prospectus Supplement, the Company may
authorize agents and underwriters to solicit offers by certain institutions to
purchase Offered Securities from the Company at the public offering price set
forth in the Prospectus Supplement pursuant to delayed delivery contracts
providing for payment and delivery on the date or dates stated in the applicable
Prospectus Supplement. Such delayed delivery contracts will be subject to only
those conditions set forth in the applicable Prospectus Supplement. A commission
indicated in the applicable Prospectus Supplement will be paid to underwriters
and agents soliciting purchases of Offered Securities pursuant to delayed
delivery contracts accepted by the Company.
Agents, underwriters, dealers and remarketing firms may be entitled under
relevant agreements with the Company to indemnification by the Company against
certain liabilities, including liabilities under the Securities Act, or to
contribution with respect to payments which such agents, underwriters, dealers
and remarketing firms may be required to make in respect thereof.
Each series of Offered Securities will be a new issue with no established
trading market. The Company may elect to list any series of Offered Securities
on an exchange, but, unless otherwise specified in the applicable Prospectus
Supplement, the Company shall not be obligated to do so. It is possible that one
or more underwriters may make a market in a series of Offered Securities, but
will not be obligated to do so and may discontinue any market making at any time
without notice. Therefore, no assurance can be given as to the liquidity of the
trading market for any of the Offered Securities.
Agents, underwriters, dealers, and remarketing firms may be customers of,
engage in transactions with, or perform services for, the Company and its
subsidiaries in the ordinary course of business.
LEGAL OPINIONS
Unless otherwise indicated in the applicable Prospectus Supplement, the
validity of any Offered Securities offered hereby will be passed upon for the
Company by Lynda Godkin, General Counsel of the Company, and for any
underwriters or agents by counsel to be named in the applicable Prospectus
Supplement.
EXPERTS
The audited consolidated financial statements and financial statement
schedules of the Company and its subsidiaries as of December 31, 1996 and 1995,
and for each of the years in the three-year period ended December 31, 1996,
incorporated by reference herein to the Company's Form 10, have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, which are incorporated herein by reference to the
Company's Form 10 and have been so incorporated in reliance upon the authority
of said firm as experts in giving said reports. Reference is made to said
reports which include an explanatory paragraph with respect to the change in the
method of accounting for debt and equity securities as of January 1, 1994, as
discussed in Note 2 of notes to consolidated financial statements.
23
124
=======================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES OTHER THAN THE SECURITIES DESCRIBED IN THIS PROSPECTUS
SUPPLEMENT OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE OF THIS
PROSPECTUS SUPPLEMENT OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO ITS DATE.
------------------
TABLE OF CONTENTS
PAGE
-----
PROSPECTUS SUPPLEMENT
Prospectus Summary................... S-3
Certain Factors Affecting the Company
and the Insurance Industry......... S-9
Company Financing Plan............... S-10
Capitalization....................... S-11
Use of Proceeds...................... S-12
Selected Consolidated Financial
Data............................... S-13
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... S-17
Business............................. S-42
Certain Relationships and
Transactions....................... S-78
Description of the Securities........ S-87
Validity of Securities............... S-88
Certain United States Federal Income
Tax Considerations................. S-89
Underwriting......................... S-93
Glossary of Selected Insurance and
Other Terms........................ G-1
PROSPECTUS
Available Information................ 2
Incorporation of Certain Documents by
Reference.......................... 2
The Company.......................... 3
Use of Proceeds...................... 3
Ratio of Earnings to Fixed Charges
and Combined Fixed Charges and
Preferred Stock Dividends.......... 4
Description of Debt Securities....... 4
Description of Capital Stock......... 14
Certain Provisions of the Certificate
of Incorporation and By-Laws of the
Company............................ 18
Plan of Distribution................. 22
Legal Opinions....................... 23
Experts.............................. 23
=======================================================
=======================================================
$650,000,000
HARTFORD LIFE, INC.
------------------------
PROSPECTUS SUPPLEMENT
------------------------
$200,000,000 % NOTES
DUE , 2004
GOLDMAN, SACHS & CO.
A.G. EDWARDS & SONS, INC.
NATIONSBANC CAPITAL MARKETS, INC.
PAINEWEBBER INCORPORATED
SALOMON BROTHERS INC
$200,000,000 % NOTES
DUE , 2007
GOLDMAN, SACHS & CO.
BANCAMERICA SECURITIES, INC.
