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FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission file number 1-12749
HARTFORD LIFE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1470915
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
200 HOPMEADOW STREET, SIMSBURY, CONNECTICUT 06089
(Address of principal executive offices)
(860) 843-7716
(Registrant's telephone number, including area code)
Securities registered pursuant to section 12(b) of the Act: the following, which
is registered on the New York Stock Exchange, Inc.:
Class A Common Stock, par value $0.01 per share
Securities registered pursuant to Section 12 (g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of February 27, 1998, there were outstanding 25,990,382 shares of Class A
Common Stock, $0.01 par value per share, and 114,000,000 of Class B Common
Stock, $0.01 per share, of the registrant. The aggregate market value of the
shares of the registrant's common equity held by non-affiliates of the
registrant was $1,113,923,187 based on the closing price of $43.06 per share of
the Class A Common Stock on the New York Stock Exchange on February 27, 1998.
Documents Incorporated by Reference:
Portions of the Registrant's definitive proxy statement for its 1998 annual
meeting of shareholders are incorporated by reference in Part III of this Form
10-K.
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[HARTFORD LIFE HARTFORD LIFE, INC. AND ITS SUBSIDIARIES ("HARTFORD
ARTWORK (ELK)] LIFE") IS A LEADING INSURANCE AND FINANCIAL SERVICES
ORGANIZATION PROVIDING PRE-RETIREMENT SAVINGS, ESTATE
PLANNING, EMPLOYEE BENEFITS AND MUTUAL FUND PRODUCTS.
A MAJORITY OWNED SUBSIDIARY OF THE HARTFORD FINANCIAL
SERVICES GROUP, INC., HARTFORD LIFE IS THE NATION'S
LARGEST WRITER OF INDIVIDUAL ANNUITIES AND A TOP
PROVIDER OF BOTH INDIVIDUAL LIFE INSURANCE AND
EMPLOYEE BENEFITS.
CONTENTS
ITEM DESCRIPTION PAGE
PART I 1 Business of Hartford Life 2
2 Properties 11
3 Legal Proceedings 11
4 Submission of Matters to a Vote of Security Holders 11
PART II 5 Market for Hartford Life's Common Stock and Related
Stockholder Matters 11
6 Selected Financial Data 12
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
7A Quantitative and Qualitative Disclosures About
Market Risk 32
8 Financial Statements and Supplementary Data 32
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 32
PART III 10 Directors and Executive Officers of Hartford Life 32
11 Executive Compensation 32
12 Security Ownership of Certain Beneficial Owners and
Management 33
13 Certain Relationships and Related Transactions 33
PART IV 14 Exhibits, Financial Statements, Schedules and Reports
on Form 8-K 33
Signatures II-1
Exhibits Index II-2
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PART I
ITEM 1. BUSINESS OF HARTFORD LIFE
(DOLLAR AMOUNTS IN MILLIONS EXCEPT FOR SHARE DATA UNLESS OTHERWISE STATED)
GENERAL
Hartford Life, Inc. and its subsidiaries ("Hartford Life" or the "Company"), an
indirect subsidiary of The Hartford Financial Services Group, Inc. ("The
Hartford"), is headquartered in Simsbury, Connecticut, and is a leading
insurance and financial services company. Hartford Life provides (i) annuity
products, such as individual variable annuities and fixed market value adjusted
("MVA") annuities, deferred compensation and retirement plan services and mutual
funds for savings and retirement needs to over 1 million customers, (ii) life
insurance for income protection and estate planning to approximately 500,000
customers and (iii) employee benefits products such as group life and group
disability insurance for the benefit of over 15 million individuals. According
to the latest publicly available data, with respect to the United States, the
Company is the largest writer of both total individual annuities and individual
variable annuities based on sales for the year ended December 31, 1997, the
sixth largest consolidated life insurance company based on statutory assets as
of December 31, 1996, and the second largest writer of group long-term
disability insurance based on premiums written for the nine months ended
September 30, 1997. The Company's strong position in each of its core businesses
provides an opportunity to increase the sale of Hartford Life's products and
services as individuals increasingly save and plan for retirement, protect their
families against disability or death and prepare their estates for an efficient
transfer of wealth between generations.
The Company strives to maintain and enhance its position as a market leader
within the financial services industry and to maximize shareholder value. The
Company has pursued a strategy of selling diverse and innovative products
through multiple distribution channels, achieving cost efficiencies through
economies of scale and improved technology, maintaining effective risk
management and prudent underwriting techniques and capitalizing on its brand
name and customer recognition of The Hartford Stag Logo, one of the most
recognized symbols in the financial services industry. In the past year, the
Company's total assets increased 26% to $101 billion and stockholders' equity
was $2.1 billion as of December 31, 1997. In addition, Hartford Life generated
$4.7 billion in revenues and $306 in net income in 1997.
Distribution
Hartford Life utilizes a multiple channel distribution network which provides a
distinct competitive advantage in selling products and services to a broad
cross-section of customers throughout varying economic and market cycles. In
particular, the Company has developed an extensive network of banks and
broker-dealers, which is one of the largest in the industry, including over
1,350 national and regional broker-dealers and approximately 450 banks. This
broad network has enabled the Company to introduce new products and services in
an effective manner and allows the Company significant opportunity to access its
customer base. Hartford Life sells fixed MVA annuities, variable annuities,
mutual funds, single premium variable life insurance, and retirement plan
services through its broker-dealer and bank distribution systems.
Products
Hartford Life provides its customers an innovative and diverse mix of products
and services directed at serving people's needs throughout the different stages
of their lives and during varying economic cycles. The Company offers a variety
of variable and fixed MVA annuity products with funds managed both internally
and by several outside money managers including Wellington Management Co., LLP
("Wellington") and Putnam Financial Services, Inc. ("Putnam"). The Company
regularly introduces new and innovative products and services to the market. For
example, Hartford Life was the leader in developing and marketing fixed
annuities with an MVA feature which protects the Company from losses due to
higher interest rates in the event of early surrender. The Company was also a
leader in the introduction of a "managed disability" approach to the group
disability insurance market, which focuses on early claimant intervention in an
effort to facilitate a claimant's return to work and to contain costs.
Customer Service, Technology and Economies of Scale
Hartford Life has achieved advantageous economies of scale and operating
efficiencies due to its growth, attention to expense management and commitment
to customer service and technology. These advantages allow the Company to
competitively price its products for its distribution network and policyholders.
The Company has been able to reduce its individual annuity operating expenses as
a percentage of total individual annuity account value to 25 basis points in
1997 from 28 basis points in 1996 and 31 basis points in 1995. In addition, the
Company utilizes computer technology to enhance communications within the
Company and throughout its distribution network in order to improve the
Company's efficiency in marketing, selling, and servicing its products and as a
result provides high-quality customer service. The Company was recently awarded,
for the second consecutive year, one of the six Quality Tested Service Seals
given by DALBAR Inc., a recognized independent research organization. This award
was also given to one of the Company's strategic partners, Putnam, for the
Putnam Capital Manager Variable Annuity, which is also
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administered through Hartford Life. The DALBAR award is given in recognition of
those organizations who achieve the highest tier of customer service in the
variable annuity industry.
Risk Management
Hartford Life's product designs, prudent underwriting standards, and risk
management techniques protect it against disintermediation risk and greater than
expected mortality and morbidity. As of December 31, 1997, the Company minimized
its exposure to risks associated with early surrender through liabilities which
were non-guaranteed, supported by policy loans, possessed market value
adjustments or surrender charges, or contained non-surrenderability provisions.
As a result, 99% of the Company's insurance liabilities were protected and 97%
of the Company's individual annuity account value was subject to surrender
charges. The Company also enforces disciplined claims management to protect
against greater than expected mortality and morbidity experience and regularly
monitors its underwriting, mortality and morbidity assumptions to determine if
experience remains consistent with assumptions and pricing.
Brand Name and Financial Strength
The Hartford Stag Logo is one of the most recognized symbols in the insurance
and financial services industry. This brand recognition, coupled with a strong
balance sheet and sound ratings, has enabled the Company to establish the
reputation and financial strength necessary to maintain distribution
relationships, enhance strategic alliances, and generate new customer sales.
Pursuant to a Master Intercompany Agreement with The Hartford, the Company has
been granted a perpetual non-exclusive license to use the Stag Logo in
connection with the sale of Hartford Life's products and services. However, in
the event that The Hartford reduces its beneficial ownership below 50% of the
combined voting power of the Company's then outstanding securities, the license
may be revoked upon the later of the fifth anniversary of the date of
consummation of the Company's Initial Public Offering ("IPO") of its Class A
Common Stock or one year after receipt by the Company of written notice of The
Hartford's intention to revoke the license.
BUSINESS SEGMENTS
Hartford Life operates in three principal business segments: Annuity, Individual
Life Insurance and Employee Benefits. The Company also maintains a Guaranteed
Investment Contracts segment, which is primarily comprised of guaranteed rate
contract business written prior to 1995 ("Closed Book GRC") and a Corporate
Operation through which it reports net investment income on assets representing
surplus not assigned to any of its business segments and certain other revenues
and expenses not specifically allocable to any of its business segments. The
following is a description of each segment, including a discussion of principal
products, methods of distribution, and competitive environments. Additional
information on Hartford Life's business segments may be found in the
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") on pages 13 to 18 and Note 17 of Notes to Consolidated
Financial Statements.
ANNUITY
The Annuity segment focuses on the savings and retirement needs of the growing
number of individuals who are preparing for retirement or have already retired.
The Company offers a variety of products within this segment, reflecting the
diverse nature of the market. These products include fixed and variable
annuities, certain deferred compensation and retirement plan services for
municipal governments and corporations, structured settlements, mutual funds,
investment management services and certain other financial products. The Annuity
segment distributes its products primarily through broker-dealers and financial
institutions for individual sales, and primarily through internal personnel of
the Company for institutional sales. Growth in the Company's assets over the
last several years has been driven primarily by its sales of variable annuities.
New sales and market appreciation, net of surrenders, have increased the Annuity
segment account value to $67.0 billion at December 31, 1997 from $50.8 billion
at December 31, 1996. The Annuity segment generated revenues of $1.3 billion and
$1.0 billion and net income of $202 and $145 in 1997 and 1996, respectively.
Individual Annuity
The Company is the market leader in the annuity industry and was the number one
writer of individual variable annuities for the years ended December 31, 1997
and 1996, with total individual annuity sales of $10.2 billion and $9.8 billion,
respectively. The Company sells both variable and fixed annuity products, with
single and flexible premium payment options, through a wide distribution network
of broker-dealers and other financial institutions. Individual variable annuity
sales were $9.7 billion and $9.3 billion in 1997 and 1996, respectively, and the
Company held an 11% market share as of December 31, 1997, according to
information compiled by Variable Annuity Research and Data Service ("VARDS"). In
each of the last two years, the Company has sold approximately 66% of its
individual annuities through broker-dealers and 34% of its individual annuities
through banks.
