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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2003
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 2-89516
HARTFORD LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 06-0974148
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 HOPMEADOW STREET, SIMSBURY, CONNECTICUT 06089
(Address of principal executive offices)
(860) 547-5000
(Registrant's telephone number, including area code)
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)
Yes [ ] No[X]
As of July 31, 2003 there were outstanding 1,000 shares of Common Stock, $5,690
par value per share, of the registrant.
The registrant meets the conditions set forth in General Instruction H (1) (a)
and (b) of Form 10-Q and is therefore filing this form with the reduced
disclosure format.
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INDEX
PAGE
Independent Accountants' Review Report 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Statements of Income - Second Quarter and Six
Months Ended June 30, 2003 and 2002 4
Condensed Consolidated Balance Sheets - June 30, 2003
and December 31, 2002 5
Condensed Consolidated Statements of Changes in
Stockholder's Equity - Six Months Ended June 30, 2003 and 2002 6
Condensed Consolidated Statements of Cash Flows - Six Months Ended June
30, 2003 and 2002 7
Notes to Condensed Consolidated Financial Statements 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 28
ITEM 4. CONTROLS AND PROCEDURES 28
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 29
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 29
Signature 30
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Board of Directors and Stockholder
Hartford Life Insurance Company
Hartford, Connecticut
We have reviewed the accompanying condensed consolidated balance sheet of
Hartford Life Insurance Company and subsidiaries (the "Company") as of June 30,
2003, and the related condensed consolidated statements of income for the second
quarters and six-month periods ended June 30, 2003 and 2002, and changes in
stockholder's equity, and cash flows for the six-month periods ended June 30,
2003 and 2002. These interim financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of the
Company as of December 31, 2002, and the related consolidated statements of
income, changes in stockholder's equity, and cash flows for the year then ended
(not presented herein); and in our report dated February 19, 2003, which
includes an explanatory paragraph relating to the Company's change in its method
of accounting for goodwill and indefinite-lived intangible assets in 2002, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 2002 is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
DELOITTE & TOUCHE LLP
Hartford, Connecticut
August 1, 2003
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
SECOND QUARTER SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
(In millions) (Unaudited) 2003 2002 2003 2002
------- ------- ------- -------
REVENUES
Fee income $ 522 $ 536 $ 1,016 $ 1,067
Earned premiums and other 184 125 315 304
Net investment income 445 381 883 760
Net realized capital gains (losses) 35 (121) (10) (138)
------- ------- ------- -------
TOTAL REVENUES 1,186 921 2,204 1,993
======= ======= ======= =======
BENEFITS, CLAIMS AND EXPENSES
Benefits and claims 629 544 1,215 1,125
Insurance expenses and other 166 157 315 334
Amortization of deferred policy acquisition costs and present
value of future profits 150 146 288 277
Dividends to policyholders 25 16 40 22
------- ------- ------- -------
TOTAL BENEFITS, CLAIMS AND EXPENSES 970 863 1,858 1,758
======= ======= ======= =======
INCOME BEFORE INCOME TAX EXPENSE 216 58 346 235
Income tax expense 27 1 57 46
------- ------- ------- -------
NET INCOME $ 189 $ 57 $ 289 $ 189
======= ======= ======= =======
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
(In millions, except for share data) 2003 2002
--------- ---------
(Unaudited)
ASSETS
Investments
Fixed maturities, available for sale, at fair value (amortized cost of
$27,118 and $23,675) $ 29,101 $ 24,786
Equity securities, available for sale, at fair value (cost of $91 and $137) 93 120
Policy loans, at outstanding balance 2,850 2,895
Other investments 746 918
--------- ---------
Total investments 32,790 28,719
Cash 45 79
Premiums receivable and agents' balances 14 15
Reinsurance recoverables 1,481 1,477
Deferred policy acquisition costs and present value of future profits 5,582 5,479
Deferred income taxes (483) (243)
Goodwill 186 186
Other assets 1,211 1,073
Separate account assets 119,383 105,316
--------- ---------
TOTAL ASSETS $ 160,209 $ 142,101
========= =========
LIABILITIES
Reserve for future policy benefits $ 6,011 $ 5,724
Other policyholder funds 25,311 23,037
Other liabilities 2,955 2,207
Separate account liabilities 119,383 105,316
--------- ---------
TOTAL LIABILITIES 153,660 136,284
========= =========
STOCKHOLDER'S EQUITY
Common Stock - 1,000 shares authorized, issued and outstanding;
par value $5,690 6 6
Capital surplus 2,191 2,041
Accumulated other comprehensive income
Net unrealized capital gains on securities, net of tax 967 574
Foreign currency translation adjustments (1) (1)
Total accumulated other comprehensive income 966 573
Retained earnings 3,386 3,197
--------- ---------
TOTAL STOCKHOLDER'S EQUITY 6,549 5,817
========= =========
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 160,209 $ 142,101
========= =========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
SIX MONTHS ENDED JUNE 30, 2003
ACCUMULATED OTHER
COMPREHENSIVE INCOME
--------------------------------------
NET
UNREALIZED NET GAINS ON
CAPITAL CASH FLOW FOREIGN
GAINS ON HEDGING CURRENCY TOTAL
COMMON CAPITAL SECURITIES, INSTRUMENTS, TRANSLATION RETAINED STOCKHOLDER'S
(In millions) (Unaudited) STOCK SURPLUS NET OF TAX NET OF TAX ADJUSTMENTS EARNINGS EQUITY
------- ------- ----------- ------------ ----------- -------- -------------
Balance, December 31, 2002 $ 6 $ 2,041 $ 463 $ 111 $ (1) $ 3,197 $ 5,817
Comprehensive income
Net income 289 289
-------
Other comprehensive income, net of
tax (1)
Unrealized gain on securities (2) 427 427
Net loss on cash flow hedging
Instruments (34) (34)
-------
Cumulative translation adjustments --
-------
Total other comprehensive income 393
-------
Total comprehensive income 682
-------
Capital contribution 150 150
Dividends declared (100) (100)
======= ======= ======= ======= ======= ======= =======
BALANCE, JUNE 30, 2003 $ 6 $ 2,191 $ 890 $ 77 $ (1) $ 3,386 $ 6,549
======= ======= ======= ======= ======= ======= =======
SIX MONTHS ENDED JUNE 30, 2002
ACCUMULATED OTHER
COMPREHENSIVE INCOME
--------------------------------------
NET
UNREALIZED NET GAINS ON
CAPITAL CASH FLOW FOREIGN
GAINS ON HEDGING CURRENCY TOTAL
COMMON CAPITAL SECURITIES, INSTRUMENTS, TRANSLATION RETAINED STOCKHOLDER'S
(In millions) (Unaudited) STOCK SURPLUS NET OF TAX NET OF TAX ADJUSTMENTS EARNINGS EQUITY
------- ------- ----------- ------------ ----------- -------- -------------
Balance, December 31, 2001 $ 6 $ 1,806 $ 114 $ 63 $ (2) $ 2,771 $ 4,758
Comprehensive income
Net income 189 189
-------
Other comprehensive income, net of
tax (1)
Unrealized gain on securities (2) 70 70
Net gain on cash flow hedging
Instruments 7 7
Cumulative translation adjustments (1) (1)
-------
Total other comprehensive income 76
-------
Total comprehensive income 265
======= ======= ======= ======= ======= ======= =======
BALANCE, JUNE 30, 2002 $ 6 $ 1,806 $ 184 $ 70 $ (3) $ 2,960 $ 5,023
======= ======= ======= ======= ======= ======= =======
(1) Unrealized gain on securities is reflected net of tax provision of $230
and $38 for the six months ended June 30, 2003 and 2002, respectively. Net
(loss) gain on cash flow hedging instruments is net of tax (benefit)
provision of $(18) and $4 for the six months ended June 30, 2003 and 2002.
There is no tax effect on cumulative translation adjustments.
(2) There were reclassification adjustments for after-tax losses in the amount
of $(16) and $(90) realized in net income for the six months ended June
30, 2003 and 2002, respectively.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
JUNE 30,
---------------------
(In millions) (Unaudited) 2003 2002
------- -------
OPERATING ACTIVITIES
Net income $ 289 $ 189
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Net realized capital losses 10 138
Amortization of deferred policy acquisition costs and present value of
future profits 288 277
Additions to deferred policy acquisition costs and present value of future profits (611) (476)
Depreciation and amortization 50 --
Decrease (increase) in premiums receivable and agents' balances 1 (3)
Increase (decrease) in other liabilities 162 (119)
Increase in receivables (14) (2)
Increase in accrued liabilities and payables 27 2
(Decrease) increase in accrued tax (26) 63
Increase in deferred income tax 66 114
Increase in future policy benefits 287 349
Increase in reinsurance recoverables (20) (131)
Other, net (159) (65)
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 350 336
------- -------
INVESTING ACTIVITIES
Purchases of investments (7,266) (5,020)
Sales of investments 2,858 2,584
Maturities and principal paydowns of fixed maturity investments 1,685 881
Other -- 4
------- -------
NET CASH USED FOR INVESTING ACTIVITIES (2,723) (1,551)
------- -------
FINANCING ACTIVITIES
Capital Contributions 150 --
Dividends Paid (100) --
Net receipts from investment and universal life-type contracts 2,289 1,179
------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,339 1,179
------- -------
Net decrease in cash (34) (36)
Impact of foreign exchange -- (1)
------- -------
Cash -- beginning of period 79 87
------- -------
CASH -- END OF PERIOD $ 45 $ 50
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
NET CASH PAID DURING THE PERIOD FOR
Income taxes $ 26 $ 37
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in millions, unless otherwise stated)
(Unaudited)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
These Condensed Consolidated Financial Statements include Hartford Life
Insurance Company and its wholly-owned subsidiaries ("Hartford Life Insurance
Company" or the "Company"), Hartford Life and Annuity Insurance Company
("HLAI"), Hartford International Life Reassurance Corporation ("HLRe") and
Servus Life Insurance Company, formerly Royal Life Insurance Company of America.
The Company is a wholly-owned subsidiary of Hartford Life and Accident Insurance
Company ("HLA"), a wholly-owned subsidiary of Hartford Life, Inc. ("Hartford
Life"). Hartford Life is a direct subsidiary of Hartford Holdings, Inc., a
direct subsidiary of The Hartford Financial Services Group, Inc. ("The
Hartford"), the Company's ultimate parent company. In November 1998, Hartford
Life Insurance Company transferred in the form of a dividend, Hartford Financial
Services, LLC and its subsidiaries to HLA.
Pursuant to an initial public offering (the "IPO") on May 22, 1997, Hartford
Life sold to the public 26 million shares of Class A Common Stock at $28.25 per
share and received proceeds, net of offering expenses, of $687. The 26 million
shares sold in the IPO represented approximately 18.6% of the equity ownership
in Hartford Life. On June 27, 2000, The Hartford acquired all of the outstanding
common shares of Hartford Life not already owned by The Hartford (The Hartford
Acquisition). As a result of The Hartford Acquisition, Hartford Life became a
direct subsidiary of Hartford Fire Insurance Company. During the third quarter
of 2002, Hartford Life became a direct subsidiary of Hartford Holdings, Inc., a
direct wholly owned subsidiary of The Hartford.
Along with its parent, HLA, the Company is a leading financial services and
insurance group which provides (a) investment products, such as individual
variable annuities and fixed market value adjusted annuities and retirement plan
services for savings and retirement needs; (b) individual life insurance for
income protection and estate planning; (c) group benefits products such as group
life and group disability insurance that is directly written by the Company and
is substantially ceded to its parent, HLA, and (d) corporate owned life
insurance.
2. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
(A) BASIS OF PRESENTATION
The Condensed Consolidated Financial Statements have been prepared on the basis
of accounting principles generally accepted in the United States of America
("GAAP"), which differ materially from the accounting practices prescribed by
various insurance regulatory authorities. Less than majority-owned subsidiaries
in which the Company has at least a 20% interest are reported on the equity
basis. All intercompany transactions and balances between Hartford Life
Insurance Company, its subsidiaries and affiliates have been eliminated.
The accompanying condensed consolidated financial statements as of June 30,
2003, and for the second quarter and six-month periods ended June 30, 2003 and
2002 are unaudited. These condensed consolidated financial statements reflect
all adjustments (consisting only of normal accruals) which are, in the opinion
of management, necessary for the fair presentation of the financial position,
results of operations, and cash flows for the interim periods. These financial
statements and condensed notes should be read in conjunction with the
consolidated financial statements and notes thereto included in Hartford Life
Insurance Company's 2002 Form 10-K Annual Report. The results of operations for
the interim periods should not be considered indicative of results to be
expected for the full year.