CHASE SECURITIES INC.
FIRST CHICAGO CAPITAL MARKETS, INC.
$250,000,000 % DEBENTURES
DUE , 2027
GOLDMAN, SACHS & CO.
CITICORP SECURITIES, INC.
CREDIT SUISSE FIRST BOSTON
LEHMAN BROTHERS
J.P. MORGAN & CO.
=======================================================
125
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all the expenses in connection with the
issuance and distribution of the Offered Securities being registered, other than
underwriting discounts and commissions. All the amounts shown are estimates,
except the Commission registration fee.
Commission Registration Fee............................................. $ 303,031
Accounting Fees and Expenses............................................ 30,000
Legal Fees and Expenses................................................. 220,000
Printing Expenses....................................................... 270,000
Rating Agency Fees...................................................... 280,000
Trustee Fees and Expenses............................................... 60,000
Miscellaneous........................................................... 236,969
--------
Total......................................................... $1,400,000
========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware (the
"DGCL") provides that a Delaware corporation may indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of such corporation), by
reason of the fact that any such person is or was a director, officer, employee
or agent of such corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise. The indemnity may include
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding, provided that such officer or director acted in
good faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful. A Delaware corporation may indemnify officers and
directors against expenses (including attorneys' fees) in connection with the
defense or settlement of an action by or in the right of the corporation under
the same conditions, except that no indemnification is permitted without
judicial approval if the officer or director is adjudged to be liable to the
corporation. Where an officer or director is successful on the merits or
otherwise in the defense of any action referred to above, the corporation must
indemnify him or her against the expenses (including attorney's fees) which such
officer or director actually and reasonably incurred. The foregoing description
is qualified in its entirety by reference to the more detailed provisions of
Section 145 of the DGCL.
Article 4 of the Company's Restated By-laws provides in terms similar to
those of Section 145 of the DGCL that the Company shall have the power and shall
be required to indemnify its officers and directors in accordance with such law.
As permitted by Section 102(b)(7) of the DGCL, Article Eleventh of the
Company's Restated Certificate of Incorporation states that:
To the fullest extent permitted by applicable law as then in effect,
no director shall be personally liable to the Corporation or any of its
stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the Corporation or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the
II-1
126
General Corporation Law of the State of Delaware or (iv) for any
transaction from which the director derived an improper personal benefit.
Any repeal or modification of this ARTICLE ELEVENTH by the stockholders of
the Corporation shall not adversely affect any right or protection of a
director of the Corporation existing at the time of such repeal or
modification with respect to acts or omissions occurring prior to such
repeal or modification.
The form of Underwriting Agreement filed as Exhibit 1.1 to this
Registration Statement provides for indemnification of the Registrant and
certain controlling persons under certain circumstances against certain
liabilities, including liabilities under the Securities Act of 1933.
ITEM 16. EXHIBITS
1.1 Proposed form of Underwriting Agreement General Terms and Conditions.
4.1 Restated Certificate of Incorporation of Hartford Life, Inc.
(incorporated by reference to the Company's Registration Statement on
Form S-1 (Registration No. 333-21459)).
4.2 By-Laws of Hartford Life, Inc. (incorporated by reference to the
Company's Registration Statement on Form S-1 (Registration No.
333-21459)).
4.3 Senior Indenture, dated as of May 19, 1997, between the Company and
Citibank, N.A., as Trustee.**
4.4 Form of Subordinated Indenture.*
4.5 Form of Depositary Receipt.*
4.6 Form of Deposit Agreement.*
5.1 Opinion of Lynda Godkin, Esq.**
12.1 Statement re: Computation of Ratio of Earnings to Fixed Charges.**
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Lynda Godkin, Esq. (included in Exhibit 5.1).**
23.3 Consent of Ramani Ayer.**
23.4 Consent of Donald R. Frahm.**
23.5 Consent of Paul G. Kirk, Jr.**
23.6 Consent of H. Patrick Swygert.**
23.7 Consent of DeRoy C. Thomas.**
23.8 Consent of Gordon I. Ulmer.**
23.9 Consent of David K. Zwiener.**
24.1 Powers of Attorney.**
25.1 Form T-1 Statement of Eligibility and Qualification under the Trust
Indenture Act of 1939 of Citibank, N.A., as Trustee for the Senior Debt
Securities.**
II-2
127
25.2 Form T-1 Statement of Eligibility and Qualification under the Trust
Indenture Act of 1939 of the Subordinated Trustee, as Trustee for the
Subordinated Debt Securities.*
- ---------------
* To be filed by amendment or by a report on Form 8-K pursuant to Item 601 of
Regulation S-K.