Individual annuity account value totaled $56.3 billion, with individual variable
annuity account value representing $46.9 billion which has grown significantly
from $9.7 billion at December 31, 1993. Approximately 92% of the individual
variable annuity
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account value was held in non-guaranteed separate accounts at December 31, 1997.
The Company earns fees for managing annuity assets (based on its account value)
and maintaining policyholder accounts, which totaled over 1 million as of
December 31, 1997. The Company's individual annuity products, principally
consisting of variable and fixed MVA annuities, generally are priced to earn an
after-tax margin of approximately 35 to 40 basis points on average total account
value and the Company has achieved such earnings in each of the past five years.
With respect to variable annuities, the Company uses specified portions of the
periodic premiums of a customer to purchase units in one or more mutual funds,
as directed by the customer, who then assumes the investment performance risks
and rewards. As a result, variable annuities permit policyholders to choose
aggressive or conservative investment strategies as they deem appropriate
without affecting the composition and quality of assets in the Company's general
account. These products offer the policyholder a variety of equity and fixed
income options. Deposits of varying amounts may be made at regular or irregular
intervals and the value of these assets fluctuates in accordance with the
investment performance of the funds selected by the policyholder. To encourage
persistency, the Company's individual annuities are subject to withdrawal
restrictions and surrender charges ranging initially from 6% to 7% of the
contract's face amount which reduce to zero on a sliding scale, usually within
seven policy years. The growth of the Company's individual variable annuity
account value has been considerable for the past several years, due to strong
sales, market appreciation and low levels of surrenders.
The assets underlying the Company's variable annuities are managed both
internally and by outside money managers, while the Company provides all policy
administration services. The Company utilizes a select group of money managers,
such as Wellington, Putnam, and Dean Witter InterCapital, Inc., who have an
interest in the continued growth in sales of the Company's products and greatly
enhance the marketability of its annuities and the strength of its product
offerings. Two of the industry's four leading variable annuities, The Director
and Putnam Capital Manager Variable Annuity (based on sales for the year ended
1997) are sponsored by Hartford Life and are managed in part by Wellington and
Putnam, respectively.
Fixed MVA annuities are fixed rate annuity contracts which guarantee a specific
sum of money will be paid in the future, either as a lump sum or as monthly
income. In the event that a policyholder surrenders a policy prior to the end of
the guarantee period, the MVA feature increases or decreases the cash surrender
value of the annuity in respect of any interest rate decreases or increases,
respectively, thereby protecting the Company from losses due to higher interest
rates at the time of surrender. The amount of payment will not fluctuate due to
adverse changes in the Company's investment return, mortality experience or
expenses. The Company's primary fixed MVA annuities have terms of one, three,
five, six, seven, eight, nine, or ten years with an average term of
approximately seven years. Account value of fixed MVA annuities have remained
stable at approximately $9.0 billion at December 31, 1997 and 1996.
In September 1996, the Company launched eight retail mutual funds. Six of these
funds are managed by Wellington and closely resemble the Company's Director
variable annuity equity funds. The other funds are managed by Hartford
Investment Management Company, a wholly owned subsidiary of The Hartford. The
Company has entered into agreements with over 400 financial services firms to
distribute these mutual funds. During 1997, the Company had mutual fund sales of
$869 bringing total mutual fund assets to $972 as of December 31, 1997. The fund
family was recognized as the fastest growing, non-proprietary mutual fund family
in 1997, according to Strategic Insight, an industry research association. In
addition, in January 1998, the fund family was also recognized as the fastest
non-proprietary mutual fund family to reach $1.0 billion in assets when it
reached that level in less than eighteen months of existence.
Group Annuity
The Company is among the top providers of retirement products and services,
including asset management and plan administration, to municipalities pursuant
to Section 457 of the Internal Revenue Code of 1986, as amended (the "Internal
Revenue Code"). The Company also provides products and services to plans created
under Section 401(k) and 403(b) of the Internal Revenue Code.
The Company presently administers approximately 900 Section 457 plans for
governmental entities. Traditionally, Section 457 plans have been held in the
Company's general account, but increasingly plan beneficiaries are transferring
assets into mutual funds held in separate accounts. The Company offers a number
of different funds, both fixed income and equity, to the employees in Section
457 plans. Generally, the Company manages the fixed income plans and certain
other outside money managers act as advisors to the equity funds offered in
Section 457 plans administered by the Company.
The Company also sells structured settlement contracts, which provide for
periodic payments to an injured person or survivor for a generally determinable
number of years typically in settlement of a claim under a liability policy in
lieu of a lump sum settlement. The Company's structured settlements are sold
through The Hartford's property-casualty insurance operations as well as
specialty brokers. The Company also markets other annuity contracts for special
purposes such as the funding of terminated defined benefit pension plans.
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Total sales in the Group Annuity area were $820 in 1997, and were primarily
responsible for the increase in account value to $10.7 billion as of December
31, 1997. Sales of Section 457 products were $151 in 1997 increasing Section 457
account value to $5.7 billion as of December 31, 1997. In addition, sales of
structured settlements and terminal funding products were $287 and $239 in 1997,
respectively.
Marketing and Distribution
The Company's individual annuity distribution network has been developed based
on management's strategy of utilizing multiple and competing distribution
channels in an effort to achieve the broadest distribution possible while
maintaining a variable cost structure. The success of the Company's marketing
and distribution system depends on its product offerings, fund performance,
successful utilization of external wholesaling organizations, relationships with
broker-dealers and banks (through which the sale of the Company's individual
annuities to customers is consummated) and quality of customer service.
The Company maintains a network of approximately 1,350 broker-dealers and
approximately 450 banks (including 23 of the 25 largest banks in the United
States) through the use of wholesaling organizations and strategic alliances.
The agreements covering these relationships have varying renewal and termination
provisions but generally provide for ongoing continuation unless one of the
parties elects otherwise or fails to reaffirm continuation on a periodic basis.
The Company also uses this distribution network to sell products other than
individual annuities, including single premium variable life products, Section
401(k) plan services and mutual funds. The Company also uses internal personnel
with extensive experience in the Section 457 market as well as access to the
Section 401(k) market, to sell its products and services in the deferred
compensation and retirement plan market.
Competition
The Annuity segment competes with numerous other insurance companies as well as
certain banks, securities brokerage firms, investments advisors and other
financial intermediaries marketing annuities, mutual funds and other
retirement-oriented products. Some of these companies have greater financial
strength and resources than Hartford Life. In particular, national banks may
become more significant competitors in the future for insurers who sell
annuities as a result of recent court decisions and regulatory actions. Product
sales are affected by competitive factors such as investment performance
ratings, product design, visibility in the marketplace, financial strength
ratings, distribution capabilities, levels of charges and credited rates,
reputation, and customer service. Also, since the Company does not have a career
agency force, competition also exists for distributors of its products. This
competition is primarily based on the variety and quality of products offered,
compensation, services provided to and relationships developed with
broker-dealers and other distributors.
INDIVIDUAL LIFE INSURANCE
The Individual Life Insurance segment sells a variety of products and the
Company's in force business primarily consists of variable life, universal life,
interest-sensitive whole life, and term life insurance products. The Company's
in force block also includes whole life, which was sold in prior years, and
modified guaranteed whole life, which was acquired from Fidelity Bankers Life
Insurance Company in 1993 and Pacific Standard Life Insurance Company in 1994.
In this segment, the Company focuses particularly on the high-end estate and
business planning markets and is among the top five writers of individual life
insurance based on average face value per policy. In addition, the Company is
among the top five writers of individual variable life for the nine months ended
September 30, 1997, based on the Tillinghast Value Variable Life Survey. Life
insurance in force increased to $55.4 billion from $52.1 billion at December 31,
1997 and 1996, respectively. New annualized weighted premiums were $140 in 1997,
an increase of $10, or 8% over prior year. Growth in sales was primarily
attributable to the Company's variable life product, which increased $23, or
31%, to $98 in 1997. The Individual Life segment generated revenues of $510, an
increase of $38, or 8%, over prior year and net income of $56 in 1997 as
compared to $44 in 1996. In addition, account values in this segment grew $555,
or 17%, to $3.8 billion as of December 31, 1997 due to strong sales of the
variable life product.
In 1997, variable life products represented 70% of new annualized weighted
premium for this segment. Variable life insurance provides a return linked to an
underlying portfolio and the Company allows policyholders to determine their
desired asset mix among a variety of underlying mutual funds. As the return on
the investment portfolio increases or decreases, as the case may be, the death
benefit or surrender value of the variable life policy may increase or decrease.
The Company's single premium variable life product provides a death benefit to
the policy beneficiary based on a single premium deposit. The Company's
second-to-die products are distinguished from other products in that two lives
are insured rather than one, and the policy proceeds are paid upon the second
death of the two insureds. Second-to-die policies are used in individual estate
planning, often to fund estate taxes for a married couple.
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Universal life and interest-sensitive whole life insurance coverages provide
life insurance with adjustable rates of return based on current interest rates.
The Company offers both flexible and fixed premium policies and provides
policyholders with flexibility in the available coverage, the timing and amount
of premium payments and the amount of the death benefit, provided there are
sufficient policy funds to cover all policy charges for the coming period.
Universal life and interest-sensitive whole life represented 24% of new
annualized premium sales of individual life insurance in 1997. The Company also
sells universal life insurance policies with a second-to-die feature similar to
that of the variable life insurance product offered.
The Company also offers individual term life insurance, but has had a limited
presence in that market. During 1997, the Company developed a new term insurance
product to sell through its bank and broker-dealer distribution channels.
Marketing and Distribution
The primary Individual Life Insurance distribution system is focused on products
designed for high-end estate and business planning. The high-end estate and
business planning organization is managed through a sales office system of
qualified life insurance professionals with specialized training in
sophisticated life insurance sales. These employees have access to an extensive
network of licensed life insurance agents. High-end sales also occur, in certain
regions, through a group of independent life insurance marketing organizations,
each of which maintains a separate marketing agreement with the Company. In
addition, other distribution relationships exist to provide incremental sales of
life insurance products for both estate planning and basic protection against
lost income from death. Furthermore, sales of single premium variable life are
generated through the individual annuity distribution system. During 1997, 61%
of total sales were produced by the sales office system, 11% resulted from the
individual annuity distribution system with the remaining 28% of sales generated
by other life insurance distribution relationships.
Competition
The Individual Life Insurance segment competes with over 2,000 life insurance
companies in the United States, as well as other financial intermediaries
marketing insurance products. Competitive factors related to this segment are
primarily the breadth and quality of life insurance products offered,
competitiveness of pricing, relationships with third-party distributors and the
quality of underwriting and customer service.