(B) RECLASSIFICATIONS
Certain reclassifications have been made to prior year financial information to
conform to the current year classifications.
(C) USE OF ESTIMATES
The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States of America, requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
The most significant estimates include those used in determining reserves,
deferred policy acquisition costs, valuation of investments and derivative
instruments, income taxes and contingencies.
(D) SIGNIFICANT ACCOUNTING POLICIES
For a description of accounting policies, see Note 2 of Notes to Consolidated
Financial Statements included in Hartford Life Insurance Company's 2002 Form
10-K Annual Report.
(E) ADOPTION OF NEW ACCOUNTING STANDARDS
In May 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No.
150, "Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity". SFAS No. 150 establishes standards for classifying and
measuring as liabilities certain financial instruments that embody obligations
of the issuer and have characteristics of both liabilities and equity.
Generally, SFAS No. 150 requires liability classification for two broad classes
of financial instruments: (a) instruments that represent, or are indexed to, an
obligation to buy back the issuer's shares regardless whether the instrument is
settled on a net-cash or gross physical basis and (b) obligations that (i) can
be settled in shares but derive their value predominately from another
underlying instrument or index (e.g., security prices, interest rates, and
currency rates), (ii) have a fixed value, or (iii) have a value inversely
related to the issuer's shares. Mandatorily redeemable equity and written
options requiring the issuer to buy back shares are examples of financial
instruments that should be reported as liabilities under this new guidance.
SFAS No. 150 specifies accounting only for certain freestanding financial
instruments and does not affect whether an embedded derivative must be
bifurcated and accounted for in accordance with SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities".
SFAS No. 150 is effective for instruments entered into or modified after May 31,
2003 and for all other instruments beginning with the first interim reporting
period beginning after June 15, 2003. Adoption of this statement did not have a
material impact on the Company's consolidated financial condition or results of
operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46") which requires an enterprise to assess
whether consolidation of an entity is appropriate based upon its interests in a
variable interest entity ("VIE"). A VIE is an entity in which the equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. The
initial determination of whether an entity is a VIE shall be made on the date at
which an enterprise becomes involved with the entity. An enterprise shall
consolidate a VIE if it has a variable interest that will absorb a majority of
the VIEs expected losses if they occur, receive a majority of the entity's
expected residual returns if they occur or both. FIN 46 is effective immediately
for new VIEs established or purchased subsequent to January 31, 2003. For VIEs
entered into prior to February 1, 2003, FIN 46 is effective for interim periods
beginning after June 15, 2003. The adoption of FIN 46 did not have a material
impact on the Company's financial condition or results of operations as there
were no material VIEs identified which required consolidation. FIN 46 further
requires the disclosure of certain information related to VIEs in which the
Company holds a significant variable interest. As of June 30, 2003, the Company
did not own any such interests that required disclosure.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45" or "the Interpretation"). FIN 45 requires
certain guarantees to be recorded at fair value and also requires a guarantor to
make new disclosures, even when the likelihood of making payments under the
guarantee is remote. In general, the Interpretation applies to contracts or
indemnification agreements that contingently require the guarantor to make
payments to the guaranteed party based on changes in an underlying instrument or
indices (e.g., security prices, interest rates, or currency rates) that are
related to an asset, liability or an equity security of the guaranteed party.
The recognition provisions of FIN 45 are effective on a prospective basis for
guarantees issued or modified after December 31, 2002. The disclosure
requirements are effective for financial statements of interim and annual
periods ending after December 15, 2002. For further discussion, see Note 2(h),
"Other Investment and Risk Management Activities - Specific Strategies", of
Notes to Consolidated Financial Statements included in Hartford Life Insurance
Company's 2002 Form 10-K Annual Report. Adoption of this statement did not have
a material impact on the Company's consolidated financial condition or results
of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities", which addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Action
(including Certain Costs Incurred in a Restructuring)" ("Issue 94-3"). The
principal difference between SFAS No. 146 and Issue 94-3 is that SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred, rather than at the date
of an entity's commitment to an exit plan. SFAS No. 146 is effective for exit or
disposal activities after December 31, 2002. Adoption of SFAS No. 146 will
result in a change in the timing of when a liability is recognized if the
Company has restructuring activities after December 31, 2002. Adoption of this
statement did not have a material impact on the Company's consolidated financial
condition or results of operations.
(F) FUTURE ADOPTION OF NEW ACCOUNTING STANDARDS
In July 2003, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants has issued a final Statement of
Position 03-1, "Accounting and Reporting by Insurance Enterprises for Certain
Nontraditional Long-Duration Contracts and for Separate Accounts" (the "SOP").
The SOP addresses a wide variety of topics, some of which may have a significant
impact on the Company. The major provisions of the SOP require:
- Recognizing expenses for a variety of contracts and contract
features, including guaranteed minimum death benefits ("GMDB") and
annuitization options, on an accrual basis versus the previous
method of recognition upon payment;
- Reporting and measuring assets and liabilities of certain separate
account products as general account assets and liabilities when
specified criteria are not met;
- Reporting and measuring seed money in separate accounts as general
account assets based on the insurer's proportionate beneficial
interest in the separate account's underlying assets; and
- Capitalizing sales inducements that meet specified criteria and
amortizing such amounts over the life of the contracts using the
same methodology as used for amortizing deferred acquisition costs
("DAC").
The SOP is effective for financial statements for fiscal years beginning after
December 15, 2003. At the date of initial application of this SOP, the Company
will have to make various determinations, such as qualification for separate
account treatment, classification of securities in separate account arrangements
not meeting the criteria of the SOP, significance of mortality and morbidity
risk, adjustments to contract holder liabilities, and adjustments to estimated
gross profits all of which may have a significant effect on the Company's
financial condition and results of operations.
Based on management's preliminary review of the SOP and market conditions as of
June 30, 2003, it appears that a significant impact to the Company is the
requirement for recording a liability for variable annuity products with a
guaranteed minimum death benefit feature. The determination of this liability is
based on models that involve numerous estimates and subjective judgments,
including those regarding expected market rates of return and volatility,
contract surrender rates and mortality experience. Based on management's
preliminary review of the SOP, the unrecorded GMDB liabilities, net of
anticipated reinsurance recoverable of approximately $300, are estimated to be
between $75 and $85 at June 30, 2003. Net of estimated DAC and income tax
effects, the cumulative effect of establishing the required GMDB reserves as of
June 30, 2003 would result in an estimated reduction of net income of between
$35 and $45. The ultimate actual impact on the Company's financial statements
may differ significantly from management's current estimates
Since the SOP is not yet effective, the Company has not recorded any liabilities
for the risks associated with GMDB offered on Hartford Life's variable annuity
business, but has consistently recorded the related expenses in the period in
which the benefits are paid to contractholders. Net of reinsurance, the Company
paid $14 and $31 for the second quarter and six months ended June 30, 2003,
respectively, and $9 and $16 for the second quarter and six months ended June
30, 2002, respectively, in GMDB benefits to contractholders. Future downturns in
the equity markets could increase these payments. At June 30, 2003, the Company
held $64.8 billion of variable annuities in its separate accounts. The Company
estimates its net amount at risk relating to these variable annuities (the
amount by which current account values of its variable annuity contracts are not
sufficient to meet its GMDB commitments) is $17.4 billion. However, at June 30,
2003, approximately 78% of Hartford Life Insurance Company's net amount at risk
was covered by reinsurance, resulting in a retained net amount at risk of $3.8
billion.
In addition to the foregoing impact of the SOP, certain of the Company's fixed
annuity products which are currently recorded as separate account assets and
liabilities are expected to be revalued upon reclassification to the general
account. The Company is currently assessing this requirement and all the other
impacts of the SOP, and has not yet determined the total impact on the Company's
consolidated financial condition or results of operations.
In April 2003, the FASB issued guidance in Statement 133 Implementation Issue
No. B36, "Embedded Derivatives: Modified Coinsurance Arrangements and Debt
Instruments That Incorporate Credit Risk Exposures That Are Unrelated or Only
Partially Related to the Creditworthiness of the Obligor of Those Instruments",
("DIG B36") that addresses the instances in which bifurcation of an instrument
into a debt host contract and an embedded credit derivative is required. DIG B36
indicates that bifurcation is necessary in a modified coinsurance arrangement
when the yield on the receivable and payable is based on a specified proportion
of the ceding company's return on either its general account assets or a
specified block of those assets, rather than the overall creditworthiness of the
ceding company. The Company believes that the majority of its modified
coinsurance and funds withheld agreements are not impacted by DIG B36. While the
Company believes there will be no material effect on its results of operations
or financial condition due to the implementation of this guidance, it is
currently evaluating those potential impacts. The guidance is effective for
quarterly periods beginning after September 15, 2003.
DIG B36 is also applicable to corporate issued debt securities that incorporate
credit risk exposures that are unrelated or only partially related to the
creditworthiness of the obligor. The Company is currently evaluating the impact
of DIG B36 on such corporate issued debt securities. The Company does not
believe the adoption of DIG B36 will have a material effect on the Company's
consolidated financial condition or results or operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of SFAS No. 133 on
Derivative Instruments and Hedging Activities". The Statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133.
SFAS No. 149 amends SFAS No. 133 for decisions made as part of the Derivatives
Implementation Group (DIG) process that effectively required amendments to SFAS
No. 133, in connection with other FASB projects dealing with financial
instruments. SFAS No. 149 also clarifies under what circumstances a contract
with an initial net investment and purchases and sales of when-issued securities
that do not yet exist meet the characteristic of a derivative as discussed in
SFAS No. 133. In addition, it clarifies when a derivative contains a financing
component that warrants special reporting in the statement of cash flows.
SFAS No. 149 is effective for contracts entered into or modified after June 30,
2003, except as stated below and for hedging relationships designated after June
30, 2003. The provisions of this statement should be applied prospectively,
except as stated below.
The provisions of this statement that relate to SFAS No. 133 DIG issues that
have been effective for fiscal quarters that began prior to June 15, 2003,
should continue to be applied in accordance with their respective effective
dates. In addition, the guidance in SFAS No. 149 related to forward purchases or
sales of when-issued securities or other securities that do not yet exist,
should be applied to both existing contracts and new contracts entered into
after June 30, 2003. The Company has determined that the adoption of SFAS No.
149 will not have a material impact on the Company's financial condition or
results of operations.
(G) STOCK-BASED COMPENSATION
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure an Amendment to FASB No. 123", which
provides three optional transition methods for entities that decide to
voluntarily adopt the fair value recognition principles of SFAS No. 123,
"Accounting for Stock Issued to Employees", and modifies the disclosure
requirements of SFAS No. 123. In January 2003, The Hartford adopted the fair
value recognition provisions of accounting for employee stock compensation and
used the prospective transition method. Under the prospective method,
stock-based
compensation expense is recognized for awards granted or modified after the
beginning of the fiscal year in which the change is made. The Hartford will
expense all stock-based compensation awards granted after January 1, 2003. The
allocated expense to the Company from The Hartford associated with these awards
for the second quarter ending June 30, 2003, was immaterial.
All stock-based compensation awards granted or modified prior to January 1,
2003, will continue to be valued using the intrinsic value-based provisions set
forth in Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock-Issued to Employees". Under the intrinsic value method, compensation
expense is determined on the measurement date, which is the first date on which
both the number of shares the employee is entitled to receive and the exercise
price are known. Compensation expense, if any, is measured based on the award's
intrinsic value, which is the excess of the market price of the stock over the
exercise price on the measurement date. For the quarter and six months ended
June 30, 2003, the Hartford's after-tax compensation expense related to its
stock-based compensation plans, including the expense associated with the
transition to SFAS No. 123 and non-option plans, was $1 and $2, respectively.
The Hartford's after-tax compensation expense for those same plans was $2 and $3
for the quarter and six months ended June 30, 2002, respectively. The expense,
including non-option plans, related to stock-based employee compensation
included in the determination of net income for the second quarter and six
months ended June 30, 2003 is less than that which would have been recognized if
the fair value method had been applied to all awards since the effective date of
SFAS No. 123. (For further discussion of the Company's stock compensation plans,
see Note 11 of Notes to Consolidated Financial Statements included in The
Hartford's 2002 Form 10-K Annual Report.)
3. GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets", and accordingly ceased all amortization of goodwill. The
carrying amount of goodwill is $186 as of June 30, 2003 and December 31, 2002.
The following table shows the Company's acquired intangible assets that continue
to be subject to amortization and aggregate amortization expense. Except for
goodwill, the Company has no intangible assets with indefinite useful lives.
AS OF JUNE 30, 2003
------------------------------
GROSS ACCUMULATED
CARRYING NET
AMORTIZED INTANGIBLE ASSETS AMOUNT AMORTIZATION
- --------------------------- ------------ ------------
Present value of future profits $ 511 $ 94
------------ ------------
TOTAL $ 511 $ 94
============ ============
Net amortization expense for the second quarter and six months ended June 30,
2003 was $9 and $14, respectively. Net amortization expense for the second
quarter and six months ended June 30, 2002 was $11 and $19, respectively.
Estimated future net amortization expense for the succeeding five years is as
follows:
FOR THE YEAR ENDING DECEMBER 31,
- --------------------------------
2003 $ 42
2004 $ 39
2005 $ 36
2006 $ 34
2007 $ 31
4. INVESTMENTS AND DERIVATIVE INSTRUMENTS
(A) SECURITIES LENDING
The Company has engaged in a securities lending program, to generate additional
income, whereby certain domestic fixed income securities are loaned for a short
period of time from the Company's portfolio to qualifying third parties, via a
lending agent. Borrowers of these securities provide collateral of 102% of the
market value of the loaned securities. Acceptable collateral may be in the form
of cash or U.S. Government securities. The market value of the loaned securities
is monitored and additional collateral is obtained if the market value of the
collateral falls below 100% of the market value of the loaned securities. Under
the terms of the securities lending program, the lending agent indemnifies the
Company against borrower defaults. As of June 30, 2003, the fair value of the
loaned securities was approximately $495 and was included in fixed maturities.
The cash collateral received as of June 30, 2003 of approximately $512 was
invested in short-term securities and was also included in fixed maturities,
with a corresponding liability recognized for the obligation to return the
collateral recorded in other liabilities. The Company retains a portion of the
income earned from the cash collateral or receives a fee from the borrower. The
Company recorded income from securities lending transactions, net of lending
fees, that was immaterial for the second quarter and six months ended June 30,
2003, which was included in net investment income.
(B) DERIVATIVE INSTRUMENTS
The Company utilizes a variety of derivative instruments, including swaps, caps,
floors, forwards and exchange traded futures and options, for one of four
Company-approved objectives: to hedge risk arising from interest rate, price or
currency exchange rate volatility; to manage liquidity; to control transaction
costs; or to enter into income enhancement and replication transactions.
All of the Company's derivative transactions are permitted uses of
derivatives under the derivatives use plan filed and/or approved, as applicable,
by the State of Connecticut and State of New York insurance departments. The
Company does not make a market or trade in these instruments for the express
purpose of earning short-term trading profits.
For a detailed discussion of the Company's use of derivative instruments, see
Note 2(h) of Notes to Consolidated Financial Statements included in Hartford
Life Insurance Company's 2002 Form 10-K Annual Report.
As of June 30, 2003 and December 31, 2002, the Company carried $185 and $179,
respectively, of derivative assets in other investments and $106 and $78,
respectively, of derivative liabilities in other liabilities. In addition, the
Company recognized embedded derivative liabilities related to guaranteed minimum
withdrawal benefits ("GMWB") on certain of its variable annuity contracts of $32
and $48 at June 30, 2003 and December 31, 2002, respectively, in other
policyholder funds. Offsetting reinsurance arrangements recognized as derivative
assets at June 30, 2003 and December 31, 2002 were $32 and $48, respectively,
and were included in reinsurance recoverables.
Cash-Flow Hedges
For the second quarter and six months ended June 30, 2003 and 2002, the
Company's gross gains and losses representing the total ineffectiveness of all
cash-flow hedges were immaterial, with the net impact reported as net realized
capital gains and losses.
Gains and losses on derivative contracts that are reclassified from accumulated
other comprehensive income ("AOCI") to current period earnings are included in
the line item in the statement of income in which the hedged item is recorded.
As of June 30, 2003 and 2002, the after-tax deferred net gains on derivative
instruments accumulated in AOCI that are expected to be reclassified to earnings
during the next twelve months were $10 and $3, respectively. This expectation is
based on the anticipated interest payments on hedged investments in fixed
maturity securities that will occur over the next twelve months, at which time
the Company will recognize the deferred net gains and losses as an adjustment to
interest income over the term of the investment cash flows. The maximum term
over which the Company is hedging its exposure to the variability of future cash
flows (for all forecasted transactions, excluding interest payments on
variable-rate debt) is twelve months. As of June 30, 2003 and December 31, 2002,
the Company held derivative notional value related to strategies categorized as
cash-flow hedges of $2.5 billion and $2.9 billion, respectively. For the second
quarter and six months ended June 30, 2003 and 2002, the net reclassifications
from AOCI to earnings resulting from the discontinuance of cash-flow hedges were
immaterial.
Fair-Value Hedges
For the second quarter and six months ended June 30, 2003 and 2002, the
Company's gross gains and losses representing the total ineffectiveness of all
fair-value hedges were immaterial, with the net impact reported as net realized
capital gains and losses. All components of each derivative's gain or loss are
included in the assessment of hedge effectiveness. As of June 30, 2003 and
December 31, 2002, the Company held $153 and $159, respectively, in derivative
notional value related to strategies categorized as fair-value hedges.
Other Investment and Risk Management Activities
The Company's other investment and risk management activities primarily relate
to strategies used to reduce economic risk or enhance income, and do not receive
hedge accounting treatment. Swap agreements, interest rate cap and floor
agreements and option contracts are used to reduce economic risk. Income
enhancement and replication transactions include the use of written covered call
options, which offset embedded equity call options, total return swaps and
synthetic replication of cash market instruments. The change in the value of all
derivatives held for other investment and risk management purposes is reported
in current period earnings as net realized capital gains and losses. As of June
30, 2003 and December 31, 2002, the Company held $4.3 billion and $3.4 billion,
respectively, in derivative notional value related to strategies categorized as
Other Investment and Risk Management Activities. In addition, Hartford Life
Insurance Company issues certain variable annuity products that contain a
Guaranteed Minimum Withdrawal Benefit ("GMWB"). The GMWB gives the policyholder
the right to make periodic surrenders that total an amount equal to the
policyholders' premium payments. This guarantee will remain in effect if
periodic surrenders each contract year do not exceed an amount equal to 7% of
total premium payments. If the policyholder chooses to surrender an amount equal
to more than 7% in a contract year, then the guarantee may be reduced to an
amount less than premium payments. In addition, the policyholder has the option,
after a specified time period, to reset the guarantee value to the then-current
account value, if greater. The GMWB represents an embedded derivative liability
in the variable annuity contract. It is carried at fair value and reported in
other policyholder funds. The fair value of the GMWB obligations are calculated
based on actuarial assumptions related to the projected benefits and related
contract charges over the lives of the contracts. Because of the dynamic and
complex nature of these cash flows, stochastic techniques under a variety of
market return scenarios and other best estimate assumptions are used. This model
involves numerous estimates and subjective judgments including those regarding
expected market rates of return and volatility and policyholder behavior.
For all contracts in effect as of June 30, 2003, the Company has entered into a
reinsurance arrangement to offset its exposure to the GMWB for the lives of
those contracts. This arrangement is recognized as a derivative asset and
carried at fair value in reinsurance recoverables. Changes in the fair value of
both the derivative assets and liabilities related to the GMWB are recorded in
net realized capital gains and losses. Beginning in July 2003, the Company has
utilized substantially all of its existing reinsurance under the current
arrangement and will be ceding only a very small number of new contracts.
Substantially all new contracts with the GMWB will not be covered by
reinsurance. These unreinsured contracts are expected to generate some
volatility in net income as the underlying embedded derivative liabilities are
marked to fair value each reporting period, resulting in the recognition of net
realized capital gains or losses in response to changes in certain critical
factors including capital market conditions and policyholder behavior.
For further discussion of the Company's other investment and risk management
activities, see "Other Investments and Risk Management Activities" in Note 2(h)
of Notes of Consolidated Financial Statements included in Hartford Life
Insurance Company's 2002 Form 10-K Annual Report.
5. COMMITMENTS AND CONTINGENCIES
(A) LITIGATION
Hartford Life Insurance Company is or may become involved in various legal
actions, in the normal course of its business, in which claims for alleged
economic and punitive damages have been or may be asserted, some for substantial
amounts. Some of the pending litigation has been filed as purported class
actions and some actions have been filed in certain jurisdictions that permit
punitive damage awards that are disproportionate to the actual damages incurred.
Although there can be no assurances, at the present time, the Company does not
anticipate that the ultimate liability arising from potential, pending or
threatened legal actions, after consideration of provisions made for estimated
losses and costs of defense, will have a material adverse effect on the
financial condition or operating results of the Company.
On March 15, 2002, a jury in the U.S. District Court for the Eastern District of
Missouri issued a verdict in Bancorp Services, LLC ("Bancorp") v. Hartford Life
Insurance Company, et al. in favor of Bancorp in the amount of $118. The case
involved claims of patent infringement, misappropriation of trade secrets, and
breach of contract against the Company and its affiliate International Corporate
Marketing Group, Inc. ("ICMG"). The judge dismissed the patent infringement
claim on summary judgment. The jury's award was based on the last two claims. On
August 28, 2002, the Court entered an order awarding Bancorp prejudgment
interest on the breach of contract claim in the amount of $16.
The Company and ICMG have appealed the judgment on the trade secret and breach
of contract claims. Bancorp has cross-appealed the pretrial dismissal of its
patent infringement claim. The Company's management, based on the advice of its
legal counsel, believes that there is a substantial likelihood that the judgment
will not survive at its current amount. Based on the advice of legal counsel
regarding the potential outcomes of this litigation, the Company recorded an $11
after-tax charge in the first quarter of 2002 to increase litigation reserves.
Should the Company and ICMG not succeed in eliminating or reducing the judgment,
a significant additional expense would be recorded in the future.
(B) TAX MATTERS
The Company's Federal income tax returns are routinely audited by the Internal
Revenue Service ("IRS"). The Company is currently under audit for the 1998-2001
tax years. No material issues have been raised to date by the IRS. Management
believes that adequate provision has been made in the financial statements for
any potential assessments that may result from tax examinations and other
tax-related matters for all open tax years.
The tax provision recorded during the second quarter of 2003 reflects a benefit
of $23, consisting primarily of a change in estimate of the dividends-received
deduction ("DRD") tax benefit reported during 2002. The change in estimate was
the result of 2002 actual investment performance on the related separate
accounts being unexpectedly out of pattern with past performance which had been
the basis for the estimate. In addition to the foregoing change in estimate,
based on the financial information received by the Company in preparing its 2002
federal income tax returns, as well as its current best judgment, the Company
has revised its estimate of the 2003 fiscal year DRD benefit to $85, from its
prior estimate of $63. As a result of this revised estimate, in the second
quarter the Company revised its first quarter DRD benefit upwards by $5,
bringing the total DRD benefit related to the 2003 tax year for the six months
ended June 30, 2003 to $43.
6. RELATED PARTY TRANSACTIONS
In connection with a comprehensive evaluation of various capital maintenance and
allocation strategies by The Hartford, an intercompany asset sale transaction
was completed in April 2003. The transaction resulted in certain of The
Hartford's Property & Casualty subsidiaries selling ownership interests in
certain high quality fixed maturity securities to the Company for cash equal to
the fair value of the securities as of the effective date of the sale. For the
Property and Casualty subsidiaries, the transaction monetized the embedded gain
in certain securities on a tax deferred basis to The Hartford because no capital
gains tax will be paid until the securities are sold to unaffiliated third
parties. The transfer re-deployed to the Company desirable investments without
incurring substantial transaction costs that would have been payable in a
comparable open market transaction. The fair value of securities transferred was
$1.7 billion.
7. SEPTEMBER 11 TERRORIST ATTACK
As a result of the September 11 terrorist attack, the Company recorded an
estimated loss amounting to $9, net of taxes and reinsurance, in the third
quarter of 2001. The Company based the loss estimate upon a review of insured
exposures using a variety of assumptions and actuarial techniques, including
estimated amounts for unknown and unreported policyholder losses. Also included
was an estimate of amounts recoverable under the Company's ceded reinsurance
programs, including the cost of additional reinsurance premiums. In the first
quarter of 2002, the Company recognized a $3 after-tax benefit related to
favorable development of reserves related to the September 11 terrorist attack.