** Previously filed.
ITEM 17. UNDERTAKINGS
(a) Rule 415 offering.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of Offered Securities (if the total
dollar value of Offered Securities would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration Statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if
the information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed by the Registrant
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of
1934 that are incorporated by reference in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) Filings incorporating subsequent Exchange Act documents by reference.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in the Registration
Statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-3
128
(h) Request for acceleration of effective date.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(i) Rule 430A registration statement.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(j) Qualification of trust indentures under the Trust Indenture Act of 1939
for delayed offerings.
The undersigned Registrant hereby undertakes to file an application for the
purpose of determining the eligibility of the trustee to act under subsection
(a) of Section 310 of the Trust Indenture Act ("Act") in accordance with the
rules and regulations prescribed by the Commission under Section 305(b)(2) of
the Act.
OTHER
The Registrant hereby states that it reasonably believes that the Offered
Securities being registered hereunder will be "investment grade securities" (as
defined in General Instruction I.B.2. of Form S-3) by the time of sale of such
securities.
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129
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment No. 3 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Simsbury, State of Connecticut, on
June 9, 1997.
HARTFORD LIFE, INC.
By /s/ LYNDA GODKIN
------------------------------------
Name: Lynda Godkin
Title: Vice President and General
Counsel
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
SIGNATURE TITLE DATE
* Chief Executive Officer, June 9, 1997
- ------------------------------------------ President and Director (Principal
Lowndes A. Smith Executive Officer)
* Senior Vice President, Chief June 9, 1997
- ------------------------------------------ Financial Officer and Treasurer
Gregory A. Boyko (Principal Financial and
Accounting Officer)
* Director June 9, 1997
- ------------------------------------------
Ramani Ayer
* Director June 9, 1997
- ------------------------------------------
Donald R. Frahm
* Director June 9, 1997
- ------------------------------------------
Paul G. Kirk, Jr.
* Director June 9, 1997
- ------------------------------------------
H. Patrick Swygert
* Director June 9, 1997
- ------------------------------------------
DeRoy C. Thomas
* Director June 9, 1997
- ------------------------------------------
Gordon I. Ulmer
* Director June 9, 1997
- ------------------------------------------
David K. Zwiener
*By /s/ LYNDA GODKIN
- ------------------------------------------
Lynda Godkin, Attorney-in-Fact
130
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
1.1 Proposed form of Underwriting Agreement General Terms and Conditions.
4.1 Restated Certificate of Incorporation of Hartford Life, Inc.
(incorporated by reference to the Company's Registration Statement on
Form S-1 (Registration No. 333-21459)).
4.2 By-Laws of Hartford Life, Inc. (incorporated by reference to the
Company's Registration Statement on Form S-1 (Registration No.
333-21459)).
4.3 Senior Indenture, dated as of May 19, 1997, between the Company and
Citibank, N.A., as Trustee.**
4.4 Form of Subordinated Indenture.*
4.5 Form of Depositary Receipt.*
4.6 Form of Deposit Agreement.*
5.1 Opinion of Lynda Godkin, Esq.**
12.1 Statement re: Computation of Ratio of Earnings to Fixed Charges.**
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Lynda Godkin, Esq. (included in Exhibit 5.1).**
23.3 Consent of Ramani Ayer.**
23.4 Consent of Donald R. Frahm.**
23.5 Consent of Paul G. Kirk, Jr.**
23.6 Consent of H. Patrick Swygert.**
23.7 Consent of DeRoy C. Thomas.**
23.8 Consent of Gordon I. Ulmer.**
23.9 Consent of David K. Zwiener.**
24.1 Powers of Attorney.**
25.1 Form T-1 Statement of Eligibility and Qualification under the Trust
Indenture Act of 1939 of Citibank, N.A., as Trustee for the Senior Debt
Securities.**
25.2 Form T-1 Statement of Eligibility and Qualification under the Trust
Indenture Act of 1939 of the Subordinated Trustee, as Trustee for the
Subordinated Debt Securities.*
- ---------------
* To be filed by amendment or by a report on Form 8-K pursuant to Item 601 of
Regulation S-K.
** Previously filed.