EMPLOYEE BENEFITS
The Employee Benefits segment consists of two areas of operation: (a) Group
Insurance and (b) Specialty Insurance Operations. The Company markets group
insurance products, including group life insurance, group short- and long-term
managed disability, stop loss and supplementary medical coverage to employers
and employer sponsored plans and accidental death and dismemberment, travel
accident and other special risk coverages to employers and associations. The
Company also offers disability underwriting, administration, claims processing
services and reinsurance to other insurers and self-funded employer plans. The
Specialty Insurance Operations unit consists of the Company's corporate owned
life insurance ("COLI") business and international operations in South America.
Group Insurance
The Company provides life, disability, and other group insurance coverage to
large and small employers across the United States. According to the latest
results published by the Life Insurance Marketing and Research Association
("LIMRA"), the Company is the second largest provider of group disability
insurance for the nine months ended September 30, 1997. The Company sells its
product line to employers through brokers and consultants and to multiple
employer groups through its relationships with trade associations. In the
disability market, the Company focuses on strong underwriting and claims
management to derive a competitive advantage. In the group insurance market, all
policies sold are term insurance, generally with one- or two-year rate
guarantees. This allows the Company to make adjustments in rate or terms of its
policies in order to minimize the adverse effect of various market trends. The
Group Insurance operation generated premiums of $1.5 billion in 1997 of which
$653 was attributable to group disability coverage and $504 was attributable to
group life coverage. Included in the 1997 results are group disability and group
life premiums of $88 and $16, respectively, related to the acquisition of a
block of business from the United States branch of Confederation Life Insurance
Company. At December 31, 1997, the Company's consolidated balance sheet included
disability reserves of $1.5 billion and group life reserves of $451. Group
Insurance net income increased $13 to $58 in 1997 as compared to 1996.
The Company is one of the largest participants in the "large case" market of the
group disability insurance business. The large case market, as defined by the
Company, generally consists of group disability policies covering over 1,000
employees in a particular company. The Company is continuing to expand its
operations in the "small" and "medium case" group markets emphasizing name
recognition and reputation as well as the Company's managed disability approach
to claims and administration. The Company's efforts in the group disability
market focus on early intervention, return-to-work programs, reduction of
long-term disability claims,
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and successful rehabilitation. The Company also works with disability claimants
to improve the receipt rate of Social Security offsets (i.e. reducing payment of
benefits by the amount of Social Security payments received).
The Company has concentrated on a managed disability approach, which emphasizes
early claimant intervention in an effort to facilitate a disabled claimant's
return to work and thereby contain costs. This approach, coupled with an
individualized approach to claim servicing, and an incentive to contain costs,
leads to an overall reduction in the cost of disability coverage for employers.
The Company's short-term disability benefit plans provide a weekly benefit
amount (typically 60% to 70% of the employee's earned income up to a specified
maximum benefit) to insured employees when they are unable to work due to an
accident or illness. Long-term disability insurance provides a monthly benefit
for those periods of time not covered by a short-term disability benefits plan
when insured employees are unable to work due to disability. Employees may
receive total or partial disability benefits. Most of these policies usually
begin providing benefits following a 90- or 180-day waiting period and continue
providing benefits until the employee reaches age 65-70. Long-term disability
benefits are paid monthly and are limited to a portion, generally 50-70%, of the
employee's earned income up to a specified maximum benefit.
Group term life insurance provides term coverage to employees and their
dependents for a specified period and has no accumulation of cash values. The
Company offers innovative options for its basic group life insurance coverage,
including portability of coverage and a living benefit option, whereby
terminally ill policyholders can receive death benefits prior to their death.
The Company also provides term life insurance, accidental death and
dismemberment, travel accident, hospital indemnity, Medicare Supplement and
other coverages primarily to individual members of various associations as well
as employee groups. The Company provides excess of loss medical coverage (known
as "stop loss" insurance) to employers who self-fund their medical plans and pay
claims using the services of a third party administrator.
Specialty Insurance Operations
The Company is a leader in the COLI market, which is life insurance purchased by
a company on the lives of its employees, with the company named as the
beneficiary under the policy. Until the Health Insurance Portability Act of 1996
("HIPA Act of 1996"), the Company sold two principal types of COLI, leveraged
and variable products. Leveraged COLI is a fixed premium life insurance policy
owned by a company or a trust sponsored by a company. The HIPA Act of 1996
phases out the deductibility of interest on policy loans under COLI by the end
of 1998, thus eliminating all future sales of leveraged COLI. Variable COLI
continues to be a product used by employers to fund non-qualified benefits or
offset other post-employment benefits liabilities, but does not provide the same
cash flow or tax advantages generated by leveraged COLI. During 1997, the
Company recorded $3.6 billion of deposits of new variable COLI business,
increasing total account value to $12.3 billion at December 31, 1997 compared to
$8.5 billion at December 31, 1996. The Specialty Insurance Operation generated
revenues of $944 and $1.4 billion and net income of $27 and $33 in 1997 and
1996, respectively. The decline in revenues is primarily related to the impact
of the HIPA Act of 1996 on leveraged COLI sales and the decline in net income is
due to a $6 operating loss related to the Company's international start-up
operations.
In addition, the Company acquired the leveraged COLI business of Mutual Benefit
Life Insurance Company ("MBL") in 1992, and currently cedes approximately $5.0
billion of leveraged COLI business to MBL Assurance Company, the
successor-in-interest to MBL ("MBLAC"). Pursuant to the original reinsurance
agreements, MBLAC is required to secure 100% of the coinsurance liabilities in
certain trust accounts held for the benefit of the Company.
In 1994, the Company initiated an international strategy to expand its business
opportunities into certain emerging insurance markets. As part of that strategy,
the Company invested in ITT Hartford Sudamericana Holding, S.A. ("Suda"), with a
group of Argentine individuals with insurance industry experience. The Company
initially owned 55% of Suda and increased its ownership to 60% in 1995. Suda
operates several subsidiaries devoted to life insurance, retirement annuities
and pensions. In addition, Suda entered into a joint venture with Banco de
Galicia y Buenos Aires, S.A. to operate an insurance business in a number of
countries throughout South America. In November of 1997, as part of a financial
and managerial restructuring, the Company purchased the remaining 40% interest
in Suda from its local shareholders. The Company has also formed two Brazilian
joint ventures with Itaboria Participacoes, S.A. (known as Grupo Icatu), a
broad-based financial services company in Brazil, to sell life insurance,
savings products, specialty health insurance and pensions. As of December 31,
1997, the Company had invested approximately $100 of start-up capital in all its
existing international operations.
Competition
Competitive factors in the group and specialty insurance markets primarily are
the variety and quality of products offered, the Company's relationships with
its third-party distributors and the quality of customer service. The Employee
Benefits segment competes with numerous other insurance companies and other
financial intermediaries marketing insurance products.
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GUARANTEED INVESTMENT CONTRACTS
The Guaranteed Investment Contracts segment consists of guaranteed rate contract
("GRC") business that is supported by assets held in either the Company's
general account or a guaranteed separate account. Historically, a significant
majority of these contracts were sold as general account contracts with fixed
rate maturities. The Company decided in 1995, after a thorough review of its GRC
business, that it would significantly de-emphasize general account GRC, choosing
to focus its distribution efforts on other products sold through other segments.
The Company internally segregates the GRC segment into distinct blocks of
business which are separately managed. The Company's GRC business written prior
to 1995 is referred to as Closed Book GRC. Management expects no material income
or loss from the Guaranteed Investment Contracts segment in the future.
OTHER MATTERS
ORGANIZATION
Hartford Life, Inc., a Delaware corporation, was formed in December, 1996 as a
direct subsidiary of Hartford Accident and Indemnity Company ("HA&I") and an
indirect subsidiary of The Hartford. On December 19, 1995, ITT Industries, Inc.
(formerly ITT Corporation) ("ITT") distributed all of its outstanding shares of
The Hartford to ITT shareholders of record in an action known herein as the
"Distribution". As a result of the Distribution, The Hartford became an
independent, publicly traded company. On February 10, 1997, Hartford Life filed
a registration statement, as amended, with the Securities and Exchange
Commission, relating to the IPO. Pursuant to the IPO on May 22, 1997, the
Company sold to the public 26 million shares representing approximately 18.6% of
the equity ownership in the Company. Additional information regarding the IPO
may be found in Note 3 of Notes to Consolidated Financial Statements and within
the "Initial Public Offering" discussion within the Capital Resources and
Liquidity section of the MD&A.
As a holding company, Hartford Life, Inc. has no significant business operations
of its own and, therefore, relies on the dividends from its insurance company
subsidiaries, which are primarily domiciled in Connecticut, as the principal
source of cash to meet its obligations (primarily debt obligations). Additional
information regarding the cash flow and liquidity needs of Hartford Life, Inc.
may be found in the Capital Resources and Liquidity section of the MD&A.
LIFE RESERVES
In accordance with applicable insurance regulations under which Hartford Life
operates, life insurance subsidiaries of the Company establish and carry as
liabilities actuarially determined reserves which are calculated to meet
Hartford Life's future obligations. Reserves for life insurance and disability
contracts are based on actuarially recognized methods using prescribed morbidity
and mortality tables in general use in the United States, which are modified to
reflect Hartford Life's actual experience when appropriate. These reserves are
computed at amounts that, with additions from premiums to be received and with
interest on such reserves compounded annually at certain assumed rates, are
expected to be sufficient to meet the Company's policy obligations at their
maturities or in the event of an insured's death. Reserves also include unearned
premiums, premium deposits, claims reported but not yet paid, claims incurred
but not reported and claims in the process of settlement. Reserves for assumed
reinsurance are computed on bases essentially comparable to direct insurance
reserves.
For Hartford Life's universal life and interest-sensitive whole life policies,
reserves are set according to premiums collected, plus interest credited, less
charges. Other fixed death benefit and individual life reserves are based on
assumed investment yield, persistency, mortality and morbidity as per commonly
used actuarial tables, expenses and margins for adverse deviations. For the
Company's group disability policies, the level of reserves is based on a variety
of factors including particular diagnoses, termination rates and benefit
payments.
The persistency of Hartford Life's annuity and other interest-sensitive life
insurance reserves is enhanced by policy restrictions on the withdrawal of
funds. Withdrawals in excess of allowable penalty-free amounts are assessed a
surrender charge during a penalty period, which is usually at least seven years.
Such surrender charge is initially a percentage of the accumulation value, which
varies by product, and generally decreases gradually during the penalty period.
Surrender charges are set at levels to protect the Company from loss on early
terminations and to reduce the likelihood of policyholders terminating their
policies during periods of increasing interest rates, thereby lengthening the
effective duration of policy liabilities and improving the Company's ability to
maintain profitability on such policies.