8. REINSURANCE RECAPTURE
On June 30, 2003, the Company recaptured a block of business previously
reinsured with an unaffiliated reinsurer. Under this treaty, Hartford Life
reinsured a portion of the guaranteed minimum death benefit (GMDB) feature
associated with certain of its annuity contracts. As consideration for
recapturing the business and final settlement under the treaty, the Company has
received assets valued at approximately $32 million and one million warrants
exercisable for the unaffiliated company's stock. This amount represents to the
Company an advance collection of its future recoveries under the reinsurance
agreement and will be recognized as future losses are recorded in 2003 or upon
the
adoption of the SOP (see Note 2(f)). Prospectively, as a result of the
recapture, Hartford Life will be responsible for all of the remaining and
ongoing risks associated with the GMDB's related to this block of business. The
recapture increased the net amount at risk retained by the Company at June 30,
2003 by $799, which is included in the net amount at risk discussed in Note
2(f).
9. SEGMENT INFORMATION
Hartford Life Insurance Company is organized into three reportable operating
segments: Investment Products, Individual Life and Corporate Owned Life
Insurance (COLI). Investment Products offers individual variable and fixed
annuities, retirement plan services and other investment products. Individual
Life sells a variety of life insurance products, including variable life,
universal life, interest sensitive whole life and term life insurance. COLI
primarily offers variable products used by employers to fund non-qualified
benefits or other postemployment benefit obligations as well as leveraged COLI.
The Company includes in "Other" realized capital gains and losses, corporate
items not directly allocable to any of its reportable operating segments, as
well as certain group benefit products including group life and group disability
insurance that is directly written by the Company and is substantially ceded to
its parent, HLA.
The accounting policies of the reportable operating segments are the same as
those described in "Basis of Presentation and Accounting Policies" in Note 2 in
the Company's 2002 Form 10-K Annual Report. Hartford Life Insurance Company
evaluates performance of its segments based on revenues, net income and the
segment's return on allocated capital. The Company charges direct operating
expenses to the appropriate segment and allocates the majority of indirect
expenses to the segments based on an intercompany expense arrangement.
Intersegment revenues are not significant and primarily occur between corporate
and the operating segments. These amounts include interest income on allocated
surplus and the allocation of net realized capital gains and losses through net
investment income utilizing the duration of the segment's investment portfolios.
The Company's revenues are primarily derived from customers within the United
States. The Company's long-lived assets primarily consist of deferred policy
acquisition costs and deferred tax assets from within the United States. The
following tables present summarized financial information concerning the
Company's segments.
SECOND QUARTER ENDED Investment Individual
JUNE 30, 2003 Products Life COLI Other Total
------ ------ ------ ------ ------
Total revenues $ 775 $ 219 $ 126 $ 66 $1,186
Net income 118 34 8 29 189
SECOND QUARTER ENDED Investment Individual
JUNE 30, 2002 Products Life COLI Other Total
------ ------ ------ ------ ------
Total revenues $ 654 $ 221 $ 146 $ (100) $ 921
Net income 92 26 9 (70) 57
SIX MONTHS ENDED Investment Individual
JUNE 30, 2003 Products Life COLI Other Total
------ ------ ------ ------ ------
Total revenues $1,457 $ 439 $ 252 $ 56 $2,204
Net income 198 63 17 11 289
SIX MONTHS ENDED Investment Individual
JUNE 30, 2002 Products Life COLI Other Total
------ ------ ------ ------ ------
Total revenues $1,350 $ 428 $ 305 $ (90) $1,993
Net income 185 56 9 (61) 189
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Dollar amounts in millions, unless otherwise stated)
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") addresses the financial condition of Hartford Life Insurance
Company and its subsidiaries ("Hartford Life Insurance Company" or the
"Company") as of June 30, 2003, compared with December 31, 2002, and its results
of operations for the second quarter and six months ended June 30, 2003 compared
with the equivalent periods in 2002. This discussion should be read in
conjunction with the MD&A included in the Company's 2002 Form 10-K Annual
Report.
Certain of the statements contained herein are forward-looking statements. These
forward-looking 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 upon 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 various factors. These factors include: the
uncertain nature of damage theories and loss amounts and the development of
additional facts related to the September 11 terrorist attack ("September 11");
the uncertain effect on the Company of the Jobs and Growth Tax Relief
Reconciliation Act of 2003, in particular the reduction in tax rates on
long-term capital gains and most dividend distributions; the response of
reinsurance companies under reinsurance contracts, the impact of increasing
reinsurance rates, and the availability and adequacy of reinsurance to protect
the Company against losses; the inability to effectively mitigate the impact of
equity market volatility on the Company's financial position and results of
operations arising from obligations under annuity product guarantees; the
possibility of more unfavorable loss experience than anticipated; the
possibility of general economic and business conditions that are less favorable
than anticipated; the effect of changes in interest rates, the stock markets or
other financial markets; stronger than anticipated competitive activity;
unfavorable legislative, regulatory or judicial developments; the Company's
ability to distribute its products through distribution channels, both current
and future; the uncertain effects of emerging claim and coverage issues; the
effect of assessments and other surcharges for guaranty funds and second-injury
funds and other mandatory pooling arrangements; a downgrade in the Company's
claims-paying, financial strength or credit ratings; the ability of the
Company's subsidiaries to pay dividends to the Company; and other factors
described in such forward-looking statements.
Certain reclassifications have been made to prior year financial information to
conform to the current year presentation.
INDEX
Critical Accounting Estimates 16
Consolidated Results of Operations - Operating Summary 18
Investment Products 19
Individual Life 20
Corporate Owned Life Insurance (COLI) 21
Investments 21
Capital Markets Risk Management 23
Accounting Standards 28
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States, requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The Company has identified the following estimates as critical in that they
involve a higher degree of judgment and are subject to a significant degree of
variability: valuation of investments and derivative instruments; deferred
policy acquisition costs; reserves and accounting for contingencies. In
developing these estimates management makes subjective and complex judgments
that are inherently uncertain and subject to material change as facts and
circumstances develop. Although variability is inherent in these estimates,
management believes the amounts provided are appropriate based upon the facts
available upon compilation of the financial statements. There have been no
significant changes to the Company's critical accounting estimates since
December 31, 2002 other than deferred policy acquisition costs as discussed
below.
DEFERRED POLICY ACQUISITION COSTS
Policy acquisition costs, which include commissions and certain other expenses
that vary with and are primarily associated with acquiring business, are
deferred and amortized over the estimated lives of the contracts, usually 20
years. These deferred costs, together with the present value of future profits
of acquired business, are recorded as an asset commonly referred to as deferred
policy acquisition costs and present value of future profits ("DAC"). At June
30, 2003 and December 31, 2002, the
carrying value of the Company's DAC was $5.6 billion and $5.5 billion,
respectively. For statutory accounting purposes, such costs are expensed as
incurred.
DAC related to traditional policies are amortized over the premium-paying period
in proportion to the present value of annual expected premium income. DAC
related to investment contracts and universal life-type contracts are deferred
and amortized using the retrospective deposit method. Under the retrospective
deposit method, acquisition costs are amortized in proportion to the present
value of the estimated gross profits ("EGPs") arising principally from projected
investment, mortality and expense margins and surrender charges. The
attributable portion of the DAC amortization is allocated to realized gains and
losses on investments. The DAC balance is also adjusted through other
comprehensive income by an amount that represents the amortization of deferred
policy acquisition costs that would have been required as a charge or credit to
operations had unrealized gains and losses on investments been realized. Actual
gross profits can vary from management's estimates, resulting in increases or
decreases in the rate of amortization.
The Company regularly evaluates its EGPs to determine if actual experience or
other evidence suggests that earlier estimates should be revised. In the event
that the Company were to revise its EGPs, the cumulative DAC amortization would
be adjusted to reflect such revised EGPs in the period the revision was
determined to be necessary. Several assumptions considered to be significant in
the development of EGPs include separate account fund performance, surrender and
lapse rates, estimated interest spread and estimated mortality. The separate
account fund performance assumption is critical to the development of the EGPs
related to the Company's variable annuity and variable life insurance
businesses. The average long-term rate of assumed separate account fund
performance (before mortality and expense charges) used in estimating gross
profits for the variable annuity and variable life business was 9% for the
six-month periods ended June 30, 2003 and June 30, 2002. For other products,
including fixed annuities and other universal life-type contracts, the average
assumed investment yield ranged from 5% to 8.5% for the periods ended June 30,
2003 and June 30, 2002.
Due to increased volatility and the decline experienced by the U.S. equity
markets in recent periods, the Company continues to enhance its DAC evaluation
process. The Company has developed sophisticated modeling capabilities which
allowed it to run a large number of stochastically determined scenarios of
separate account fund performance. These scenarios were then utilized to
calculate a statistically significant range of reasonable estimates of EGPs.
This range was then compared to the present value of EGPs currently utilized in
the DAC amortization model. As of June 30, 2003, the present value of the EGPs
utilized in the DAC amortization model fall at the margin of a reasonable range
of statistically calculated present value of EGPs. As a result, the Company does
not believe there is sufficient evidence to suggest that a revision to the EGPs
(and therefore, a revision to the DAC) as of June 30, 2003 is necessary;
however, if in the future, the EGPs utilized in the DAC amortization model were
to exceed the margin of the reasonable range of statistically calculated EGPs, a
revision could be necessary. Furthermore, the Company has estimated that the
present value of the EGP's is likely to remain within a reasonable range if
overall separate account returns decline by 15% or less for the remainder of
2003, and if overall separate account returns decline by 10% or less for the
next twelve months, and if certain other assumptions that are implicit in the
computations of the EGP's are achieved.
Additionally, the Company continues to perform analyses with respect to the
potential impact of a revision to future EGPs. If such a revision to EGPs were
deemed necessary, the Company would adjust, as appropriate, all of its
assumptions for products accounted for in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 97, "Accounting and Reporting by Insurance
Enterprises for Certain Long-Duration Contracts and for Realized Gains and
Losses form the Sale of Investments", and reproject its future EGPs based on
current account values at the end of the quarter in which a revision is deemed
to be necessary. To illustrate the effects of this process, assume the Company
had concluded, that a revision of the Company's EGPs was required at June 30,
2003. If the Company assumed a 9% average long-term rate of growth from that
date forward along with other appropriate assumption changes in determining the
revised EGPs, the Company estimates the cumulative positive adjustment to
amortization would be approximately $125-$135, after tax. If instead, the
Company were to assume a long-term growth rate of 8% in determining the revised
EGPs, the adjustment would be approximately $150-$170, after tax. Assuming that
such an adjustment were to have been required, the Company anticipates that
there would have been immaterial impacts on its DAC amortization for the 2003
and 2004 years exclusive of the adjustment, and that there would have been
positive earnings effects in later years. Any such adjustment would not affect
statutory income or surplus, due to the prescribed accounting for such amounts
that is discussed above.
Aside from absolute levels and timing of market performance assumptions,
additional factors that will influence this determination include the degree of
volatility in separate account fund performance and shifts in asset allocation
within the separate account made by policyholders. The overall return generated
by the separate account is dependent on several factors, including the relative
mix of the underlying sub-accounts among bond funds and equity funds as well as
equity sector weightings. The Company's overall separate account fund
performance has been reasonably correlated to the overall performance of the S&P
500 Index (which closed at 975 on June 30, 2003), although no assurance can be
provided that this correlation will continue in the future.
The overall recoverability of the DAC asset is dependent on the future
profitability of the business. The Company tests the aggregate recoverability of
the DAC asset by comparing the amounts deferred to the present value of total
EGPs. In addition, the Company routinely stress tests its DAC asset for
recoverability against severe declines in its separate account assets, which
could occur if the equity markets experienced another significant sell-off, as
the majority of policyholders' funds in the separate accounts is invested in the
equity market. As of June 30, 2003, the Company believed variable annuity
separate account assets could fall by at least 31% before portions of its DAC
asset would be unrecoverable.
CONSOLIDATED RESULTS OF OPERATIONS - OPERATING SUMMARY
OPERATING SUMMARY SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------- -----------------------------------
2003 2002 CHANGE 2003 2002 CHANGE
------- ------- ------- ------- ------- -------
Fee income $ 522 $ 536 (3%) $ 1,016 $ 1,067 (5%)
Earned premiums 151 93 62% 254 240 6%
Net investment income 445 381 17% 883 760 16%
Other revenues 33 32 3% 61 64 (5%)
Net realized capital gains (losses) 35 (121) Na (10) (138) 93%
------- ------- ------- ------- ------- -------
TOTAL REVENUES 1,186 921 29% 2,204 1,993 11%
Benefits, claims and claim adjustment expenses 629 544 15% 1,215 1,125 8%
Amortization of deferred policy acquisition costs
and present value of future profits 150 146 3% 288 277 4%
Insurance operating costs and expenses 190 171 11% 352 336 5%
Other expenses 1 2 50% 3 20 (85%)
------- ------- ------- ------- ------- -------
TOTAL BENEFITS, CLAIMS AND EXPENSES 970 863 12% 1,858 1,758 6%
------- ------- ------- ------- ------- -------
INCOME BEFORE INCOME TAXES 216 58 272% 346 235 47%
Income tax expense 27 1 na 57 46 24%
------- ------- ------- ------- ------- -------
NET INCOME $ 189 $ 57 232% $ 289 $ 189 53%
======= ======= ======= ======= ======= =======
Hartford Life Insurance Company is organized into the following reportable
operating segments: Investment Products, Individual Life and Corporate Owned
Life Insurance ("COLI"). The Company also includes in "Other" realized capital
gains and losses, corporate items not directly allocated to any of its
reportable operating segments, as well as certain group benefits operations,
including group life and group disability insurance that is directly written by
the Company and is substantially ceded to its parent, Hartford Life and Accident
Insurance Company ("HLA").
Revenues increased for the second quarter and six months ended June 30, 2003
primarily as a result of realized capital gains reported in the Other category
compared to realized capital losses in the prior year comparable periods and
higher net investment income and earned premiums in the Investment Products
segment. Partially offsetting the revenue increases was lower fee income in the
Investment Products and COLI segments as well as lower net investment income in
the COLI segment. Fee income in the Investment Products segment was lower for
the second quarter and six months ended as a result of lower average account
values, specifically in individual annuities and mutual fund businesses, due
primarily to the lower equity market values compared to the prior year periods.
The decrease in COLI revenues for the second quarter and six months ended June
30, 2003 was primarily as a result of lower net investment income. The lower
COLI net investment income was due to lower average leveraged COLI account
values as compared to a year ago. In addition, COLI had lower fee income
resulting from the lower equity markets and lower sales in the second quarter of
2003 and for the six months ended June 30, 2003, as compared to the prior year
comparable periods.
Benefits, claims and expenses increased for the second quarter and six months
ended June 30, 2003 primarily due to increases in Investment Products interest
credited associated with the growth in the segment and death benefit costs.
Partially offsetting this increase was a decrease in COLI expenses consistent
with lower COLI revenues. Additionally, the COLI expenses for the six months
ended June 30, 2003 decreased due to a charge incurred in the first quarter of
2002, associated with the Bancorp Services, LLC ("Bancorp") litigation. (For
further discussion of the Bancorp litigation, see Note 5 of Notes to Condensed
Consolidated Financial Statements.)
Net income increased for the second quarter and six months ended June 30, 2003
as a result of the increase in revenues described above compared to a year ago.
COLI net income increased $9 for the six months ended June 30, 2003 as compared
to the prior year period, primarily due to the charge for the Bancorp litigation
in 2002 discussed above. Additionally, net income for the six month period ended
June 30, 2002 was positively impacted by an $8 after-tax benefit related to
favorable development on the Company's estimated September 11 exposure, which
was recognized in the first quarter of 2002.
The tax provision recorded during the second quarter of 2003 reflects a benefit
of $30, consisting primarily of a change in estimate of the dividends-received
deduction ("DRD") tax benefit reported during 2002. The change in estimate was
the result of 2002 actual investment performance on the related separate
accounts being unexpectedly out of pattern with past performance which had been
the basis for the estimate. In addition to the foregoing change in estimate,
based on the financial information received by the Company in preparing its 2002
federal income tax returns, as well as its current best judgment, the Company
has revised its estimate of the 2003 fiscal year DRD benefit to $85, from its
prior estimate of $63. As a result of this revised estimate, in the second
quarter the Company revised its first quarter DRD benefit upwards by $5,
bringing the total DRD benefit related to the 2003 tax year for the six months
ended June 30, 2003 to $43.
INVESTMENT PRODUCTS
OPERATING SUMMARY SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------ -----------------------------------
2003 2002 CHANGE 2003 2002 CHANGE
--------- --------- --------- --------- --------- ---------
Fee income and other $ 314 $ 328 (4%) $ 601 $ 654 (8%)
Earned premiums 144 78 85% 235 209 12%
Net investment income 317 248 28% 621 487 28%
--------- --------- --------- --------- --------- ---------
TOTAL REVENUES 775 654 18% 1,457 1,350 8%
Benefits, claims and claim adjustment expenses 449 327 37% 838 692 21%
Insurance operating costs and other expenses 107 106 1% 204 216 (6%)
Amortization of deferred policy acquisition costs 109 105 4% 205 207 (1%)
--------- --------- --------- --------- --------- ---------
TOTAL BENEFITS, CLAIMS AND EXPENSES 665 538 24% 1,247 1,115 12%
--------- --------- --------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 110 116 (5%) 210 235 (11%)
Income tax expense (8) 24 (133%) 12 50 (76%)
--------- --------- --------- --------- --------- ---------
NET INCOME $ 118 $ 92 28% $ 198 $ 185 7%
========= ========= ========= ========= ========= =========
Individual variable annuity account values $ 73,748 $ 67,712 9%
Other individual annuity account values 10,587 10,413 2%
Other investment products account values 22,451 19,204 17%
--------- --------- ---------
TOTAL ACCOUNT VALUES [1] $ 106,786 $ 97,329 10%
[1] Includes policyholder balances for investment contracts and reserves for
future policy benefits for insurance contracts.
Revenues in the Investment Products segment increased for the second quarter and
six months ended June 30, 2003 primarily due to higher net investment income and
higher earned premiums. Net investment income increased due to higher general
account assets in the individual annuity business. General account individual
annuity assets were $9.9 billion as of June 30, 2003, an increase of $3.9
billion, or 65%, from June 30, 2002, due to policyholder transfer activity and
increased sales of individual annuities. Additionally, net investment income
related to other investment products increased as a result of the growth in
average assets over the last twelve months in the institutional investment
business, where related assets under management increased $1.8 billion, or 20%,
since June 30, 2002 to $10.9 billion as of June 30, 2003. Assets under
management is an internal performance measure used by the Company since a
significant portion of the Company's revenue is based upon asset values. These
revenues increase or decrease with a rise or fall, respectively, in the level of
average assets under management. The increase in earned premiums is due to
higher sales of certain products in the institutional investment products
business. Partially offsetting the revenue increases was lower fee income for
the second quarter and six months ended June 30, 2003 as a result of lower
average assets in the individual annuities business due primarily to lower
equity market levels.
Total benefits, claims and expenses increased for the second quarter and six
months ended June 30, 2003, primarily driven by increased interest credited as a
result of growth in the segment's general account assets discussed above, and
death benefit costs.
Net income increased for the second quarter and six months ended June 30, 2003,
primarily as a result of the favorable impact of $21, resulting from the
Company's previously discussed change in estimate of the dividends-received
deduction ("DRD") tax benefit reported during 2002. The change in estimate was
the result of 2002 actual investment performance on the related separate
accounts being unexpectedly out of pattern with past performance which had been
the basis for the estimate. In addition to the foregoing change in estimate,
based on the financial information received by the Company in preparing its 2002
federal income tax returns, as well as its current best judgment, the Company
has revised its estimate of the 2003 fiscal year DRD benefit to $80, from its
prior estimate of $58. As a result of this revised estimate, in the second
quarter the Company revised its first quarter DRD benefit upwards by $5,
bringing the total DRD benefit related to the 2003 tax year for the six months
ended June 30, 2003 to $40. In addition, for the six months ended June 30, 2003,
net income was negatively affected by the lower average assets under management
discussed above.
Future net income for the Investment Products segment may be affected by the
effectiveness of the risk management strategies the Company plans to implement
to mitigate the market risk associated with the guaranteed minimum withdrawal
benefit ("GMWB") rider currently being sold with the majority of new variable
annuity contracts. The GMWB rider is considered an embedded derivative for
accounting purposes. Beginning in July 2003, substantially all new contracts
with the GMWB will not be covered by reinsurance. These unreinsured contracts
are expected to generate some volatility in net income as the underlying
embedded derivative liabilities are marked to fair value each reporting period,
resulting in the recognition of net realized capital gains or losses in response
to changes in certain critical factors including capital market conditions and
policyholder behavior. Hartford Life is evaluating alternative risk mitigation
strategies to limit future net income volatility that may be associated with new
sales of variable annuities with the GMWB rider. The Company will carefully
balance the value of product benefits to our policyholders with the Company's
profit objectives and risk tolerance.
INDIVIDUAL LIFE
OPERATING SUMMARY SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------- ---------------------------------
2003 2002 CHANGE 2003 2002 CHANGE
------- ------- ------- ------- ------- -------
Fee income and other $ 165 $ 164 1% $ 328 $ 316 4%
Net investment income 54 57 (5%) 111 112 (1%)
------- ------- ------- ------- ------- -------
TOTAL REVENUES 219 221 (1%) 439 428 3%
Benefits, claims and claim adjustment expenses 94 103 (9%) 192 201 (4%)
Insurance operating costs and other expenses 36 37 (3%) 72 72 --
Amortization of deferred policy acquisition costs 41 41 -- 83 70 19%
------- ------- ------- ------- ------- -------
TOTAL BENEFITS, CLAIMS AND EXPENSES 171 181 (6%) 347 343 1%
------- ------- ------- ------- ------- -------
INCOME BEFORE INCOME TAXES 48 40 20% 92 85 8%
Income tax expense 14 14 -- 29 29 --
------- ------- ------- ------- ------- -------
NET INCOME $ 34 $ 26 31% $ 63 $ 56 13%
======= ======= ======= ======= ======= =======
Revenues in the Individual Life segment decreased for the second quarter ended
June 30, 2003 primarily driven by decreases in net investment income. For the
six months ended June 30, 2003, revenues increased due primarily to higher cost
of insurance charges resulting from the growth in the total life insurance in
force. The decrease in investment income was due primarily to lower investment
yields.
Total benefits, claims and expenses decreased for the second quarter principally
due to lower benefit costs resulting from favorable mortality experience when
compared to the prior year results. For the six months ended June 30, 2003,
total benefits, claims and expenses increased due primarily to higher
amortization of deferred policy acquisition costs resulting from higher gross
profits in the variable life business primarily due to improved mortality.
Net income increased for the second quarter and six months ended June 30, 2003
primarily due to the favorable impact of a $2 DRD benefit as discussed in the
Investment Products segment. In addition growth in the in force business and
favorable comparable mortality experience were largely offset by lower net
investment income for the second quarter and six months ended June 30, 2003 and
higher amortization of deferred policy acquisition costs for the six months
ended June 30, 2003 when compared to the prior year comparable periods.
CORPORATE OWNED LIFE INSURANCE (COLI)
OPERATING SUMMARY SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------- ---------------------------------
2003 2002 CHANGE 2003 2002 CHANGE
------- ------- ------- ------- ------- -------
Fee income and other $ 69 $ 74 (7%) $ 136 $ 158 (14%)
Net investment income 57 72 (21%) 116 147 (21%)
------- ------- ------- ------- ------- -------
TOTAL REVENUES 126 146 (14%) 252 305 (17%)
Benefits, claims and claim adjustment expenses 77 101 (24%) 164 216 (24%)
Insurance operating costs and expenses 11 16 (31%) 22 56 (61%)
Dividends to policyholders 25 15 67% 39 20 95%
------- ------- ------- ------- ------- -------
TOTAL BENEFITS, CLAIMS AND EXPENSES 113 132 (14%) 225 292 (23%)
------- ------- ------- ------- ------- -------
INCOME BEFORE INCOME TAXES 13 14 (7%) 27 13 108%
Income tax expense 5 5 -- 10 4 150%
------- ------- ------- ------- ------- -------
NET INCOME $ 8 $ 9 (11%) $ 17 $ 9 89%
======= ======= ======= ======= ======= =======
Variable COLI account values $20,326 $19,076 7%
Leveraged COLI account values 3,137 4,119 (24%)
------- ------- -------
TOTAL ACCOUNT VALUES $23,463 $23,195 1%
======= ======= =======
COLI revenues decreased for the second quarter and six months ended June 30,
2003 due to lower net investment and fee income. Net investment income
decreased, primarily related to the decline in leveraged COLI account values as
a result of surrender activity. Fee income was reduced as the result of lower
equity market levels and lower sales for the second quarter and six months ended
June 30, 2003 as compared to the equivalent prior year periods.