Hartford Life's reserves comply in all material respects with state insurance
department statutory accounting practices; however, in the Company's
consolidated financial statements, life insurance reserves are determined in
accordance with generally accepted accounting principles, which may vary from
statutory accounting practices.
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REGULATION AND PREMIUM RATES
Insurance companies are subject to comprehensive and detailed regulation and
supervision throughout the United States. The extent of such regulation varies,
but generally has its source in statutes which delegate regulatory, supervisory
and administrative powers to state insurance departments. Such powers relate to,
among other things, the standards of solvency which must be met and maintained;
the licensing of insurers and their agents; the nature of and limitations on
investments; premium rates; claim handling and trade practices; restrictions on
the size of risks which may be insured under a single policy; deposits of
securities for the benefit of policyholders; approval of policy forms; periodic
examinations of the affairs of companies; annual and other reports required to
be filed on the financial condition of companies or for other purposes; fixing
maximum interest rates on life insurance policy loans and minimum rates for
accumulation of surrender values; and the adequacy of reserves and other
necessary provisions for unearned premiums, unpaid claims and claim adjustment
expenses and other liabilities, both reported and unreported.
Most states have enacted legislation which regulates insurance holding company
systems such as Hartford Life. This legislation provides that each insurance
company in the system is required to register with the insurance department of
its state of domicile and furnish information concerning the operations of
companies within the holding company system which may materially affect the
operations, management or financial condition of the insurers within the system.
All transactions within a holding company system affecting insurers must be fair
and equitable. Notice to the insurance departments is required prior to the
consummation of transactions affecting the ownership or control of an insurer
and of certain material transactions between an insurer and any entity in its
holding company system. In addition, certain of such transactions cannot be
consummated without the applicable insurance department's prior approval.
RATINGS
Reference is made to the Capital Resources and Liquidity section of the MD&A
under "Ratings".
RISK-BASED CAPITAL
Reference is made to the Capital Resources and Liquidity section of the MD&A
under "Risk-Based Capital".
LEGISLATIVE INITIATIVES
Reference is made to the Regulatory Initiatives and Contingencies section of the
MD&A.
REINSURANCE
In accordance with normal industry practice, Hartford Life is involved in both
the cession and assumption of insurance with other insurance and reinsurance
companies. At December 31, 1997, the maximum amount of life insurance retained
on any one life by any of the life operations is approximately $2.5, excluding
accidental death benefits.
INVESTMENT OPERATIONS
The Company's investment operations are managed by its investment strategy group
which reports directly to senior management of the Company. Hartford Life's
investments have been separated into specific portfolios which support specific
classes of product liabilities. The investment strategy group works closely with
the product lines to develop investment guidelines, including duration targets,
asset allocation and convexity constraints, asset/liability mismatch tolerances
and return objectives, to ensure that the product line's individual risk and
return objectives are met. The Company's primary investment objective for its
general account and guaranteed separate accounts is to maximize after-tax
returns consistent with acceptable risk parameters, including the management of
the interest rate sensitivity of invested assets to that of policyholder
obligations.
For further discussion of Hartford Life's investment operations and the
Company's approach to managing investment risk, see the Investments section and
Capital Markets Risk Management section of the MD&A, as well as Note 4 to the
Consolidated Financial Statements.
EMPLOYEES
Hartford Life had approximately 4,000 employees at February 28, 1998, primarily
in the United States and Canada.
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EXECUTIVE OFFICERS OF HARTFORD LIFE
Information about the executive officers of Hartford Life who are also directors
and/or nominees for election as directors is set forth in Hartford Life's 1998
Proxy Statement. Listed below are the Company's executive officers:
LOWNDES A. SMITH, 58, has been Vice-Chairman of The Hartford since February 1,
1997 and is President and Chief Executive Officer of the Company. He served as
an Executive Vice President of The Hartford from December 1995 until his
appointment as Vice-Chairman and has been a director of The Hartford since 1991.
Mr. Smith served as President and Chief Operating Officer of The Hartford's life
insurance subsidiaries since 1989. Prior to that time, he served as Senior Vice
President and Group Controller for all companies owned or operated by The
Hartford. Mr. Smith joined The Hartford in 1968 as a member of the Corporate
Accounting Department and in 1972 he was appointed the Secretary and Director of
Corporate Accounting. He was elected Assistant Vice President in 1974, and he
was named Controller in 1977. Mr. Smith is a director of the Connecticut
Children's Medical Center.
JOHN P. GINNETTI, 52, has been Executive Vice President and Director of Asset
Management Services since 1994. From 1988 to 1994, he served as Senior Vice
President and Director of Individual Life and Annuities. Mr. Ginnetti joined
Hartford Life in 1982 as General Counsel. Previously, he was Assistant General
Counsel with the Life Insurance Company of North America.
THOMAS M. MARRA, 39, has been Executive Vice President and Director of
Individual Life and Annuities since 1996. Mr. Marra also oversees the Individual
Life Insurance Segment. Mr. Marra joined Hartford Life in 1980 as an associate
actuary. He held positions of increasing responsibility and in 1991 was named
Vice President and Director of Individual Annuities. He was elected Senior Vice
President in 1994. He is a fellow of the Society of Actuaries.
RAYMOND P. WELNICKI, 49, has been Senior Vice President and Director of Employee
Benefits since 1994. He joined Hartford Life in 1992 as Actuary, Director of
Group Actuarial and Long-Term Care. He was named Vice President of Hartford Life
in 1993. Prior to 1992, he was employed with Aetna Life & Casualty Company as
Assistant Vice President, Issues and Strategic Management. He is a Fellow of the
Society of Actuaries.
GREG A. BOYKO, 46, is Senior Vice President, Chief Financial Officer and
Treasurer. He joined Hartford Life in 1995 as Controller and was elected Vice
President in 1996. In November 1997, Mr. Boyko assumed responsibility for the
Company's international operations. He previously worked at ING America Life
Insurance Company where he held the position of Senior Vice President and Chief
Financial Officer. His prior experience included positions at Connecticut Mutual
Life Insurance Company ("CML"), where he progressed from Controller of CML to
Chief Financial Officer of Connecticut Mutual Insurance Services. Mr. Boyko
holds a Juris Doctor degree and is a Certified Public Accountant, Chartered Life
Underwriter and Chartered Financial Consultant. He is a member of the
Connecticut and American Bar Associations and the Connecticut Society of
Certified Public Accountants.
LYNDA GODKIN, 43, is Vice President and General Counsel. She joined Hartford
Life in 1990 as Counsel for the Employee Benefits Segment. In 1994 she was named
Assistant General Counsel and Director of Hartford Life's Law Department. In
1996 she was named General Counsel of Hartford Life. She previously practiced
law at CIGNA Corporation. She began her legal career in 1981 at the law firm of
Day, Berry & Howard in Hartford, Connecticut. She is a member of the Connecticut
and American Bar Associations.
CRAIG R. RAYMOND, 36, is Vice President and Chief Actuary. Since joining
Hartford Life in 1985, Mr. Raymond has held actuarial positions of increased
responsibility throughout the Company. In 1992, he was named Assistant Vice
President and Director of Individual Life and Annuities, Actuarial and became
Vice President in 1994. Prior to joining Hartford Life, Mr. Raymond held
positions at Integon Corporation and The National Life and Accident Insurance
Company. He is a Fellow of the Society of Actuaries and Chairman of the American
Academy of Actuaries Committee on Life Insurance.
ANN M. DE RAISMES, 47, is Vice President and Director of Human Resources. Ms. de
Raismes joined Hartford Life in 1984 as Manager of Staffing. She has been
Director of Human Resources since 1991 and was elected Vice President in 1994.
Previously, she held human resource management positions of increasing
responsibility with SCM Corporation. She is a member of The Hartford Foundation
Board of Directors.
DAVID M. ZNAMIEROWSKI, 37, is Vice President and Director of Investment
Strategy. Mr. Znamierowski joined Hartford Life in 1996 as Director of Risk
Management. Previously, he held various positions with Aetna Life & Casualty
Company, including Vice President, Investment Strategy and Policy. From 1986
through 1991, Mr. Znamierowski held positions with Salomon Brothers Inc.
LIZABETH H. ZLATKUS, 39, is Vice President and Director of Group Life and
Disability. Ms. Zlatkus has held positions of increasing responsibility since
joining The Hartford in 1983. She was named Vice President and Director of Risk
Management and Business Operations in 1994. Prior to joining The Hartford, she
was a senior accountant at Peat, Marwick, Mitchell & Company. She became a
Certified Public Accountant in 1982.
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WILLIAM A. GODFREY, 39, is Vice President and Director of Information
Technology. Mr. Godfrey joined the senior team at Hartford Life in 1996 to
oversee technology management. Previously, Mr. Godfrey held information
technology positions at Fleet Financial Group and systems development positions
with CIGNA Corporation and Electronic Data Systems.
ROBERT F. NOLAN, 43, is Vice President and Director of Corporate Relations. Mr.
Nolan joined Hartford Life in 1992 and was elected Vice President in 1995.
Previously, Mr. Nolan held positions of increasing responsibility at Aetna Life
& Casualty Company in public relations, marketing communications and corporate
communications.
WALTER C. WELSH, 50, is Vice President and Director of Government Affairs. Mr.
Welsh has worked at The Hartford since 1979. Since 1993, Mr. Welsh has served as
Director of Government Relations for Hartford Life. From 1979 to 1993, Mr. Welsh
held various tax management positions within the Law Department of The Hartford.
He was named Assistant General Counsel in 1984 and was named Assistant Director
of Taxes in 1986. He previously practiced law with the Internal Revenue Service
and is a member of the Connecticut and American Bar Associations.
ITEM 2. PROPERTIES
Hartford Life occupies office space in Simsbury, Connecticut, leased from a
third party by Hartford Fire Insurance Company ("Hartford Fire"), an indirect
subsidiary of The Hartford. Expenses associated with these offices are allocated
on a direct and indirect basis to Hartford Life and its subsidiaries by Hartford
Fire.
ITEM 3. LEGAL PROCEEDINGS
Hartford Life is involved in pending and threatened litigation in the normal
course of its business in which claims for monetary and punitive damages have
been asserted. Although there can be no assurances, management, at the present
time, does not anticipate that the ultimate liability arising from such pending
or threatened litigation will have a material effect on the financial condition
or operating results of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders of Hartford Life during
the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR HARTFORD LIFE'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Hartford Life's Class A Common Stock is traded on the New York Stock Exchange
("NYSE") under the trading symbol "HLI". Hartford Accident and Indemnity
Insurance Company ("HA&I"), an indirect wholly-owned subsidiary of The
Hartford, holds all of the shares of Class B Common Stock. As such, the Class B
Common Stock is not listed on any exchange and there is no established public
trading market for it.