Total benefits, claims and expenses decreased for the second quarter and six
months ended June 30, 2003 as a result of the decline in the leveraged COLI
block noted above. Insurance operating costs and expenses for the six months
ended June 30, 2003 also decreased due to the $11 after-tax expense related to
the Bancorp litigation accrued in the first quarter of 2002. Dividends to
policyholders increased due to an increase in mortality dividends on the
leveraged COLI block.
Net income decreased for the second quarter 2003 as compared to the prior year
due to the decreased revenues and benefits, claims and expenses discussed above.
Net income increased for the six months ended June 30, 2003 as compared to prior
year, principally as a result of the Bancorp litigation expense recorded in the
first quarter of 2002.
INVESTMENTS
Hartford Life Insurance Company's general account and guaranteed separate
account investment portfolios are managed based on the underlying
characteristics and nature of each operation's respective liabilities and within
established risk parameters. (For a further discussion on Hartford Life
Insurance Company's approach to managing risks, see the Capital Markets Risk
Management section.)
Please refer to the Investments section of the MD&A in Hartford Life Insurance
Company's 2002 Form 10-K Annual Report for a description of the Company's
investment objectives and policies.
Return on general account invested assets is an important element of the
Company's financial results. Significant fluctuations in the fixed income or
equity markets could weaken the Company's financial condition or its results of
operations. Additionally, changes in market interest rates may impact the period
of time over which certain investments, such as mortgage-backed securities, are
repaid and whether certain investments are called by the issuers. Such changes
may, in turn, impact the yield on these investments and also may result in
reinvestment of funds received from calls and prepayments at rates below the
average portfolio yield.
Fluctuations in interest rates affect the Company's return on, and the fair
value of, fixed maturity investments, which comprised approximately 89% and 86%
of the fair value of its general account invested assets as of June 30, 2003 and
December 31, 2002, respectively. Other events beyond the Company's control could
also adversely impact the fair value of these investments. Specifically, a
downgrade of an issuer's credit rating or default of payment by an issuer could
reduce the Company's investment return.
A decrease in the fair value of any investment that is deemed other than
temporary would result in the Company's recognition of a realized loss in its
financial results prior to the actual sale of the investment.
The following table identifies invested assets by type held in the Company's
general account as of June 30, 2003 and December 31, 2002.
COMPOSITION OF INVESTED ASSETS
- --------------------------------------------------------------------------------------
JUNE 30, 2003 DECEMBER 31, 2002
------------------- -------------------
AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------- -------
Fixed maturities, at fair value $29,101 88.8% $24,786 86.3%
Equity securities, at fair value 93 0.3% 120 0.4%
Policy loans, at outstanding balance 2,850 8.7% 2,895 10.1%
Limited partnerships, at fair value 244 0.7% 486 1.7%
Other investments 502 1.5% 432 1.5%
------- ----- ------- -----
TOTAL INVESTMENTS $32,790 100.0% $28,719 100.0%
======= ===== ======= =====
Fixed maturity investments increased 17% since December 31, 2002, primarily the
result of investment and universal life contract sales and operating cash flows.
In March 2003, the Company decided to liquidate its hedge fund limited
partnership investments and reinvest the proceeds in fixed maturity investments.
Hedge fund liquidations have totaled $273 since December 31, 2002. As of June
30, 2003, Hartford Life Insurance Company owned approximately $89 of hedge fund
investments, all of which are expected to be liquidated by March 31, 2004.
INVESTMENT RESULTS
The table below summarizes the Company's investment results.
SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
(Before-tax) 2003 2002 2003 2002
------- ------- ------- -------
Net investment income - excluding policy loan income $ 391 $ 314 $ 772 $ 626
Policy loan income 54 67 111 134
------- ------- ------- -------
Net investment income - total $ 445 $ 381 $ 883 $ 760
Yield on average invested assets [1] 5.9% 6.3% 6.1% 6.3%
------- ------- ------- -------
Gross gains on sale $ 76 $ 26 $ 124 $ 55
Gross losses on sale (27) (6) (68) (35)
Impairments (15) (137) (66) (152)
Other, net [2] 1 (4) -- (6)
------- ------- ------- -------
Net realized capital gains (losses) $ 35 $ (121) $ (10) $ (138)
======= ======= ======= =======
[1] Represents annualized net investment income (excluding net realized
capital losses) divided by average invested assets at cost (fixed
maturities at amortized cost).
[2] Primarily consists of changes in fair value and hedge ineffectiveness on
derivative instruments.
For the second quarter and six months ended June 30, 2003, net investment
income, excluding policy loan income, increased $77, or 25%, and $146, or 23%,
compared to the respective prior year periods. The increases in net investment
income were primarily due to income earned on a higher invested asset base, the
result of increased cash flow, partially offset by lower investment yields.
Yields on average invested assets decreased as a result of lower rates on new
investment purchases and decreased policy loan income.
Net realized capital gains (losses) for the second quarter and six months ended
June 30, 2003 improved by $86 and $128, respectively, compared to the respective
prior year periods, primarily the result of a decrease in other than temporary
impairments on fixed maturities. For the second quarter ended June 30, 2003,
fixed maturity impairment losses of $15 primarily consisted of interest only
securities of $11 and commercial mortgage-backed securities of $4. The interest
only security impairments were due to the flattening of the forward yield curve.
For the six months ended June 30, 2003, fixed maturity impairment losses were
$59 and consisted of asset-backed securities of $25, corporate securities of $19
and the interest only and commercial mortgage backed securities, as discussed
above, of $15. The asset-backed securities primarily consisted of $12 backed by
credit card receivables and $10 of corporate debt. The corporate securities were
concentrated in the following sectors: $7 in consumer non-cyclical, $7 in
transportation, $3 in technology and communications and $2 in financial
services. Also included in net realized capital gains and losses for the second
quarter and six months ended June 30, 2003 were write-downs for other than
temporary impairments on seeded equity and mutual fund investments of $0 and $8,
respectively.
For the second quarter and six months ended June 30, 2002, the fixed maturity
impairment losses of $137 and $152, respectively, consisted of corporate
securities of $109 and $121 and asset-backed securities of $29 and $31. For the
second quarter and six months ended June 30, 2002, impairments of corporate
securities were concentrated in the technology and communications sector and
included a $74 before-tax loss related to securities issued by WorldCom. For the
quarter and six months ended June 30, 2002, impairments of asset-backed
securities were concentrated in securities backed by aircraft lease receivables
of $16, mutual fund fee receivables of $7, and corporate debt obligations of $3
and $6, respectively.
CAPITAL MARKETS RISK MANAGEMENT
Hartford Life Insurance Company has a disciplined approach to managing risks
associated with its capital markets and asset/liability management activities.
Investment portfolio management is organized to focus investment management
expertise on specific classes of investments, while asset/liability management
is the responsibility of a dedicated risk management unit supporting Hartford
Life Insurance Company, including the Company's guaranteed separate accounts.
Derivative instruments are utilized in compliance with established Company
policy and regulatory requirements and are monitored internally and reviewed by
senior management.
Hartford Life Insurance Company is exposed to two primary sources of investment
and asset/liability management risk: credit risk, relating to the uncertainty
associated with the ability of an obligor or counterparty to make timely
payments of principal and/or interest, and market risk, relating to the market
price and/or cash flow variability associated with changes in interest rates,
securities prices, market indices, yield curves or currency exchange rates. The
Company does not hold any financial instruments purchased for trading purposes.
Please refer to the Capital Markets Risk Management section of the MD&A in
Hartford Life Insurance Company's 2002 Form 10-K Annual Report for a description
of the Company's objectives, policies and strategies.
CREDIT RISK
The Company invests primarily in securities that are rated investment grade, and
has established exposure limits, diversification standards and review procedures
for all credit risks including borrower, issuer and counterparty.
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, asset sector and industry concentrations are subject to
established limits and monitored on a regular basis. Hartford Life Insurance
Company is not exposed to any credit concentration risk of a single issuer
greater than 10% of the Company's stockholder's equity.
The following table identifies fixed maturity securities by type, including
guaranteed separate accounts, as of June 30, 2003 and December 31, 2002.
FIXED MATURITIES BY TYPE
- ----------------------------------------------------------------------------------------------------------------------------------
JUNE 30, 2003 DECEMBER 31, 2002
--------------------------------------------- ---------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
--------- ---------- ---------- ------- --------- ---------- ---------- -------
Asset-backed securities ("ABS") $ 5,237 $ 117 $ (161) $ 5,193 $ 5,115 $ 109 $ (143) $ 5,081
Commercial mortgage-backed
securities ("CMBS") 6,309 569 (11) 6,867 4,979 416 (9) 5,386
Collateralized mortgage
obligation ("CMO") 886 18 (1) 903 752 33 (2) 783
Corporate
Basic industry 2,463 227 (6) 2,684 2,000 129 (7) 2,122
Capital goods 1,105 109 (3) 1,211 1,048 68 (7) 1,109
Consumer cyclical 1,683 149 (6) 1,826 1,425 88 (3) 1,510
Consumer non cyclical 2,620 244 (6) 2,858 2,462 176 (16) 2,622
Energy 1,442 175 (3) 1,614 1,446 110 (8) 1,548
Financial services 5,156 490 (42) 5,604 4,956 307 (81) 5,182
Technology and communications 3,247 442 (7) 3,682 2,911 247 (68) 3,090
Transportation 571 55 (5) 621 571 45 (11) 605
Utilities 1,855 197 (13) 2,039 1,757 114 (41) 1,830
Other 491 32 (1) 522 404 18 -- 422
Government/Government agencies
- Foreign 789 97 (3) 883 720 68 (5) 783
Government/Government agencies
- United States 571 51 (1) 621 553 44 -- 597
Mortgage-backed securities
("MBS") - agency 1,537 32 (1) 1,568 2,035 58 -- 2,093
Municipal - tax-exempt -- -- -- -- -- -- -- --
Municipal - taxable 225 20 -- 245 99 16 (1) 114
Redeemable preferred stock 1 -- -- 1 1 -- -- 1
Short-term 1,695 3 -- 1,698 992 1 -- 993
------- ------- ------- ------- ------- ------- ------- -------
TOTAL FIXED MATURITIES $37,883 $ 3,027 $ (270) $40,640 $34,226 $ 2,047 $ (402) $35,871
======= ======= ======= ======= ======= ======= ======= =======
Total general account fixed
maturities $27,118 $ 2,174 $ (191) $29,101 $23,675 $ 1,389 $ (278) $24,786
Total guaranteed separate
account fixed maturities $10,765 $ 853 $ (79) $11,539 $10,551 $ 658 $ (124) $11,085
======= ======= ======= ======= ======= ======= ======= =======
The Company's fixed maturity gross unrealized losses have declined by $132 from
December 31, 2002 to June 30, 2003 primarily as a result of the credit markets
experiencing a strong sustained rally, as issuers have taken concerted action to
improve their credit quality. An important element of credit remediation
includes a renewed emphasis on improving liquidity and reducing leverage. Many
companies have been able to improve their liquidity and leverage positions
through equity issuances and asset sales. These improving fundamental factors
have led to a sharp tightening of spreads over treasuries for most issuers. The
market value appreciation driven by tightening spreads has been further enhanced
by the general decline in interest rates.
As of June 30, 2003, the Company's fixed maturity portfolio had gross unrealized
losses of $270, of which 75% were concentrated in asset-backed securities and
corporate securities within the financial services sector. The Company's current
view of risk factors relative to these fixed maturity types is as follows:
ABS - As of June 30, 2003, ABS supported by aircraft lease receivables, credit
card receivables, corporate debt obligations ("CDO"), and manufactured housing
receivables were in a gross unrealized loss position of $78, $30, $28 and $12,
respectively.
The securities supported by aircraft, aircraft lease payments and enhanced
equipment trust certificates ("aircraft ABS") have continued to decline in value
due to a reduction in lease payments and aircraft values driven by a decline in
airline travel, which resulted in bankruptcies and other financial difficulties
of airline carriers. As a result of these factors, significant risk premiums
have been required by the market for securities in this sector, resulting in
reduced liquidity and lower broker quoted prices. The level of recovery will
depend on economic fundamentals and airline operating performance. Aircraft ABS
will be further stressed if passenger air traffic declines or airlines liquidate
rather than emerge from bankruptcy protection. Approximately 68% of the
Company's investments supported by aircraft ABS payments at June 30, 2003 were
investment grade.
Adverse CDO experience can be attributed to higher than expected default rates
on the collateral, particularly in the technology and utilities sectors and
lower than expected recovery rates. Improved economic and operating fundamentals
of the underlying security issuers should lead to improved pricing levels.
Approximately 83% of the CDOs owned by the Company at June 30, 2003 were
investment grade.
The unrealized loss position in credit card securities has primarily been caused
by exposure to companies originating loans to sub-prime borrowers. While the
unrealized loss position improved for these holdings during the first half of
this year, the Company believes that this sub-sector will continue to be under
stress and expects holdings to be very sensitive to changes in collateral
performance. Approximately 98% of the Company's investments supported by credit
card receivables at June 30, 2003 were investment grade.
The manufactured housing ("MH") sub-sector, over the past few months, has
continued to deteriorate as the liquidation of repossessed units has been
accelerated. This has caused a rapid increase in loss rates, which has eroded
credit protection and triggered numerous rating agency downgrades. The driving
force behind the increase in loss rates is primarily the relaxed underwriting
standards produced from intense competition among MH lenders beginning in the
mid-1990s. The Company expects elevated loss rates to remain at least over the
short term. In the long term, a less volatile and more sustainable loss rate
will depend, in large part, on general economic conditions and successful
servicing on existing loans. Approximately 94% of the Company's investments
supported by MH receivables at June 30, 2003 were investment grade.
Financial Services - The financial services securities in an unrealized loss
position are primarily variable rate securities with extended maturity dates,
which have been adversely impacted by the reduction in forward interest rates
resulting in lower expected cash flows. Future changes in fair value of these
securities are primarily dependent on forward interest rates. A substantial
percentage of these securities are hedged with interest rate swaps, which
convert the variable rate earned on the securities to a fixed amount. The swaps
receive cash flow hedge accounting treatment and are currently in an unrealized
gain position.
The following table identifies fixed maturities by credit quality, including
guaranteed separate accounts, as of June 30, 2003 and December 31, 2002. The
ratings referenced below are based on the ratings of a nationally recognized
rating organization or, if not rated, assigned based on the Company's internal
analysis of such securities.
FIXED MATURITIES BY CREDIT QUALITY
- -----------------------------------------------------------------------------------------------------------------------------------
JUNE 30, 2003 DECEMBER 31, 2002
----------------------------------- -----------------------------------
PERCENT OF PERCENT OF
AMORTIZED TOTAL FAIR AMORTIZED TOTAL FAIR
COST FAIR VALUE VALUE COST FAIR VALUE VALUE
--------- ---------- ---------- --------- ---------- ----------
United States Government/Government agencies $ 2,914 $ 3,012 7.4% $ 3,213 $ 3,341 9.3%
AAA 5,948 6,368 15.6% 5,077 5,399 15.1%
AA 3,239 3,468 8.5% 3,334 3,507 9.8%
A 11,809 12,870 31.7% 11,019 11,687 32.5%
BBB 10,214 11,078 27.3% 8,662 9,081 25.3%
BB & below 2,064 2,146 5.3% 1,928 1,862 5.2%
Short-term 1,695 1,698 4.2% 993 994 2.8%
------- ------- ------- ------- ------- -------
TOTAL FIXED MATURITIES $37,883 $40,640 100.0% $34,226 $35,871 100.0%
======= ======= ======= ======= ======= =======
Total general account fixed maturities $27,118 $29,101 71.6% $23,675 $24,786 69.1%
Total guaranteed separate account fixed maturities $10,765 $11,539 28.4% $10,551 $11,085 30.9%
======= ======= ======= ======= ======= =======
As of June 30, 2003 and December 31, 2002, over 94% of the fixed maturity
portfolio was invested in securities rated investment grade (BBB and above). As
of June 30, 2003, below investment grade ("BIG") holdings were diversified by
sector and issuer with the greatest concentration of securities, based upon fair
value, in the following sectors: 17% in technology and communications, 16% in
utilities, 15% in consumer non-cyclical, 12% in consumer cyclical, 8% in basic
industry and 8% in foreign government. As of June 30, 2003, the Company held no
issuer of a BIG security with a fair value in excess of 4% of the total fair
value for BIG securities. As of December 31, 2002, BIG holdings were
concentrated, based upon fair value, in the following sectors: 20% in the
technology and communications, 17% in utilities, 11% in consumer cyclical, 11%
in basic industry, and 9% in foreign government. As of December 31, 2002, the
Company held no issuer of a BIG security with a fair value in excess of 2% of
the total fair value for BIG securities.
The following table presents the Company's unrealized loss aging for total fixed
maturity and equity securities, including guaranteed separate accounts, as of
June 30, 2003 and December 31, 2002, by length of time the security was in an
unrealized loss position.
UNREALIZED LOSS AGING OF TOTAL SECURITIES
- --------------------------------------------------------------------------------------------------------------------------
JUNE 30, 2003 DECEMBER 31, 2002
----------------------------------- ------------------------------------
AMORTIZED FAIR UNREALIZED AMORTIZED FAIR UNREALIZED
COST VALUE LOSS COST VALUE LOSS
--------- ------- ---------- --------- ------- ----------
Three months or less $ 2,170 $ 2,134 $ (36) $ 1,382 $ 1,316 $ (66)
Greater than three months to six months 403 386 (17) 1,211 1,158 (53)
Greater than six months to nine months 484 449 (35) 519 465 (54)
Greater than nine months to twelve months 369 347 (22) 1,247 1,181 (66)
Greater than twelve months 1,768 1,604 (164) 1,873 1,693 (180)
------- ------- ------- ------- ------- -------
TOTAL $ 5,194 $ 4,920 $ (274) $ 6,232 $ 5,813 $ (419)
======= ======= ======= ======= ======= =======
The total securities that were in an unrealized loss position for longer than
six months as of June 30, 2003 primarily consisted of asset-backed securities
and corporate debt. Asset-backed securities backed by aircraft lease
receivables, credit card receivables and corporate debt comprised 34%, 13% and
10%, respectively, of the greater than six months unrealized loss amount. The
significant corporate security industry sectors of financial services and
utilities comprised 18% and 5%, respectively, of the greater than six months
unrealized loss amount. As of June 30, 2003, the Company held no securities of a
single issuer that were at an unrealized loss in excess of 7% of total
unrealized losses. The total unrealized loss position of $274 consisted of $195
in general account losses and $79 in guaranteed separate account losses.
As of June 30, 2003, fixed maturities represented $270, or 99%, of the Company's
total unrealized loss. There were no fixed maturities as of June 30, 2003 with a
fair value less than 80% of the security's amortized cost basis for six
continuous months other than certain asset-backed and commercial mortgage-backed
securities. Other than temporary impairments for certain asset-backed and
commercial mortgage-backed securities are recognized if the fair value of the
security, as determined by external pricing sources, is less than its carrying
amount and there has been a decrease in the present value of the expected cash
flows since the last reporting period. There were no asset-backed or
mortgage-backed securities included in the table above, as of June 30, 2003 and
December 31, 2002, for which management's best estimate of future cash flows
adversely changed during the reporting period. For a detailed discussion of the
other than temporary impairment criteria, see "Valuation of Investments and
Derivative Instruments" included in the Critical Accounting Estimates section of
the MD&A and in Note 2(g) of Notes to Consolidated Financial Statements, both of
which are included in Hartford Life Insurance Company's 2002 Form 10-K Annual
Report.
Fair values for asset-backed and commercial mortgage-backed securities are
obtained primarily from broker quotations. The Company believes that the recent
price appreciation realized in many corporate sectors has not yet been reflected
in many of the broker quotations received for ABS backed by corporate debt and
that the delay in price appreciation is likely due to the current lack of
liquidity in this sector and the significant risk premium currently attached to
these issues. As of June 30, 2003, no asset-backed securities had an unrealized
loss in excess of $20.
The total securities that were in an unrealized loss position for longer than
six months as of December 31, 2002 primarily consisted of corporate and
asset-backed debt. The significant corporate security industry sectors of
financial services, utilities, technology and communications and transportation
comprised 20%, 13%, 14%, and 3%, respectively, of the greater than six months
unrealized loss amount. Asset-backed securities backed by credit card
receivables, corporate debt and aircraft lease receivables comprised 34% of the
greater than six month unrealized loss amount and included securities backed by
corporate debt, aircraft lease receivables and credit card
receivables. At December 31, 2002, the Company held no securities of a single
issuer that were at an unrealized loss in excess of 4% of total unrealized
losses. The total unrealized loss position of $419 consisted of $297 in general
account losses and $122 in guaranteed separate account losses.
As part of the Company's ongoing monitoring process by a committee of investment
and accounting professionals, the Company has reviewed its investment portfolio
and concluded that there were no additional other than temporary impairments as
of June 30, 2003 and December 31, 2002. Due to the issuers' continued
satisfaction of the securities' obligations in accordance with their contractual
terms and the expectation that they will continue to do so, as well as the
evaluation of the fundamentals of the issuers' financial condition, the Company
believes that the prices of the securities in the sectors identified above, were
temporarily depressed primarily as a result of a market dislocation and
generally poor cyclical economic conditions and sentiment. See "Valuation of
Investments and Derivative Instruments" included in the Critical Accounting
Estimates section of MD&A and in Note 2(g) of Notes to Consolidated Financial
Statements both included in Hartford Life Insurance Company's 2002 Form 10-K
Annual Report.
The evaluation for other than temporary impairments is a quantitative and
qualitative process, which is subject to risks and uncertainties in the
determination of whether declines in the fair value of investments are other
than temporary. The risks and uncertainties include changes in general economic
conditions, the issuer's financial condition or near term recovery prospects and
the effects of changes in interest rates. In addition, for securitized financial
assets with contractual cash flows (e.g. asset-backed securities), projections
of expected future cash flows may change based upon new information regarding
the performance of the underlying collateral.
The following table presents the Company's unrealized loss aging for BIG and
equity securities, including guaranteed separate accounts, as of June 30, 2003
and December 31, 2002.
UNREALIZED LOSS AGING OF BIG AND EQUITY SECURITIES
- -------------------------------------------------------------------------------------------------------------------------
JUNE 30, 2003 DECEMBER 31, 2002
----------------------------------- -----------------------------------
AMORTIZED FAIR UNREALIZED AMORTIZED FAIR UNREALIZED
COST VALUE LOSS COST VALUE LOSS
--------- ------- ---------- --------- ------- ----------
Three months or less $ 169 $ 160 $ (9) $ 131 $ 104 $ (27)
Greater than three months to six months 58 52 (6) 188 165 (23)
Greater than six months to nine months 72 57 (15) 160 134 (26)
Greater than nine months to twelve months 12 5 (7) 299 264 (35)
Greater than twelve months 277 221 (56) 354 299 (55)
------- ------- ------- ------- ------- -------
TOTAL $ 588 $ 495 $ (93) $ 1,132 $ 966 $ (166)
======= ======= ======= ======= ======= =======
The BIG and equity securities that were in an unrealized loss position for
longer than six months as of June 30, 2003 primarily consisted of asset-backed
securities backed by aircraft lease and credit card receivables and corporate
debt. The asset-backed securities along with corporate securities in the
utilities sector comprised 72% and 10%, respectively, of the BIG and equity
securities that were in an unrealized loss position for greater than six months
at June 30, 2003. The total unrealized loss position of BIG and equity
securities of $93 consisted of $81 in general account losses and $12 in
guaranteed separate account losses.
The BIG and equity securities that were in an unrealized loss position for
longer than six months as of December 31, 2002 primarily consisted of corporate
securities in the technology and communications and utilities sectors as well as
asset-backed securities backed by corporate debt, equipment loans and credit
card receivables. The technology and communications and utilities sectors along
with diversified equity mutual funds and asset-backed securities comprised 29%,
23%, 18%, and 14%, respectively, of the BIG and equity securities that were in
an unrealized loss position for greater than six months at December 31, 2002.
The total unrealized loss position of BIG and equity securities of $166
consisted of $131 in general account losses and $35 in guaranteed separate
account losses.