The following table presents high and low closing prices for the Class A Common
Stock of Hartford Life on the NYSE for the periods indicated, and the quarterly
dividends declared per share:
1997 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
- --------------------------------------------------------------------------------
Common Stock Price
High N/A $37.50 $41.75 $45.31
Low N/A 32.13 33.94 34.63
Dividends Declared (1) - - 0.09 0.09
- --------------------------------------------------------------------------------
(1) Dividends declared exclude amounts paid to Hartford Life's parent prior to
the Company's initial public offering.
N/A - Not applicable
At February 27, 1998, there were approximately 530 shareholders of record of
Hartford Life's Class A common stock and HA&I was the only holder of Class B
common stock.
In 1998, Hartford Life expects to continue to pay quarterly dividends on its
common stock of $0.09 per share. Dividend decisions will be based on and
affected by a number of factors, including the operating results and financial
requirements of Hartford Life on a stand-alone basis and the impact of
regulatory restrictions discussed in the Liquidity Requirements section of the
MD&A.
There are also various legal limitations governing the extent to which Hartford
Life's insurance subsidiaries may extend credit, pay dividends or otherwise
provide funds to Hartford Life, Inc. as discussed in the Capital Resources and
Liquidity section of the MD&A under "Liquidity Requirements".
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ITEM 6. SELECTED FINANCIAL DATA
(IN MILLIONS, EXCEPT FOR PER SHARE DATA)
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
General account invested assets $ 20,970 $19,830 $20,072 $18,078 $15,866
Separate account assets (1) 69,362 49,770 36,296 22,847 16,314
All other assets 10,648 10,333 9,594 9,324 7,454
-------- ------- ------- ------- -------
TOTAL ASSETS $100,980 $79,933 $65,962 $50,249 $39,634
-------- ------- ------- ------- -------
Policy liabilities $ 26,078 $26,239 $26,318 $25,208 $20,863
Separate account liabilities (1) 69,362 49,770 36,296 22,847 16,314
Allocated Advances from parent (2) -- 893 732 525 425
Debt (2) 700 -- -- -- --
All other liabilities 2,696 1,757 1,439 1,283 1,107
-------- ------- ------- ------- -------
TOTAL LIABILITIES $ 98,836 $78,659 $64,785 $49,863 $38,709
-------- ------- ------- ------- -------
STOCKHOLDERS' EQUITY (3) $ 2,144 $ 1,274 $ 1,177 $ 386 $ 925
- ------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA
Total revenues $ 4,699 $ 4,384 $ 4,090 $ 3,543 $ 2,922
Total expenses 4,393 4,360 3,940 3,392 2,792
-------- ------- ------- ------- -------
NET INCOME (4) $ 306 $ 24 $ 150 $ 151 $ 130
- ------------------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE DATA
PRO FORMA BASIC EARNINGS PER SHARE (5) $ 2.28 $ 0.19 $ -- $ -- $ --
PRO FORMA DILUTED EARNINGS PER SHARE (5) $ 2.28 $ 0.19 $ -- $ -- $ --
DIVIDENDS DECLARED PER COMMON SHARE (6) $ 0.18 $ -- $ -- $ -- $ --
- ------------------------------------------------------------------------------------------------------------------------------
(1) Includes both non-guaranteed and guaranteed separate accounts.
(2) For financial reporting purposes, the Company has treated certain amounts
previously allocated by The Hartford Financial Services Group, Inc. ("The
Hartford") to the Company's life insurance subsidiaries as Allocated Advances
from parent. Cash received in respect of Allocated Advances from parent was used
to support the growth of the life insurance subsidiaries. For further
information see the "Debt" discussion in the Capital Resources and Liquidity
section of the Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") and also see Note 7 of Notes to Consolidated
Financial Statements.
(3) Stockholders' equity beginning December 31, 1994 reflects the adoption of
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". Under SFAS No. 115 the Company's fixed maturity investments are
classified as "available for sale" and, accordingly, these investments are
reflected at fair value with the corresponding impact included as a component of
stockholders' equity.
(4) 1996 includes a $169 third quarter charge related to Closed Book GRC (see
the discussions related to Closed Book GRC in the "Guaranteed Investment
Contracts" discussion within the MD&A).
(5) In 1997, the Company adopted SFAS No. 128, "Earnings per Share". Pro forma
basic earnings per share is calculated based upon the weighted average number of
common shares outstanding during the respective periods. Pro forma diluted
earnings per share are determined on the assumption that stock options were
exercised upon issuance. For periods prior to the Company's Initial Public
Offering ("IPO") (May 22, 1997), outstanding shares are based upon 114 million
shares of Class B Common Stock owned by The Hartford plus an assumed issuance of
11 million shares of Class A Common Stock (the number of shares that, based upon
the IPO price and the underwriting discounts and expenses payable by the
Company, would result in net proceeds equal to the excess of the amount of the
February and April 1997 dividends over the 1996 earnings and the allocated
advances from parent). For the period subsequent to the closing of the IPO,
outstanding shares are based upon 114 million shares of Class B Common Stock
owned by The Hartford plus approximately 26 million shares of Class A Common
Stock owned by the public. See Note 9 of Notes to Consolidated Financial
Statements for further explanation associated with earnings per share for
periods prior to the IPO.
(6) Dividends per common share represent amounts paid subsequent to the
Company's IPO. In the third and fourth quarters of 1997, Hartford Life declared
and paid a dividend of $0.09 per share of common stock totaling $25. In 1998,
Hartford Life expects to continue paying quarterly dividends on its common stock
of $0.09 per share. The table does not include dividends paid to the parent in
periods prior to the IPO. For further explanation see the "Dividends" discussion
within the Capital Resources and Liquidity section of the MD&A.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE STATED)
MANAGEMENT'S DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES BEGINNING ON PAGE F-1.
Certain statements contained in this discussion, other than statements of
historical fact, are forward-looking statements. These statements are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 and include estimates and assumptions related to economic,
competitive, and legislative developments. These forward-looking statements are
subject to change and uncertainty which are, in many instances, beyond the
Company's control and have been made based upon management's expectations and
beliefs concerning future developments and their potential effect on Hartford
Life, Inc. and subsidiaries ("Hartford Life" or the "Company"). There can be no
assurance that future developments will be in accordance with management's
expectations or that the effect of future developments on Hartford Life will be
those anticipated by management. Actual results could differ materially from
those expected by the Company, depending on the outcome of certain factors,
including those described in the forward-looking statements.
Certain reclassifications have been made to prior year financial information to
conform to the current year presentation.
INDEX
Consolidated Results of Operations 13
Annuity 15
Individual Life Insurance 16
Employee Benefits 17
Guaranteed Investment Contracts 18
Reserves 19
Investments 19
Capital Markets Risk Management 21
Capital Resources and Liquidity 28
Regulatory Initiatives and Contingencies 31
Effect of Inflation 32
CONSOLIDATED RESULTS OF OPERATIONS
Hartford Life is a leading insurance and financial services company that
provides pre-retirement savings, estate planning and employee benefit products.
The Company offers variable and fixed annuities, retirement plan services,
mutual funds, and life and disability insurance on both a group and an
individual basis.
The Company derives its revenues principally from: (a) asset management fees on
separate accounts and mortality and expense fees; (b) fully insured premiums;
(c) net investment income on general account assets; and (d) certain other fees
earned by the Company. Asset management fees and mortality and expense fees are
primarily generated from separate account assets which are deposited with the
Company through the sale of variable annuity and variable life products. Premium
revenues are derived primarily from the sale of group life and group disability
insurance products. Hartford Life's operating expenses primarily consist of
interest credited to policyholders on general account liabilities, insurance
benefits provided, dividends to policyholders, costs of selling and servicing
the various products offered by the Company, and other general business
expenses. Hartford Life's profitability depends largely on the amount of assets
under management, the adequacy of product pricing and underwriting discipline,
and its ability to earn target spreads between earned investment rates on
general account assets and credited rates to customers.
OPERATING SUMMARY
1997 1996 1995
- ----------------------------------------------------------------------------------------------------
Premiums and other considerations $3,163 $ 3,069 $ 2,643
Net investment income 1,536 1,534 1,451
Net realized capital losses -- (219) (4)
- ----------------------------------------------------------------------------------------------------
TOTAL REVENUES 4,699 4,384 4,090
------ ------- -------
Benefits, claims and claim adjustment expenses 2,671 2,727 2,395
Amortization of deferred policy acquisition costs 345 241 205
Dividends to policyholders 241 635 675
Other expenses 962 750 589
- ----------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 4,219 4,353 3,864
------ ------- -------
INCOME BEFORE INCOME TAX EXPENSE 480 31 226
Income tax expense 174 7 76
- ----------------------------------------------------------------------------------------------------
NET INCOME $ 306 $ 24 $ 150
------ ------- -------
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Revenues increased $315, or 7%, to $4.7 billion in 1997 from $4.4 billion in
1996. Revenues were impacted by the Health Insurance Portability and
Accountability Act of 1996 ("HIPA Act of 1996"), which phases out the
deductibilty of interest expense on policy loans by the end of 1998, virtually
eliminating all new sales of leveraged corporate owned life insurance ("COLI"),
and by the Guaranteed Investment Contracts segment ("GIC"), which had a loss of
$225 in 1996, primarily related to a closed block of guaranteed rate contract
business ("Closed Book GRC"). Excluding COLI and GIC, revenues increased $490,
or 16%, to $3.5 billion in 1997 as compared to $3.0 billion 1996. This growth
was driven by premiums and other considerations related to the Annuity segment
and the Group Insurance operation of the Employee Benefits segment. Annuity
premiums and other considerations increased $230 in 1997, primarily resulting
from increased variable annuity fee income, which grew $198, or 54%, in 1997 as
compared to 1996. Average variable annuity account value increased $13.1
billion, or 49%, to $39.7 billion in 1997. This solid growth in average account
value was due to strong variable annuity sales of $9.7 billion and significant
stock market appreciation. Premium revenue related to the Group Insurance
operation of the Employee Benefits segment increased $209, or 16%, in 1997 due
to strong sales of $480, a 17% increase over 1996, and good persistency.
Revenues increased $294, or 7%, to $4.4 billion in 1996 from $4.1 billion on
1995. Excluding COLI and GIC, revenues increased $549, or 22%, to $3.0 billion
in 1996 as compared to $2.4 billion 1995. This increase was driven by increases
in premiums and other considerations, which included an increase in fees from
the Annuity segment of $216, as the separate account assets grew due to sales
growth and market appreciation, as well as increased premiums and other
considerations of $226 from the Group Insurance operation due to strong sales
and renewals.
Total benefits, claims and expenses decreased $134 in 1997 as compared to 1996.
Excluding COLI and GIC for the reasons described above, total benefits, claims
and expenses increased $391, or 15%, to $3.0 billion in 1997 as compared to $2.6
billion in 1996. Benefits, claims and claim adjustment expenses related to the
Group Insurance operation increased $161, or 14%, reflecting the growth in that
operation's group life and group disability business. Amortization of deferred
policy acquisition costs ("DPAC") increased $105 in 1997 primarily due to the
Annuity segment, which increased $76, or 44%, as a result of strong sales in
both 1997 and 1996. Also, other business expenses increased $157 in 1997 as
compared to 1996. Total benefits, claims and expenses increased $489 in 1996 as
compared to 1995. Excluding COLI and GIC, total benefits, claims and expenses
increased $508, or 24%, to $2.6 billion in 1996 as compared to $2.1 billion in
1995. This increase was related to increased benefits, claims and claim
adjustment expenses of approximately $205, $99, and $49 related to the Group
Insurance operation, the Annuity segment and the Individual Life Insurance
segment, respectively, as these blocks of business all experienced strong
growth. Also, increased prior year sales and total account value in the Annuity
segment caused an increase in amortization of DPAC of $57 in 1996 as compared to
1995.
Net income totaled $306 in 1997 as compared to $24 in 1996 and $150 in 1995. The
1996 results include a $225 net loss related to GIC, which when excluded,
results in an increase in 1997 net income of $57, or 23%, over comparable 1996
results. The improvement in earnings, excluding GIC, for both comparative
periods is primarily related to increased fee income earned on the Annuity
segment's growing block of separate account assets due to strong sales and
significant market appreciation and earnings growth in the Individual Life
Insurance segment and Group Insurance operation of the Employee Benefits
segment. Partially offsetting improved earnings in the principal segments were
increased losses of $19 in the Corporate Operation due to the increased capital
allocated to the other segments to fund their growth and higher interest expense
due to increased indebtedness in connection with the Company's Initial Public
Offering ("IPO").
Management believes that it has developed and implemented strategies to maintain
and enhance its position as a market leader within the financial services
industry, to continue the Company's asset growth, and to maximize shareholder
value. Hartford Life's strong market position in each of its primary businesses,
coupled with the growth potential management believes exists in its markets,
provides opportunities to increase sales of the Company's products and services
as individuals increasingly save and plan for retirement, protect themselves and
their families against disability or death and prepare their estates for an
efficient transfer of wealth between generations.
SEGMENT RESULTS
The Company operates in three principal segments: Annuity, Individual Life
Insurance, and Employee Benefits as well as a Guaranteed Investments Contracts
segment, which is primarily comprised of guaranteed rate contract business
written prior to 1995. The Company also maintains a Corporate Operation through
which it reports items that are not directly allocable to any of its business
segments.
Below is a summary of net income (loss) by segment.
1997 1996 1995
- ------------------------------------------------------------------------
ANNUITY $ 202 $ 145 $ 113
INDIVIDUAL LIFE INSURANCE 56 44 37
EMPLOYEE BENEFITS 85 78 67
GUARANTEED INVESTMENT
CONTRACTS -- (225) (67)
CORPORATE OPERATION (37) (18) --
- ------------------------------------------------------------------------
NET INCOME $ 306 $ 24 $ 150
- ------------------------------------------------------------------------
14
16
ANNUITY
OPERATING SUMMARY
1997 1996 1995
- ----------------------------------------------------------------------------------------------
Premiums and other considerations $ 769 $539 $323
Net investment income 502 434 397
Net realized capital gains -- -- --
- ----------------------------------------------------------------------------------------------
TOTAL REVENUES 1,271 973 720
--------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 445 416 317
Amortization of deferred policy acquisition costs 250 174 117
Dividends to policyholders -- -- --
Other expenses 262 159 118
- ----------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 957 749 552
--------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 314 224 168
Income tax expense 112 79 55
- ----------------------------------------------------------------------------------------------
NET INCOME $ 202 $145 $113
--------------------------------------------------------------------------------------
The Annuity segment focuses on the savings and retirement needs of the growing
number of individuals who are preparing for retirement or have already retired.
This segment consists of two areas of operation: Individual Annuity and Group
Annuity. The variety of products sold within this segment reflects the diverse
nature of the market. These products include, in the Individual Annuity
operation, individual variable annuities, fixed market value adjusted ("MVA")
annuities, and mutual funds; and in the Group Annuity operation, deferred
compensation and retirement plan services for municipal governments and
corporations, structured settlement contracts and other special purpose annuity
contracts, and investment management contracts. The Company was rated the number
one writer of variable annuities for 1997 with an 11% market share according to
the Variable Annuity Research and Data Service, and sold approximately $869 of
mutual funds in its first full year offering the product, resulting in total
mutual fund assets of $972 at December 31, 1997.
Revenues increased $298, or 31%, to $1.3 billion in 1997 from $1.0 billion in
1996. This increase was principally the result of a $230 increase in premiums
and other considerations, reflecting a substantial increase in aggregate fees
earned due to the segment's growing block of separate account assets. The
average separate account assets of this segment increased to $50.7 billion in
1997, from $37.2 billion in 1996 primarily due to sales of individual variable
annuities of approximately $9.7 billion in 1997, as well as significant market
appreciation. Also, Group Annuity sales were $820 in 1997, an increase of $186,
or 29%, over 1996. In addition, net investment income grew $68, or 16%, to $502
in 1997 primarily due to growth in average general account assets which
increased to $8.1 billion in 1997 from $7.2 billion in 1996 largely as a result
of growth in the general account portion of the individual variable annuity
products.
The growth in this segment in 1997 also resulted in an increase in total
benefits, claims and expenses of $208, or 28%, to $957 in 1997 from $749 in
1996. Benefits, claims and claim adjustment expenses grew $29, or 7%, in 1997
primarily related to increased interest credited on Group Annuity general
account liabilities. Amortization of DPAC related to the Individual Annuity
operation grew $82, or 52%, in 1997 as prior and current year sales remained
strong. Also, other business expenses increased $103, in 1997, as a result of
the growth in this segment.
A 33% growth in average account value in 1997, coupled with a reduction in
individual annuity operating expenses as a percentage of total individual
annuity account value to 25 basis points in 1997 from 28 basis points in 1996,
contributed to the increase in net income of $57, or 39%, to $202 from $145 in
1996.
Similar factors generated an increase in 1996, as compared with 1995, in
revenues of $253, or 35%, average general account assets of $1.0 billion, or
16%, average separate account assets of $11.1 billion, or 42%, total benefits,
claims and expenses of $197, or 36%, net income of $32, or 28%, and a reduction
in individual annuity operating expenses as a percentage of total individual
annuity account value to 28 basis points in 1996 from 31 basis points in 1995.
Management believes it has developed and implemented strategies to maintain and
enhance its position as a market leader in the financial services industry as
individuals increasingly save and plan for retirement.
15
17
INDIVIDUAL LIFE INSURANCE
OPERATING SUMMARY
1997 1996 1995
- -------------------------------------------------------------------------------------------
Premiums and other considerations $339 $313 $266
Net investment income 171 159 142
Net realized capital gains -- -- --
- -------------------------------------------------------------------------------------------
TOTAL REVENUES 510 472 408
------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 251 266 217
Amortization of deferred policy acquisition costs 87 63 72
Dividends to policyholders 1 1 --
Other expenses 84 74 61
- -------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 423 404 350
------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 87 68 58
Income tax expense 31 24 21
- -------------------------------------------------------------------------------------------
NET INCOME $ 56 $ 44 $ 37
------------------------------------------------------------------------------------
The Individual Life Insurance segment, which focuses on the high end estate and
business planning markets, sells a variety of life insurance products, including
variable life, universal life, interest-sensitive whole life, and term life
insurance policies. The Company is among the top five writers of individual life
insurance based on average face value per policy. In addition, the Company is
among the top five writers of individual variable life for the nine months ended
September 30, 1997, based on the Tillinghast Value Variable Life Survey.
Revenues in 1997 increased $38, or 8%, to $510 from $472 in 1996. In the first
quarter of 1996, a block of business was assumed from Investors Equity Life
Insurance Company ("IEL") which increased 1996 revenues by $9. Excluding this
transaction, 1997 revenues increased $47, or 10%, as compared to 1996,
reflecting the impact of applying cost of insurance charges and variable life
fees to a larger block of business. Account values increased $555, or 17%, to
$3.8 billion in 1997 from $3.2 billion in 1996. Sales were $140 in 1997, an
increase of 8% over 1996. Variable life product sales constituted 70%, or $98,
of total 1997 sales and grew $23, or 31%, over 1996 levels.
Total benefits, claims and expenses increased $19, or 5%, to $423 in 1997 from
$404 in 1996. Total benefits, claims and expenses, excluding IEL, increased $28,
or 7%, in 1997. This increase was primarily driven by an increase in
amortization of DPAC of $24 in 1997 related to the growth in new variable life
business.
The growth in this segment's account values, particularly variable life, along
with favorable mortality experience, contributed to an increase in net income of
$12, or 27%, in 1997.
Revenues in 1996 increased $64, or 16%, to $472 from $408 in 1995. This increase
was primarily due to a $47 increase in premiums and other considerations,
reflecting an increase in cost of insurance charges and variable life fees
applied to a larger block of business as account values increased $678 to $3.2
billion in 1996 from $2.6 billion in 1995. Total benefits, claims and expenses
increased $54, or 15%, to $404 in 1996 from $350 in 1995. This increase reflects
the growth in the block of individual life insurance business and is partially
offset by favorable mortality results and the full year impact of expense
leverage due to the consolidation of the division's two individual life
operations in 1995. The combination of account value growth, operational
efficiencies, and favorable mortality experience resulted in an increase in net
income of $7, or 19%, to $44 in 1996 from $37 in 1995.
Management believes that the Company's strong market position will provide
opportunities for growth in this segment as individuals increasingly prepare
their estates for an efficient transfer of wealth between generations.
16
18
EMPLOYEE BENEFITS
OPERATING SUMMARY
1997 1996 1995
- -----------------------------------------------------------------------------------------
Premiums and other considerations $ 2,051 $ 2,215 $ 2,048
Net investment income 593 618 467
Net realized capital gains - - -
- -----------------------------------------------------------------------------------------
TOTAL REVENUES 2,644 2,833 2,515
----------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 1,705 1,684 1,373
Amortization of deferred policy acquisition costs 8 4 4
Dividends to policyholders 240 634 675
Other expenses 553 396 362
- -----------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 2,506 2,718 2,414
----------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 138 115 101
Income tax expense 53 37 34
- -----------------------------------------------------------------------------------------
NET INCOME $ 85 $ 78 $ 67
----------------------------------------------------------------------------------
The Employee Benefits segment consists of two areas of operation: Group
Insurance and Specialty Insurance. Through Group Insurance, the Company offers
products such as group life insurance, group short-term and long-term disability
and accidental death and dismemberment. According to the latest results
published by the Life Insurance Marketing and Research Association ("LIMRA"),
the Company is the second largest provider of group disability insurance for the
nine months ended September 30, 1997. Specialty Insurance primarily consists of
the Company's COLI business and its international operations, primarily in South
America.