EQUITY RISK
The Company's operations are significantly influenced by changes in the equity
markets. The Company's profitability depends largely on the amount of assets
under management, which is primarily driven by the level of sales, equity market
appreciation and depreciation and the persistency of the in-force block of
business. A prolonged and precipitous decline in the equity markets, as has been
experienced in recent periods, can have a significant impact on the Company's
operations, as sales of variable products may decline and surrender activity may
increase, as customer sentiment towards the equity market turns negative. The
lower assets under management will have a negative impact on the Company's
financial results, primarily due to lower fee income related to the Investment
Products and Individual Life segments, where a heavy concentration of
equity-linked products are administered and sold. Furthermore, the Company may
experience a reduction in profit margins if a significant portion of the assets
held in the variable annuity separate accounts move to the general account and
the Company is unable to earn an acceptable investment spread, particularly in
light of the low interest rate environment and the presence of contractually
guaranteed minimum interest credited rates, which for the most part are at a 3%
rate.
In addition, prolonged declines in the equity market may also decrease the
Company's expectations of future gross profits, which are utilized to determine
the amount of DAC to be amortized in a given financial statement period. A
significant decrease in the Company's estimated gross profits would require the
Company to accelerate the amount of DAC amortization in a given period,
potentially causing a material adverse deviation in that period's net income.
Although an acceleration of DAC amortization would have a negative impact on the
Company's earnings, it would not affect the Company's cash flow or liquidity
position.
Additionally, the Investment Products segment sells variable annuity contracts
that offer various guaranteed death benefits. For certain guaranteed death
benefits, The Hartford pays the greater of (1) the account value at death; (2)
the sum of all premium payments less prior withdrawals; or (3) the maximum
anniversary value of the contract, plus any premium payments since the contract
anniversary, minus any withdrawals following the contract anniversary. The
Company currently reinsures a significant portion of these death benefit
guarantees associated with its in-force block of business. The Company currently
records the death benefit costs, net of reinsurance, as they are incurred.
Declines in the equity market may increase the Company's net exposure to death
benefits under these contracts.
The Company's total gross exposure (i.e. before reinsurance) to these guaranteed
death benefits as of June 30, 2003 is $17.4 billion. Due to the fact that 78% of
this amount is reinsured, the Company's net exposure is $3.8 billion. This
amount is often referred to as the retained net amount at risk. However, the
Company will only incur these guaranteed death benefit payments in the future if
the policyholder has an in-the-money guaranteed death benefit at their time of
death. In order to analyze the total costs that the Company may incur in the
future related to these guaranteed death benefits, the Company performed an
actuarial present value analysis. This analysis included developing a model
utilizing stochastically generated investment performance scenarios and best
estimate assumptions related to mortality and lapse rates. A range of projected
costs was developed and discounted back to the financial statement date
utilizing the Company's cost of capital, which for this purpose was assumed to
be 9.25%. Based on this analysis, the Company estimated a 95% confidence
interval of the present value of the retained death benefit costs to be incurred
in the future to be a range of $121 to $387. The median of the stochastically
generated scenarios was $183.
On June 30, 2003, the Company recaptured a block of business previously
reinsured with an unaffiliated reinsurer. Under this treaty, Hartford Life
Insurance Company reinsured a portion of its guaranteed minimum death benefit
(GMDB) feature associated with certain of its annuity contracts. As
consideration for recapturing the business and final settlement under the
treaty, the Company has received assets valued at approximately $32 million and
one million warrants exercisable for the unaffiliated company's stock. This
amount represents to the Company an advance collection of its future recoveries
under the reinsurance agreement and will be recognized as future losses are
recorded in 2003 or upon the adoption of SOP 03-1 (see discussion below).
Prospectively, as a result of the recapture, Hartford Life Insurance Company
will be responsible for all of the risks associated with the GMDB related to
this block of business. The recapture increased the net amount at risk retained
by the Company at June 30, 2003 by $799.
In the first quarter of 2004, the Company will adopt the provisions of Statement
of Position 03-1 (SOP), "Accounting and Reporting by Insurance Enterprises for
Certain Nontraditional Long-Duration Contracts and for Separate Accounts" (the
"SOP"). The provisions of the SOP include a requirement for recording a
liability for variable annuity products with a guaranteed minimum death benefit
feature. The determination of this liability is also based on models that
involve numerous estimates and subjective judgments, including those regarding
expected market rates of return and volatility, contract surrender rates and
mortality experience. Based on management's preliminary review of the SOP and
current market conditions, the unrecorded GMDB liabilities, net of reinsurance,
are estimated to be between $75 and $85 at June 30, 2003. Net of estimated DAC
and income tax effects, the cumulative effect of establishing the required GMDB
reserves is expected to result in a reduction of net income of between $35 and
$45. The ultimate actual impact on the Company's financial statements may differ
significantly from management's current estimates.
In addition, Hartford Life Insurance Company issues certain variable annuity
products that contain a guaranteed minimum withdrawal benefit ("GMWB"). The GMWB
gives the policyholder the right to make periodic surrenders that total an
amount equal to the policyholders' premium payments. This guarantee will remain
in effect if periodic surrenders each contract year do not exceed an amount
equal to 7% of total premium payments. If the policyholder chooses to surrender
an amount equal to more than 7% in a contract year, then the guarantee may be
reduced to an amount less than premium payments. In addition, the policyholder
has the option, after a specified time period, to reset the guarantee value to
the then-current account value, if greater. The GMWB obligations are derivatives
which are required to be carried at fair value on the financial statements. The
fair value of the GMWB obligations are calculated based on actuarial assumptions
related to the projected benefits and related contract charges over the lives of
the contracts. Because of the dynamic and complex nature of these cash flows,
stochastic techniques under a variety of market return scenarios and other best
estimate assumptions are used. This model involves numerous estimates and
subjective judgments including those regarding expected market rates of return
and volatility and policyholder behavior. Declines in the equity market may
increase the Company's exposure to benefits under these contracts. For all
contracts in effect as of June 30, 2003, the Company has entered into a
reinsurance arrangement to offset its exposure to the GMWB for the remaining
lives of those contracts. Beginning in July 2003, the Company has utilized
substantially all of its existing reinsurance under the current arrangement and
will be ceding only a small number of new contracts. Substantially all new
contracts with the GMWB will not be covered by reinsurance. In the absence of
reinsurance coverage, the Company is exposed to several risks including the risk
that fees collected on the GMWB rider may be inadequate to cover the cost of the
rider and provide acceptable profit margins. In addition, these unreinsured
contracts are expected to generate some volatility in
net income as the underlying embedded derivative liabilities are marked to fair
value each reporting period, resulting in the recognition of net realized
capital gains or losses in response to changes in certain critical factors
including capital market conditions and policyholder behavior. In order to
address these risks, the Company is evaluating alternative risk mitigation
strategies such as product design changes and hedging its equity market risk
using capital market instruments.
MARKET RISK
Hartford Life Insurance Company has material exposure to both interest rate and
equity market risk. The Company analyzes interest rate risk using various models
including multi-scenario cash flow projection models that forecast cash flows of
the liabilities and their supporting investments, including derivative
instruments. There have been no material changes in market risk exposures from
December 31, 2002.
DERIVATIVE INSTRUMENTS
The Company utilizes a variety of derivative instruments, including swaps, caps,
floors, forwards and exchange traded futures and options, in compliance with
Company policy and regulatory requirements in order to achieve one of four
Company approved objectives: to hedge risk arising from interest rate, price or
currency exchange rate volatility; to manage liquidity; to control transaction
costs; or to enter into income enhancement and replication transactions. The
Company does not make a market or trade derivatives for the express purpose of
earning short term trading profits. (For further discussion on the Company's use
of derivative instruments, refer to Note 4 of Notes to Condensed Consolidated
Financial Statements.)
REGULATORY INITIATIVES AND CONTINGENCIES
LEGAL PROCEEDINGS
The Company is or may become involved in various legal actions, in the normal
course of its business, in which claims for alleged economic and punitive
damages have been or may be asserted, some for substantial amounts. Some of the
pending litigation has been filed as purported class actions and some actions
have been filed in certain jurisdictions that permit punitive damage awards that
are disproportionate to the actual damages incurred. Although there can be no
assurances, at the present time, the Company does not anticipate that the
ultimate liability arising from potential, pending or threatened legal actions,
after consideration of provisions made for estimated losses and costs of
defense, will have a material adverse effect on the financial condition or
operating results of the Company.
Certain elements of the recently enacted Jobs and Growth Tax Relief
Reconciliation Act of 2003, in particular the reduction in tax rates on
long-term capital gains and most dividend distributions, could have a material
effect on the Company's sales of variable annuities and other investment
products. In addition, other tax proposals and regulatory initiatives which are
being considered by Congress could have a material effect on the insurance
business. These proposals and initiatives include changes pertaining to the tax
treatment of insurance companies and life insurance products and annuities,
reductions in certain individual tax rates and the estate tax, reductions in
benefits currently received by the Company stemming from the dividends received
deduction, changes to the tax treatment of deferred compensation arrangements,
and changes to investment vehicles and retirement savings plans and incentives.
Prospects for enactment and the ultimate market effect of these proposals are
uncertain. Any potential effect to the Company's financial condition or results
of operations from the Jobs and Growth Act of 2003 or future tax proposals
cannot be reasonably estimated at this time.
ACCOUNTING STANDARDS
For a discussion of accounting standards, see Note 2 of Notes to Condensed
Consolidated Financial Statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained in the Capital Markets Risk Management section of
Management's Discussion and Analysis of Financial Condition and Results of
Operations is incorporated herein by reference.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures.
The Company's principal executive officer and its principal financial officer,
based on their evaluation of the Company's disclosure controls and procedures
(as defined in Exchange Act Rule 13a-15(e)), have concluded that the Company's
disclosure controls and procedures are adequate and effective for the purposes
set forth in the definition thereof in Exchange Act Rule 13a-15(e) as of June
30, 2003.
Change in internal controls over financial reporting.
There was no change in the Company's internal control over financial reporting
that occurred during the second quarter of 2003 that has materially affected, or
is reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Hartford Life Insurance Company is or may become involved in various legal
actions, in the normal course of its business, in which claims for alleged
economic and punitive damages have been or may be asserted, some for substantial
amounts. Some of the pending litigation has been filed as purported class
actions and some actions have been filed in certain jurisdictions that permit
punitive damage awards that are disproportionate to the actual damages incurred.
Although there can be no assurances, at the present time, the Company does not
anticipate that the ultimate liability arising from potential, pending or
threatened legal actions, after consideration of provisions made for estimated
losses and costs of defense, will have a material adverse effect on the
financial condition or operating results of the Company.
On March 15, 2002, a jury in the U.S. District Court for the Eastern District of
Missouri issued a verdict in Bancorp Services, LLC ("Bancorp") v. Hartford Life
Insurance Company, et al. in favor of Bancorp in the amount of $118. The case
involved claims of patent infringement, misappropriation of trade secrets, and
breach of contract against the Company and its affiliate International Corporate
Marketing Group, Inc. ("ICMG"). The judge dismissed the patent infringement
claim on summary judgment. The jury's award was based on the last two claims. On
August 28, 2002, the Court entered an order awarding Bancorp prejudgment
interest on the breach of contract claim in the amount of $16.
Hartford Life Insurance Company and ICMG have appealed the judgment on the trade
secret and breach of contract claims. Bancorp has cross-appealed the pretrial
dismissal of its patent infringement claim. The Company's management, based on
the advice of its legal counsel, believes that there is a substantial likelihood
that the judgment will not survive at its current amount. Based on the advice of
legal counsel regarding the potential outcomes of this litigation, the Company
recorded an $11 after-tax charge in the first quarter of 2002 to increase
litigation reserves. Should Hartford Life Insurance Company and ICMG not succeed
in eliminating or reducing the judgment, a significant additional expense would
be recorded in the future.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -- See Exhibit Index.
(b) Reports on Form 8-K: None.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HARTFORD LIFE INSURANCE COMPANY
/s/ Ernest M. McNeill Jr.
-------------------------------------------
Ernest M. McNeill Jr.
Vice President and Chief Accounting Officer
August 6, 2003
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
FORM 10-Q
EXHIBITS INDEX
EXHIBIT #
- ---------
31.1 Certificate of Thomas M. Marra pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certificate of Lizabeth H. Zlatkus pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Certificate of Thomas M. Marra pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certificate of Lizabeth H. Zlatkus pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.