Revenues decreased $189 to $2.6 billion in 1997, which was primarily
attributable to the COLI business for which associated revenues decreased $380,
or 28%, to $980 from $1.4 billion in 1996. The decrease in COLI revenues is
primarily a result of the elimination of sales of leveraged COLI due to the HIPA
Act of 1996, which phases out the deductibility of interest on policy loans
under leveraged COLI by the end of 1998. Excluding COLI, this segment's revenues
increased $191, or 13%, to $1.7 billion, in 1997, as compared to $1.5 billion,
in 1996. This increase was driven by Group Insurance which had growth in
premiums and other considerations of $209, or 16%, in 1997 as compared to 1996.
The increased Group Insurance premiums were primarily attributable to group
disability business, where premiums increased $115, or 21%, in 1997 and group
life business, where premiums increased $72, or 17%, in 1997 as compared to
1996. Group Insurance sales increased $68, or 17%, to $480 in 1997 as compared
to $412 in 1996. Included in the 1997 results are group disability and group
life premiums of $88 and $16, respectively, as a result of the acquisition of a
block of business from the United States branch of Confederation Life Insurance
Company. The 1996 results include $78 of group disability premiums and $23 of
group life premiums related to the acquisition of a block of business from North
American Life Assurance Company of Toronto.
Benefits, claims and expenses decreased $212 to $2.5 billion in 1997, which
generally reflected a decrease in dividends to policyholders of $394, or 62%,
primarily due to the elimination of sales of leveraged COLI as discussed above.
Benefits, claims and expenses, excluding COLI, increased $172, or 12%, to $1.6
billion, in 1997 from $1.4 billion in 1996. The increase in benefits, claims,
and claim adjustment expenses is directly related to an increase in benefits of
$161, or 14%, due to growth in the Company's group life and group disability
business.
As a result of the factors mentioned above, and the impact of favorable
mortality and morbidity results, Group Insurance net income grew $13, or 29%, to
$58 in 1997. Within Specialty Insurance, net income related to COLI increased $1
in 1997 to $27. In addition, the results of Specialty Insurance were impacted by
a $6 operating loss arising from the Company's international operations. This
loss was primarily attributable to the Company's operations in Argentina. In
November 1997, the Company replaced the Argentine management team with a new
management team and purchased the remaining 40% interest in ITT Hartford
Sudamericana Holding, S.A. from the local shareholders. The Argentine loss was
primarily due to higher than anticipated costs and expenditures.
Revenues increased $318, or 13%, to $2.8 billion in 1996 from $2.5 billion in
1995. This increase was largely the result of (i) a $167 increase in premiums
and other considerations, reflecting a $226 increase in group insurance premiums
from strong group disability sales and renewals, partially offset by a decline
in leveraged COLI premiums as a result of the HIPA Act of 1996 and (ii) a $151
increase in net investment income, primarily due to an increase in COLI account
value related to strong sales in 1995. Total benefits, claims and expenses
increased $304, or 13%, to $2.7 billion in 1996 from $2.4 billion in 1995. This
increase generally reflected an increased block of group disability business and
an increase in the Company's COLI account value, partially offset by a $41
decrease in dividends to policyholders primarily due to the elimination of sales
of leveraged COLI as a result of the enactment of the HIPA
17
19
Act of 1996. The premium growth in Group Insurance, along with favorable
mortality and morbidity experience, resulted in an increase in net income in
this segment of $11, or 16%, to $78 in 1996 from $67 in 1995.
As employers continue to offer benefit plans in order to attract and retain
valued employees, management expects that the need for group life and group
disability insurance will continue to expand and believes the Company is well
positioned to take advantage of this growth potential.
GUARANTEED INVESTMENT CONTRACTS
OPERATING SUMMARY
1997 1996 1995
- ---------------------------------------------------------------------------------------------------
Premiums and other considerations $ 2 $ 2 $ 1
Net investment income 237 251 377
Net realized capital losses -- (219) --
- --------------------------------------------------------------------------------------------------
TOTAL REVENUES 239 34 378
-------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 232 332 453
Amortization of deferred policy acquisition costs -- 1 12
Dividends to policyholders -- -- --
Other expenses 7 47 16
- --------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 239 380 481
-------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT) -- (346) (103)
Income tax expense (benefit) -- (121) (36)
- ---------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ -- $(225) $ (67)
-------------------------------------------------------------------------------------------
The GIC segment consists of guaranteed rate contract ("GRC") business that is
supported by assets held in either the Company's general account or a guaranteed
separate account and includes Closed Book GRC. Historically, a significant
majority of these contracts were sold as general account contracts with fixed
rates and fixed maturities. The Company decided in 1995, after a thorough review
of its GRC business, that it would significantly de-emphasize general account
GRC, choosing instead to focus its distribution efforts on other products sold
through other segments and selling general account GRC primarily as an
accommodation to customers. From 1992 to 1994, the GIC segment sold over $5
billion of GRC. In contrast, the GIC segment sold only $47 and $108 of general
account GRC in 1997 and 1996, respectively. Consistent with management's
expectations, the segment had no net income in 1997 and expects no material
income or loss from the GIC segment in the future.
Closed Book GRC results in 1996 and 1995 were negatively affected by lower
investment rates and earnings in the related investment portfolio (primarily
consisting of collateralized mortgage obligations and mortgage backed
securities) due to prepayments experienced in excess of assumed and historical
levels. Closed Book GRC was also affected by the interest rate rise in 1994 when
the duration of its assets lengthened relative to that of the liabilities.
Although the Closed Book GRC asset portfolio as a whole is duration matched with
its liabilities, certain investments continue to have a longer maturity than
their corresponding liabilities and will need to be liquidated prior to maturity
in order to meet the specific liability commitments. To protect the existing
value of these investments, the Company entered into various hedge transactions
in late September 1996 which substantially eliminated further fluctuation in
fair value of the investments due to interest rate changes. As of December 31,
1997, Closed Book GRC had general account assets and liabilities of $2.2
billion. The scheduled maturities are $1.0 billion, or 45%, in 1998, $0.7
billion, or 32%, in 1999 and $0.5 billion, or 23%, thereafter.
During 1996, Closed Book GRC incurred a $51, after-tax, loss from operations as
a result of negative interest spread, as compared with an after-tax loss from
operations of $68 in 1995. With the initiation of the hedge transactions
discussed above, which eliminated the possibility that the fair value of Closed
Book GRC investments would recover to their current amortized cost prior to
sale, an other than temporary impairment loss of $82, after-tax, was determined
to have occurred and was recorded in September 1996. An additional other than
temporary impairment loss of $6, after-tax, occurred in the fourth quarter of
1996 bringing the total 1996 impairment to $88. Also, during the third quarter
of 1996, Closed Book GRC had asset sales resulting in proceeds of approximately
$500 and a realized loss of $55, after-tax. The asset sales were undertaken as a
result of liquidity needs and favorable market conditions for certain
securities. Other charges of $32, after-tax, were also incurred in the third
quarter of 1996.
18
20
RESERVES
In accordance with applicable insurance regulations under which Hartford Life
operates, life insurance subsidiaries of the Company establish and carry as
liabilities actuarially determined reserves which are calculated to meet
Hartford Life's future obligations. Reserves for life insurance and disability
contracts are based on actuarially recognized methods using prescribed morbidity
and mortality tables in general use in the United States, which are modified to
reflect Hartford Life's actual experience when appropriate. These reserves are
computed at amounts that, with additions from premiums to be received and with
interest on such reserves compounded annually at certain assumed rates, are
expected to be sufficient to meet the Company's policy obligations at their
maturities or in the event of an insured's death. Reserves include unearned
premiums, premium deposits, claims reported but not yet paid, claims incurred
but not reported and claims in the process of settlement. Reserves for assumed
reinsurance are computed on bases essentially comparable to direct insurance
reserves.
INVESTMENTS
GENERAL
The Company's investments are managed by its investment strategy group which
consists of a risk management unit and a portfolio management unit and reports
directly to senior management of the Company. The risk management unit is
responsible for monitoring and managing the Company's asset/liability profile
and establishing investment objectives and guidelines. The portfolio management
unit is responsible for determining, within specified risk tolerances and
investment guidelines, the general asset allocation, duration, convexity and
other characteristics of the Company's general account and guaranteed separate
account investment portfolios. The Hartford Investment Management Company, a
wholly owned subsidiary of The Hartford, executes the investment plan of the
investment strategy group including the identification and purchase of
securities that fulfill the objectives of the strategy group.
The primary investment objective of the Company's general account and guaranteed
separate accounts is to maximize after-tax returns consistent with acceptable
risk parameters (including the management of the interest rate sensitivity of
invested assets relative to that of policyholder obligations). The Company does
not have any financial instruments entered into for trading purposes. The
Company is exposed to two primary sources of investment risk: credit risk,
relating to the uncertainty associated with an obligor's continued ability to
make timely payment of principal and interest, and interest rate risk, relating
to the market price and/or cash flow variability associated with changes in
market yield curves. See the Capital Markets Risk Management section of the MD&A
for further discussion of the Company's approach to managing these investment
risks.
The Company's separate accounts reflect two categories of risk assumption:
non-guaranteed separate accounts totaling $58.7 billion as of December 31, 1997,
wherein the policyholder assumes substantially all the investment risk and
reward, and guaranteed separate accounts totaling $10.7 billion as of December
31, 1997, wherein Hartford Life contractually guarantees either a minimum return
or account value to the policyholder. Non-guaranteed separate account products
include variable annuities, variable life and COLI. Guaranteed separate account
products primarily consist of fixed MVA individual annuities and modified
guaranteed life insurance, and generally include market value adjustment
features to mitigate the disintermediation risk in the event of surrenders.
The Company's general account consists of a diversified portfolio of
investments. Although all the assets of the general account support all the
Company's liabilities, the Company's investment strategy group has developed
separate investment portfolios for specific classes of product liabilities
within the general account. The strategy group works closely with the business
lines to develop specific investment guidelines, including duration targets,
asset allocation and convexity constraints, asset/liability mismatch tolerances
and return objectives, for each product line in order to achieve each product
line's individual risk and return objectives.
Invested assets in the Company's general account totaled $21 billion at December
31, 1997 and were comprised of $16.8 billion of fixed maturities, $3.8 billion
of policy loans, and other investments of $363. Policy loans, which had a
weighted-average interest rate of 11.2%, as of December 31, 1997, are secured by
the cash value of the underlying life insurance policies. These loans do not
mature in a conventional sense, but expire in conjunction with the related
policy liabilities.
19
21
The following table sets forth by type the fixed maturity securities held in the
Company's general account as of December 31, 1997 and 1996.
FIXED MATURITIES BY TYPE
- -------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------
FAIR FAIR
TYPE VALUE PERCENT VALUE PERCENT
- -------------------------------------------------------------------------
Corporate $ 7,970 47.3% $ 7,587 48.3%
ABS 3,199 19.0% 2,693 17.1%
Commercial MBS 1,606 9.5% 1,098 7.0%
Short-term 1,395 8.3% 765 4.9%
CMO 978 5.8% 2,150 13.7%
MBS - agency 514 3.1% 402 2.6%
Gov't/Gov't agencies - For. 502 3.0% 395 2.5%
Municipal - taxable 267 1.6% 266 1.7%
Gov't/Gov't agencies - U.S. 241 1.4% 355 2.2%
Municipal - tax-exempt 171 1.0% -- --
Redeemable preferred stock 5 -- -- --
- -------------------------------------------------------------------------
TOTAL FIXED MATURITIES $16,848 100.0% $15,711 100.0%
- -------------------------------------------------------------------------
During 1997, the Company continued to concentrate on reducing exposure to CMO's
and reallocated the funds into public and private corporate bonds, commercial
mortgage backed securities and other non-residential asset backed securities. In
general, commercial MBS and asset backed securities, although subject to
prepayment risk, are significantly less sensitive to changes in interest rates
as compared to CMO's and MBS.
As of December 31, 1997 and 1996, approximately 22.6% and 10.3%, respectively,
of the Company's fixed maturity portfolio was invested in private placement
securities (including Rule 144A offerings). Private placement securities are
generally less liquid than public securities; however, covenants for private
placements are designed to mitigate the impact of such increased liquidity risk.
Most of the private placement securities in the Company's portfolio are rated by
nationally recognized rating organizations. For further discussion of the
Company's investment credit policies, see the Capital Markets Risk Management
section of the MD&A under "Credit Risk".
INVESTMENT RESULTS
The table below summarizes Hartford Life's results for the past three years.
(Before taxes) 1997 1996 1995
- ----------------------------------------------------------------------
Net investment income $1,536 $1,534 $1,451
Yield on average invested assets (1) 7.6% 7.7% 7.4%
Net realized capital losses $ - $(219) $(4)
- ----------------------------------------------------------------------
(1) Represents net investment income (excluding net realized capital losses)
divided by average invested assets at cost (fixed maturities at amortized cost).
For the year ended December 31, 1997, before-tax net investment income totaled
$1.5 billion, unchanged from 1996. Before-tax yields on average invested assets
decreased to 7.6% in 1997 from 7.7% in 1996. The decrease in before-tax yields
was primarily attributable to declining market interest rates and a reduction in
policy loan yields.
For the year ended December 31, 1996, before-tax net investment income increased
$83 to $1.5 billion. The increase in net investment income was primarily due to
an increase in policy loans, new business cash flow invested in fixed maturities
and asset mix changes offset by asset sales and maturities in Closed Book GRC.
Yields on average invested assets increased to 7.7% in 1996 from 7.4% in 1995.
The increase in the before-tax yield was primarily due to the increase in policy
loan yields offset by a reduction in yields on fixed maturities as a result of
sales and maturities of higher yielding assets reinvested at lower average
yields.
There were no net realized capital gains or losses for the year ended December
31, 1997, as compared to net realized losses of $219 in 1996 and $4 in 1995. The
1996 capital losses were primarily attributable to the writedown and sale of
certain securities within Closed Book GRC.
20
22
CAPITAL MARKETS RISK MANAGEMENT
As described below, credit risk and market risk are the primary sources of
investment risk to the Company. The following discussion identifies the
Company's policies and procedures for managing these risks and monitoring the
results of the Company's risk management activities.
CREDIT RISK
Hartford Life has established investment credit policies that focus on the
credit quality of obligors and counterparties, limit credit concentrations,
encourage diversification and require frequent creditworthiness reviews.
Investment activity, including setting of policy and defining acceptable risk
levels, is subject to regular review and approval by senior management and
frequent review by Hartford Life's Finance Committee.
The Company invests primarily in investment grade securities and has established
exposure limits, diversification standards and review procedures for all credit
risks whether borrower, issuer or counterparty. The creditworthiness of specific
obligors is determined by an internal credit evaluation supplemented by
consideration of external determinants of creditworthiness, typically ratings
assigned by nationally recognized ratings agencies. Obligor, geographic, asset
sector and industry concentrations are subject to established limits and
monitored at regular intervals.
The following table identifies fixed maturity securities for the Company's
operations by credit quality. The ratings referenced in the tables are based on
the ratings of nationally recognized rating organizations or, if not rated,
assigned based on the Company's internal analysis of such securities.
As of December 31, 1997, more than 99% of the fixed maturity portfolio,
including guaranteed separate accounts, was invested in investment-grade
securities.
FIXED MATURITIES BY CREDIT QUALITY
- -------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------
FAIR VALUE PERCENT FAIR VALUE PERCENT
- -------------------------------------------------------------------------------
U.S. Gov't/Gov't agencies $ 2,907 10.7% $ 2,003 7.8%
AAA 3,974 14.6% 5,752 22.2%
AA 2,967 10.9% 3,693 14.3%
A 9,351 34.3% 8,935 34.5%
BBB 5,966 21.9% 4,467 17.3%
BB & below 205 0.7% 155 0.6%
Short-term 1,869 6.9% 863 3.3%
- -------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 27,239 100.0% $ 25,868 100.0%
- -------------------------------------------------------------------------------
The Company also maintains credit policies regarding the financial stability and
credit standing of its major derivatives' counterparties and typically requires
credit enhancement provisions to further reduce its credit risk. Credit risk for
derivatives contracts is limited to the amounts calculated to be due to the
Company on such contracts based on current market conditions and potential
payment obligations between the Company and its counterparties. Credit exposures
are quantified weekly and netted, and collateral is pledged to or held by the
Company to the extent the current value of derivatives exceed exposure policy
thresholds.
MARKET RISK
Hartford Life's exposure to market risk relates to the market price and/or cash
flow variability associated with changes in market interest rates. The following
discussion focuses on the Company's exposure to interest rate risk,
asset/liability management strategies utilized to manage this risk, and
characteristics of the Company's insurance liabilities and their sensitivity to
movements in interest rates.
INTEREST RATE RISK
Changes in interest rates can potentially impact the Company' profitability.
Under certain circumstances of interest rate volatility, the Company could be
exposed to disintermediation risk and reduction in net interest rate spread or
profit margins. For the Company's non-guaranteed separate accounts, exposure is
not significant since the policyholder assumes substantially all of the
investment risk.
The Company's general account and guaranteed separate account investment
portfolios primarily consist of investment-grade, fixed maturity securities,
including corporate bonds, asset backed securities, mortgage backed securities
and collateralized mortgage obligations. The fair value of these and the
Company's other invested assets fluctuates depending on the interest rate
environment
21
23
and other general economic conditions. During periods of declining interest
rates, paydowns on mortgage backed securities and collateralized mortgage
obligations increase as the underlying mortgages are prepaid. In addition,
during such periods, the Company generally will not be able to reinvest the
proceeds of any such prepayments at comparable yields. Conversely, during
periods of rising interest rates, the rate of prepayments generally declines,
which also exposes the Company to the possibility of asset/liability cash flow
mismatch. For a discussion of the Company's risk management techniques to manage
this market risk, see the "Asset/Liability Management Strategies used to Manage
Market Risk" section below.
As described above, the Company holds a significant fixed maturity portfolio
which includes both fixed and variable rate features. The following table
reflects the principal amounts of the fixed and variable rate fixed maturity
portfolio at December 31, 1997, along with the respective weighted average
coupons by estimated maturity year. Expected maturities differ from contractual
maturities due to call or prepayment provisions. The weighted average coupon on
variable rate securities is based upon spot rates as of December 31, 1997, and
is primarily based upon the London Interbank Offered Rate ("LIBOR"). Callable
bonds and notes are distributed to either call dates or maturity depending on
which date produces the most conservative yield. Asset backed securities,
collateralized mortgage obligations and mortgage backed securities are
distributed to maturity year based on estimates of the rate of future
prepayments of principal over the remaining life of the securities. These
estimates are developed using prepayment speeds provided in broker consensus
data. Such estimates are derived from prepayment speeds previously experienced
at the interest rate levels projected for the underlying collateral. Actual
prepayment experience may vary from these estimates. Financial instruments with
certain leverage features have been included in each of the fixed maturity
categories. These instruments have not been separately displayed because they
were immaterial to the Company's investment portfolio.
22
24
1997
1998 1999 2000 2001 2002 Thereafter TOTAL Fair Value
- -----------------------------------------------------------------------------------------------------------------------------------
BONDS AND NOTES - CALLABLE
Fixed Rate
Par value $ 37 $ 50 $ 28 $ 13 $ 12 $ 566 $ 706 $ 668
Weighted average coupon 10.5% 7.5% 7.7% 7.6% 7.7% 5.4% 6.0%
Variable Rate
Par value $ 66 $ 33 $ 28 $ 44 $ 15 $ 981 $ 1,167 $ 1,106
Weighted average coupon 6.4% 6.9% 7.1% 6.0% 6.4% 6.5% 6.5%
BONDS AND NOTES - OTHER
Fixed Rate
Par value $3,013 $1,400 $1,285 $1,215 $1,033 $7,053 $14,999 $14,815
Weighted average coupon 3.2% 6.8% 7.1% 7.4% 7.7% 6.1% 5.9%
Variable Rate
Par value $ 140 $ 47 $ 138 $ -- $ 84 $ 900 $ 1,309 $ 1,352
Weighted average coupon 5.1% 1.3% 6.4% -- 5.7% 5.4% 5.3%
ASSET BACKED SECURITIES
Fixed Rate
Par value $ 211 $ 251 $ 447 $ 566 $ 240 $ 573 $ 2,288 $ 2,325
Weighted average coupon 6.9% 6.6% 6.7% 7.0% 6.8% 7.3% 7.0%
Variable Rate
Par value $ 40 $ 183 $ 237 $ 304 $ 358 $ 837 $ 1,959 $ 1,959
Weighted average coupon 6.2% 6.2% 6.2% 6.7% 6.2% 6.4% 6.4%
COLLATERALIZED MORTGAGE OBLIGATIONS
Fixed Rate
Par value $ 29